ECON1000 – Case Study Demand and Supply Analysis

ECON1000 Open CampusMicro Paper – contributes 20% [DUE: October 23rd @ 11:55pm]Case Study: Demand and Supply Analysis (Units 4 and 5)This Micro paper is designed to apply the theories and principles ofMicroeconomics to the real world. The paper is divided into two sections. Eachsection is marked out of 30 and contributes 10% to your final course grade.Instructions:• Your response should be typed, with at least 1 ½ line-spacing, and a 12point font size.• Where necessary, graphs can be drawn by hand and scanned intodocument.• Plagiarising your colleagues’ work or allowing your work to be plagiarisedwill be penalized with a score of zero. 1 Section A: The Market for Coffee (10%) Read the following four extracts and answer the questions belowExtract 1: Coffee prices on the riseCoffee prices hit a record 14-year high this month, and it’s only a matter of timebefore coffee lovers will have to pay more in stores and coffee shops. A series ofbad news has affected the market for coffee – bad weather in South America isthreatening crops; Brazil and Vietnam are talking about hoarding their stocks;and US stockpiles are reportedly at 10-year lows. Moreover, the current behaviorof prices reflects uncertainties concerning short-term coffee supplies. Asuncertainties persist, investors are placing significant bets on where prices areheaded.Adapted from CNNMoney…. (February 2011) Extract 2: Colombian government extends subsidies to the coffee sectorIn South America, despite a budget deficit, the Colombian governmentannounced a subsidy package in November 2008, aimed at controlling theescalating price of coffee. The subsidy package includes assistance to farmersby extending discounts of up to 50% on fertilizer to farmers and provision of cashcredits to farmers for the replacement of old and poor-yielding coffee trees withnewer and higher-yielding varietiesAdapted from USDA Foreign Agricultural Service Report (April 2009) 2 Extract 3: Venezuela maintains strict price regimes on basic foodsSince 2003, the Venezuelan President has maintained a strict price regime onsome basic foods like coffee, beans, sugar and powdered milk. But this measuredesigned to curb inflation has alienated Venezuela’s coffee importers who saytheir profit margins have been reduced to nothing.For at least a week, there has been no roasted coffee available on the shelves ofVenezuelan supermarkets, as wholesalers and coffee importers have beenwithholding their coffee from sale. The situation is so bad that authorities havesuccessfully stepped in to seize coffee, which is deliberately being withheld fromsale.Yet several food stores in Venezuela’s capital city Caracas say the coffee raidsare not addressing the fact that shops are also running low on sugar, maize,powdered milk and beans. Store managers insist they are not being supplied withnew stock from wholesalers and importers.Three days ago, street sellers working in the country’s black market were stillable to provide the roasted coffee that the supermarkets were not stocking.However, even they have since admitted defeat.Adapted from the BBC (January 2006) Questions(a) Using Extract 1, illustrate and explain the impact on the market for coffeein 2011.(6 marks)(b) Using Extract 2 and 3,(i)Examine the government intervention In Colombia. To what extentwere the objectives of the Colombian government met. Justify yourresponse.(10 marks)(ii) Examine the government intervention In Venezuela. To what extentwere the objectives of the Venezuelan government met. Justifyyour response.(10 marks) (iii) Which intervention is more effective? Justify your response.(4 marks) 3 Section B: Rent Subsidy (10%)Assume there is a well-defined geographic area of a city. The area is composedexclusively of apartments and is populated by low-income residents. The peoplewho live in the area tend to stay in that area because (1) they cannot afford tolive in other areas of the city, (2) they prefer to live with people of their own ethnicgroup, or (3) there is discrimination against them in other areas of the city. Rentspaid are a very high percent of peoples’ incomes.(a) Would the demand for apartments in this area be relatively inelastic orrelatively elastic? Explain.(3 marks)(b) Would the supply of apartments in this area be relatively inelastic orrelatively elastic? Explain.(3 marks)(c) Draw the demand and supply curves as you have described them,showing the initial equilibrium price and quantity. Label carefully.(4 marks)(d) Now assume the government creates a rent supplement program.Under this program, the renter is required to pay 30% of income in rentany additional rent is paid by the government (up to a limit). For example,a low-income person with an income of $1,000 a month would be requiredto pay $300 in rent (30%). If the rent were $500, the government wouldpay the other $200. Analyze the results of this program. Show thechanges on the graph and explain what will result. Who gains and wholoses from this program?(8 marks)(e) Instead, now assume that the government decides to provide a buildingsubsidy to people who build apartments in this low-income area. Thegovernment will pay a certain percent of their costs. Analyze the results ofthis program. Show the results on the graph and explain what will result.Who gains and who loses from this program?(8 marks)(f) From the point of view of improving housing for the poor, which is thebetter public policy? Justify your response.(4 marks) 4

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