QUESTION 1: 35 marks; Word Limit: 400 words Part A: The cigarette market can be described by the following equations:

Demand: P = 10 - Q

Supply: P = Q - 4

where p is the price in dollars and Q is the quantity in cartons.

What is the equilibrium price and quantity? [10 MARKS]

Suppose the government imposes a tax of $1 to reduce cigarette consumption and also raise government revenue. What will the new equilibrium quantity be? What price will the buyer pay? What amount per carton will the seller receive? How much is the inefficiency of the tax to the economy? [15 MARKS]

PART B: Using the same amount of resources, Australia and New Zealand can both produce apples and oranges as shown in the following table, measured in thousands of tonnes.

Australia New Zealand

APPLES ORANGES APPLES ORANGES

6 0 12 0

3 3 3 3

0 6 0 4

Suppose that both countries are currently producing 3000 tonnes of apples and 3000 tonnes of oranges. Show that both can be better off if each specialises in producing one good and then engage in trade. [10 MARKS]

QUESTION 2: 25 marks. Word Limit: None, but succinct.

The Chinese government recently passed a law to reduce the amount of coal that can be imported from Australia, without replacement from other sources. This has resulted in shortage of coal required to run power plants in China and high prices of energy. To shield the public from rising energy prices, the government has frozen retail prices of gasoline and diesel at levels before the implementation of the new law. Oil refiners say they are suffering heavy losses and some have begun cutting production, causing fuel shortages in parts of China's south.