Assessment
Assignment questions
Short answer questions (references not needed)
Question 1
Pharmaceutical drugs have an inelastic demand, and computers have an elastic demand. Suppose that technological advance doubles the supply of both products (that is, the quantity supplied at each price is twice what it was).
a. What happens to the equilibrium price and quantity in each market? (2 marks)
b. Which product experiences a larger change in price? Which product experiences a larger change in quantity? (2 marks)
c. What happens to total consumer spending on each product? (2 marks)
Question 2
Suppose you are thinking about opening a hardware store. You estimate that it would cost $500,000 per year to rent the store and buy the stock. In addition, you would have quit your $50,000 per year job as an accountant.
a. Define opportunity cost. (1 mark)
b. What is your opportunity cost of running a hardware store for a year? If you could sell $510 000 worth of merchandise in a year, should you open the store? Explain. (3 marks)
c. List some of your fixed costs and describe why they are fixed. (1 mark)
d. List some of your variable costs and explain why they are variable. (1 mark)
Question 3
a. All along the central and northern coast of New south Wales there are motels offering basis accommodation –some of it within easy walking distance of the beach. During the school holidays and at other peak times the room rate is over $150 a night. But in the off-season, when the kids are back at school, one can find rooms for as little as $60 a night. Assume the average fixed cost of a room per night, including local government rates, insurance, taxes and depreciation, is $75. The average guest-related cost for a room each night, including electricity, water, cleaning service and linen, is $40. Would these motels be better off renting rooms for $60 in the off season or shutting down until the school holidays come round again? Explain your answer with proper graph/s. (6 Marks)

b. Give two examples of price discrimination. In each case, explain why the monopolists choose to follow this business strategy. (2 Marks)

Essay question (references needed)
Question 4
A persistent problem facing our society is the use of illegal drugs, such as heroin, cocaine and crack. Drug use has several adverse effects. One is that drug dependency can ruin the lives of drug users and their families. Another is that drug addicts often turn to robbery and other violent crimes to obtain the money needed to support their habit. To discourage the use of illegal drugs, many governments devote billions of dollars each year to reduce the flow of drugs into their countries. Suppose the Australian government increases the number of customs inspectors and police officers devoted to preventing imports of drugs. (20 marks)
a. Using the concepts of demand supply and elasticity examine this policy of drug prohibition. What happens in the market for illegal drugs? Use appropriate graph/s to answer your question.
b. Do drug bans increase or decrease drug-related crime? Explain. Use economic theories and empirical findings to support your arguments.
(Hints: First, you can consider whether the supply or demand curve shifts; Second, the direction of the shift; Third, how the shift affects the equilibrium price and quantity).