BEC1034 MICROECONOMICS

TUTORIAL 3

Question 1

As Siti's income increases, her demand for shoes increases. Are shoes normal or inferior goods for Siti? What happens to Siti's demand for shoes when there is an increase in her income?

Shoes are normal goods.

Question 2

In 2001, a serious outbreak of foot-and-mouth disease in England led to the burning of millions of cattle carcasses. What impact do you think this had on the supply of cattle hides, hide prices, the supply of leather goods, and the price of leather goods?

Question 3

If a price is not an equilibrium price, there is a tendency for it to move to its equilibrium level. Regardless of whether the price is too high or too low to begin with, the adjustment process will increase the quantity of the good purchased.

Explain, using a demand and supply diagram.

Question 4

The Malaysian government believes that the current market price for rice is too low.

a. Suppose the government imposes a binding price floor in the rice market. Use a supply and demand diagram to illustrate the effect of this policy on the price of rice and the quantity of rice sold. What is the result of a binding price floor on rice?

b.Farmers complain that their total revenue has declined due to the price floor. Is there complaint valid? Explain.

c.In response to farmers' complaints, government promises to buy all the surplus rice at the price floor. Who will benefit and who will lose from this new policy?