Question 1 (2 points)

Read attachment 1.

a] (1 point) Use the demand/supply model to explain why low interest rates are likely to cause higher house prices.

b] (1 point) What other factor mentioned in the attachment might explain higher house prices?

Question 2 (6 points)

Read attachment 2.

a] (2 points) Use the demand supply/model to analyse the impact of half-price air tickets on the quantity and price of air travel to the locations covered by the government subsidy? [To answer this question, assume that the government pays one-half of whatever price the supplier needs to be paid to supply any given quantity of flights).

b] (2 points) Show how the incidence of the subsidy will depend on the own-price elasticity of demand and own-price elasticity of supply. Explain your answer.

c] (1 point) How do you expect that the government subsidy will affect the markets for flights to destinations not covered by the subsidy?

d] (1 point) The article says that the government will be 'relying on competition rather than regulation to make sure the benefits are passed on to consumers'. What potential problems can you see with the government following that approach?

Attachments

Attachment 1

Ultra-low interest rates are pushing up property prices, with figures showing the average home buyer could spend $41,000 more at auction that a year ago...

With cheaper mortgage repayments, a borrower on an average income of $89,000 who has saved a 20 per cent deposit could have a budget of $806,250...A year ago, the same buyer would have had less borrowing power and a budget of only $765,000...

Canstar group of executive of financial services Steve Mickenbecker said: 'It obviously does push house prices up. There's no question, people turn up with more money in their pockets, it means that demand is higher...

Aside from low interest rates, Jellis Craig managing director Steven Abbott cites pent-up buyer demand after last year's lockdowns and extra cash on hand from cancelled international holiday plans...

'Low rates propel house price surge' by Elizabeth Redman (The Age, Saturday March 13 2021, p.18)

Attachment 2

Airline tickets will be sold at half-price to 800,000 travellers in a federal government bid to help the tourism industry survive the pandemic by encouraging more Australians to book flights.

The subsidy will run from April to July to increase flights to priority tourist destinations as part of a $1.2 billion package that answers industry calls for assistance.

Customers will see the subsidy in lower prices for flights to regions including the Gold Coast, Cairns, the Whitsundays, the Sunshine coast, Alice Springs, Launceston, Broome, regional Victoria, Merimbula and Kangaroo Island...

Describing the subsidy as a 'demand-driven' scheme, the government says it will cut the price of about 46,000 fares every week.

Customers will be able to buy the half-price tickets from April 1, with the government relying on competition rather than regulation to make sure the benefits are passed on to consumers. Airlines will have to show that they have flown the route over the previous two years to gain the subsidy.

'Half-price air tickets in travel industry aid plan' by David Crowe (The Age, Thursday March 11, 2021, p.5)