The Reserve Bank of Australia (RBA) is committed to doing what it can to support jobs, incomes, and businesses in Australia. The Reserve Bank of Australia reduced the official cash rate a couple of times during the pandemic in 2020-21 to boost the economy. These RBA decisions to reduce interest rates have impacted many sectors including the housing sector in Australia.

Required:

Question:1

Suppose the housing sector in Australia is a perfectly competitive market.

a. Draw a diagram of a perfectly competitive firm making short-run economic losses during the COVID-19 pandemic situation. Explain your answer. (4 marks)

b. Explain the impact of interest rate reduction in the housing sector. Draw diagrams to show the transition from a short run to a long run in a perfectly competitive market. (7 marks)

Question 2:

Now let’s assume XYZ Company is one of the monopolistic competitive firms in Sydney, that specializes in housing construction.

a. Draw a diagram to illustrate XYZ making economic losses in the short run during the pandemic. (4 marks)

b. Assume there is no change in the costs of building materials. Show the impact of interest rate reduction on builder XYZ’s demand from Q2 part (a)

Question 3.

Now let us suppose XYZ Co. decides to join the “Fly Buys” scheme which entitles its customers to earn points towards free air travel.

a. Discuss how the “Fly Buy” scheme will affect the firm’s cost and revenue curves. Assume XYZ Co was initially in long-run equilibrium and that the scheme is successful.

If the “Fly Buy” scheme is successful at increasing XYZ’s profit, do you expect these profits to be maintained over the long run? Why or why not?

Answer rating: 100% (QA)

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