BEA200 INTERMEDIATE MICROECONOMICS
ASSIGNMENT 2018
Due Date: Week 7, Friday 20 April, 2.00pm
Value of Assignment: 30% of your final assessment
Total Marks: 300 marks
Instructions
• This assignment may be submitted individually or as a group of 2 students.
• It is each group's responsibility to work out an approach to complete the assignment and allocate the share of work.
• Each group completes and submits one assignment as a group work and all group members will gain the same grade.
• The assignment should be typed.
• Please use line spacing no lower than 1.5 and font no smaller than 11 point.
• You may are and encouraged to use MS Excel or similar to perform the calculations required in this assignment and produce tables and charts from data. You do not need to submit your MS
Excel file.
• Diagrams of models (such as supply-demand and budget constraint-indifference) may be hand drawn and photographed/scanned and embedded into your document.
• Drawing diagrams of models electronically can take a considerable amount of time.
• Submit your assignment either electronically via MyLO drop box or in the assignment box for BEA200 on the level 3 foyer in the southern wing of the Centenary Building (the Business and Economics Building).
• Attach a UTAS Group Assignment Cover Sheet (available from MyLO) with each group member’s name, student ID and signature.
• For electronic submission please merge the cover sheet and any other relevant documents into one PDF or MS Word file.
Question 1 5
Sugar Tax I: Supply-Demand, Elasticity, Tax Revenue
Collect the amount spent on soft drinks (0310010101), energy drinks (0310010103) and cordials
(0310050101) per week from the Australian Bureau of Statistics (ABS) 6530.0 - Household Expenditure Survey, Australia: Summary of Results, 2015-16, Data Cubes, Net Worth Quintiles, Table 6.3A for the five quintiles of net worth and for all Australians. Also collect the total goods and services expenditure per week for each of the five quintiles of net worth and for all Australians.
Calculate the total spent on soft drinks, energy drinks and cordials per week per household for each of the five quintiles of net worth and for all Australians. Calculate the proportion that soft drinks, energy drinks and cordials spending forms of the total spending on goods and services per week for each of the five quintiles of net worth and for all Australians.
a. Using MS Excel or similar present a chart that shows the proportion and total spent per week on soft drinks, energy drinks and cordials per household for each of the five quintiles of net worth.
(10 marks)
Consider the introduction of a 20% ad valorem tax on soft drinks, energy drinks and cordials. The tax is to be collected from retailers (those that sell to the consumers). The supply for soft drinks, energy drinks and cordials at the retail level is perfectly elastic. Initially assume that households do not alter their behaviour so that demand is perfectly inelastic.
b. Using a supply and demand diagram for the weekly retail market of soft drinks, energy drinks and cordials, illustrate the effects of the tax, showing any movements in the demand and/or supply curves and any change in retail price and quantity sold.
(10 marks)
c. What proportion of the tax is borne/paid by retailers? What proportion of the tax is borne/paid by consumers?
(5 marks)
d. How much tax per week on average would a household in each of the five net worth quintiles pay? Is the tax regressive or progressive tax?
(10 marks)
e. Calculate the tax per week and the tax per year (assuming that there are 52.1775 weeks in a year) that the average (all households) would pay. If there are approximately 9.6 million Australian households in 2017-18, how much revenue would the tax raise in 2017-18 assuming no change in behaviour?
(5 marks)
Now consider the effects of a 20% ad valorem tax on soft drinks, energy drinks and cordials, when the own price elasticity of demand is -0.90.
f. By what % would the demand for soft drinks, energy drinks and cordials change? How much would the average household spend on soft drink?
(5 marks)
g. How much revenue would the tax raise in 2017-18 assuming a price elasticity of -0.90?
(5 marks)
Question 2 4
Sugar Tax II: Different Types of Taxes, Elasticity, Policy Evaluation
Many countries have implemented or have proposed to implement a tax on sugar-sweetened beverages (SSB). Various types of taxes have been implemented or proposed, such as
A Ad Valorem Tax – for example a 20% tax on the retail price of SSBs
B Volumetric Tax – for example $0.30 per litre of SSBs
C Content Tax – for example $0.40 per 100 grams of sugar in SSBs
Consider the following SSBs
1. 2 litre bottles of soft drink, with 200 grams of sugar that retail in super markets for $1.00
2. 2 litre bottles of soft drink, with 200 grams of sugar that retail in convenience stores for $3.00
3. 333? ml cans of soft drink, with 40 grams of sugar that retail in super markets for $0.50
4. 333? ml cans of soft drink, with 40 grams of sugar that retail in convenience stores for $2.00
5. 250ml cans of energy drinks, with 25 grams of sugar that retail in super markets for $2.00
6. 250ml cans of energy drinks, with 25 grams of sugar that retail in convenience stores for $4.00
7. 2 litre bottles of fruit juice, with 150 grams of sugar that retail in super markets for $3.00
8. 2 litre bottles of fruit juice, with 150 grams of sugar that retail in convenience stores for $6.00
Assume that all SSBs have the same own price elasticity and that all taxes will be passed fully to consumers.
a. Calculate the % price increase for the eight different SSBs for each of three taxes A, B and C and present your calculations in a table.
(20 marks)
b. Compare and contrast the impact of the three taxes A, B and C upon the sales and consumption of the eight different SSBs. What general conclusions can your draw from your analysis about the impact of valorem, volumetric and content taxes on SSBs assuming all are designed to raise the same amount of revenue?
(20 marks)
3 8
Education: Individual’s Demand and Choice, Welfare Implications, Policy Evaluation
There are approximately 3.75 million primary and secondary school students in Australia, with 2.5 million attending public schools and 1.25 million attending private schools.
The Federal and State governments combined spend approximately $40.5 billion on primary and secondary education, with $30 billion spent on public education and $10.5 billion on private education per year. Private schools raise an additional $42 billion from fees per year.
Suppose households have one child each and an income of M per year to spend on their child's primary and secondary education and other goods. Each year they elect to either send their children to:
i) a public school where their child receives 12,000 units of education for free; or ii) a private school where they pay a subsidised price of $0.80 for every unit of education.
Assume that a unit of education is a homogenous good, that is, there is no difference between a single unit of education from a public school or a private school. However public and private schools may differ with how many education units they provide.
a. Draw a diagram with $ of education spending (X) on the horizontal axis and $ of spending on other goods (Y) on the vertical axis. For a household with $120,000 of annual income, draw two budget constraints: the first if the household sends their child to a public school and the second if it sends their child to a private school. Label all intercepts and axis.
(10 marks) b. For a household with a utility function U = Xa Yb find the household demand functions (in algebraic form) for private education units (X) and other goods (Y) as a function of their budget M, the price of education units PX.
(15 marks) Suppose that there are:
1.25 million Type I households with $80,000 income and U = X0.1Y0.9
1.25 million Type II households with $120,000 income and U = X0.1Y0.9
0.75 million Type III households with $120,000 income and U = X0.2Y0.8
0.50 million Type IV households with $180,000 income and U = X0.2Y0.8
c. Use your answer from b. to determine the amount of private education (X) and other goods (Y) and utility (U) each of the four household types would demand if there were no free public schools.
(10 marks) d. How much utility would each of the four household types generate if they sent their child to a free public school?
(10 marks) e. Use your answers from c. and d. to determine which household types will choose to send their child to a public or private school?
(5 marks)
A spokesperson from a think tank has advocated that the all government education funding to both public and private schools should cease and instead be channelled into a voucher system. Under this scheme parents would receive a voucher that would be used to purchase education from any school they choose at price of $1 for every unit of education. The spokesperson claimed, “All households will be better off and be able to afford to invest more into their children’s education resulting in better level of education for Australian students”.
f. Evaluate the think tank’s spokesperson’s claim.
(30 marks)
4 6
Labour: Labour Supply, Policy Evaluation, Reaction to Economic and Social Change
Use the consumption-leisure model, provide diagrams and the direction of the income and substitution effects were relevant, to support your answers to the following questions.
a. Explain why in a response to a cut in top marginal tax rate, some workers who pay the top marginal tax rate will reduce their labour supply while other workers who also pay the top marginal tax rate will increase their labour supply.
(20 marks) b. Explain what will happen to workers who pay the top marginal tax rate but are unable to change the hours they work. Would they be better off if they could change their work hours after the tax cut.
(10 marks) c. The hours worked by full time employees in Australia rose from `38 weeks in the 1980s to 41.5 weeks by the end of the 1990s. Evaluate the following three changes that occurred in the 1980s and 90s as possible reasons why work hours of full time employees rose.
1) Real wages grew by 2.4% (lower than the 1970s and 2000s).
2) Income taxes were cut.
3) There was an increase in consumerism.
(30 marks)

5 7
Insurance and Risk: Expected Utility, Insurance Premiums, Diversification
a. Fei Hong and Saanvi live and in the same house that they jointly own in Hobart that is at risk of bush fires. Fei Hong wants to buy insurance to fully insure against the risk, but Saanvi does not want to insure. Explain using the concept of expected utility why Fei Hong wants insurance, but Saanvi does not.
(20 marks)
b. Suppose that Farooq farms potatoes and if the crop is successful will earn $6,400 per year, but there is a 10% chance the crop will fail and be worthless.
i) What is Farooq’s expected annual income?
(5 marks)
ii) Suppose Farooq’s utility function for his potato crop is given by U = vM where M is his potato crop income . What is Farooq’s expected utility for next year’s income?
(5 marks)
iv) If a firm was offering crop protection, what is the minimum it would charge Farooq to guarantee his potato crop income?
(10 marks)
v) What is the maximum that Farooq would be willing to pay for crop protection?
(10 marks)
vi) If no insurance is available but Farooq can divide his original potato field into two adjacent halves field A and field B at no cost, with the chance of the failure of each field 10% and independent of one another, would he divide his field in two?
{You do not have to calculate his expected utility of if you can adequately explain the answer without it, but if you think it will help you answer you may}
(10 marks)
vii) Consider vi) again but that a crop failing is perfectly positively correlated with an adjacent crop failing, such that they either both succeed or both fail, would he divide his field in two? If it cost him $1 to divide his crop would he do it?
(10 marks)
{You do not have to calculate his expected utility of if you can adequately explain the answer without it, but if you think it will help you answer you may}