Question 1

State whether the following statements are true, false or uncertain, and briefly justify your answers. (1 mark x 10)

(a)A price ceiling that is below the perfectly competitive equilibrium price creates a dead weight loss because it leads to reduced supply and excessive consumption.

(b)Suppose that wool and acrylic re substitutes for many consumers so that a rise in the world wool price leads to a rise in the price of acrylic. This means that a rise in the world wool price will tend to lead to a fall in the sales of acrylic.

(c)The consumption of cigarettes in public places creates a negative externality. So a policy that bans all cigarette smoking will maximize social welfare.

(d)The Melbourne flower market is perfectly competitive and the equilibrium price is $8 per bunch of flowers. If the government introduces a price ceiling of $10 per bunch on flowers then this will not affect the flower market.

(e)If the elasticity of demand for cocaine is -0.2 and the government succeeds in reducing supply substantially. As a result, buyers will now spend more on cocaine.

(f)Farmers suffer declines in their total revenues when they become more productive as a group.

(g)The world's poorest nations will have nothing to export as they are not productive in producing anything.

(h)Economics is the study of how fairly goods and services are distributed within society.

(i)Aunty Grace operates a business in a competitive market. The current market price is RM10.At her profit-maximizing level of production, the average variable cost is RM8, and the average total cost is RM12.Aunty Grace should continue to operate in the short run.

Roads are considered public goods