Question 1 (20 marks)
The following events occur in the market for mobile phones.
a) The price of a mobile phone falls.
b) Everyone expects the price of a mobile phone to fall next month
c) The price of a call made from a mobile phone falls
d) The price of a call made from a land-line phone increases
Explain the effect of each event on the demand for mobile phones. Use graphs to show the effects of each event. Does any event (or events) illustrate the law of demand? Explain.
Question 2 (25 marks)
Discuss the following statement: The easiest way for perfectly competitive firms to improve their prospects of earning economic profits would be for their owners to get together and agree to raise prices
Question 3 (30 marks)
Case study: What? High prices for tea and coffee? Read the following article and answer the questions below. Coffee price rise – it’s bean a long time coming
The days of the $3 coffee may be numbered as café owners come under pressure to pass rising costs on to legions of coffee drinkers. In addition to increases in rents, transport costs and milk prices, cafes were within weeks of being hit with higher prices for coffee beans, Australian Coffee Traders Association vice-chairman Andrew Mackay warned yesterday : “Coffee’s been really, really strong but, historically speaking, we’re seeing prices at almost 10-year highs in the Arabica market and the same with Robusta”… “The market price for Arabica beans had gone from roughly $US1.30 a pound to $US1.58 a pound over the past three to four weeks”, Mr Mackay said… Tea, coffee and “food drinks” rose 4.5 per cent in the three months to December, according to the latest figures, and coffee drinkers thinking of switching to tea will find no respite as tea prices are at record heights. The managing director of tea retailer T2 Maryanne Shearer said…”The demand for tea has increased dramatically, initially as a result of the wellbeing focus on people’s lifestyles. It’s very much a global thing.”
Source: Midalia, A. 2008. ‘Coffee price rise – it’s bean a long time coming.’ The Australian Financial Review, Thursday 21 February.
a) Draw a diagram to show the change in the coffee market that has resulted in higher prices for coffee.
b) Draw a diagram to show the change in the tea market that has resulted in higher prices for tea.
c) Explain the non-price determinants involved in the change in each market.
d) Why would the writer suggest coffee drinkers might be thinking of switching to tea
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