## BUSMGT 714 ECONOMICS FOR MANAGERS: This question is related to the market for face masks in a New Zealand city

**BUSMGT 714 ECONOMICS FOR MANAGERS**

**Practice Unmarked Assignment Topics 1 and 2**

**Instructions:**

This unmarked assignment is an individual practice exercise on Topic 1 and Topic 2 for your learning enhancement. You will note that next to each question a partial mark (out of 50) is included. This is only for your self-assessment. An answer guide for this practice assignment will be available on Canvas at the end of Week 5. We strongly recommend that you review the answer guide only after you have had a chance to attempt answering the questions first.

**Questions:**

This question is related to the market for face masks in a New Zealand city. In December 2019, the market demand and supply for the N95 respirator face mask could be represented by the following equations:

Demand: P=10-6Q.

Supply: P=2+2Q

where Q=quantity (in 10,000 pieces (pcs)) and P = price (in NZ dollars per piece),

1. For the price change range from $6 to $7 per piece, find the price elasticity of demand. (Hint: You need to find the corresponding quantity demanded based on the demand equation for each case). Use 2 digits decimal points for the calculations of price elasticity for this question. Show your formulation and calculations.

Is demand price elastic or price inelastic in that price range?

When Price=$6, Quantity of Demand is: 6=10-6Q -> Q=2/3≈0.67

When Price=$7, Quantity of Demand is: 7=10-6Q -> Q=1/2=0.50

As a result, the mid Quantity of Demand is: (0.67+0.50)/2=0.59

Mid-Point Price = (6+7)/2=6.5

Or you can just report the absolute value for PED, and it is 1.87.

The absolute value of PED is 1.87 (which is more than 1). Therefore, it is price elastic in that price range.

- marks)

2. Based on the demand and supply equations provided above, work out the market equilibrium quantity and price for N95 respirator masks in 2019 in the city. Clearly show your formulations and calculations (Use one digit after the decimal for this part and the rest of the assignment).

(3 marks)

At market equilibrium, we will have: Demand=Supply

10-6Q=2+2Q 8=8Q Q=1 (in 10,000 pcs)

Substituting Q=1 into the demand equation, we can find the value for price at each quantity level demanded. For example, at quantity level 1, the price consumers are willing to pay is $4. Or said differently, if price is $4, 1 unit (of 10000 pcs) will be demanded by consumers overall.

P=10-6Q=10-6*1=4

As a result, the market equilibrium price is $4 and the equilibrium quantity is 10,000 pcs.

- Draw a demand and supply graph of the market for N95 respirator market in the city in 2019 based on the above information, clearly indicating the equilibrium quantity and price. (Remember to label the axes and draw your diagram to scale!)

(4 marks)

- Use consumers’ willingness to pay measure to determine whether demand is price elastic or price inelastic at that price. Show your calculation and reasoning briefly.

(2 marks)

According to the demand function (P=10-6Q), the consumer’s maximum willingness to pay is $10. (That is when quantity demanded will be 0).

Therefore, using the mid-point of demand concept, when the price is more than $5 (half of this maximum willingness to pay, that is 10/2=5), demand is price elastic. When the price is lower than $5, demand is price inelastic.

When the price is exactly $5, demand is price unit elastic.

Since the market equilibrium price is $4, which is below $5, at the market equilibrium price, the demand is price inelastic.

- In May 2020, because of the COVID-19 epidemic, New Zealand’s market demand and supply for N95 respirator masks changed. Since that time, NZ consumers in the city became willing to pay an extra $40 (at any given price) to buy the N95 respirator mask to protect them from COVID-19. At the same time, because of the effects of the world- wide lock down and boarder control, international cargo transportation and mask production had been greatly influenced. Therefore, NZ importers have had to pay an extra $32 to the international suppliers to secure their orders regardless of quantities of masks ordered. According to the above description, derive the new demand and supply of the N95 respirator market, and derive the equilibrium quantity and price in New Zealand in May 2020. Show your calculations and explain. (Use one digit after the decimal point for this part).

(7 marks)

- When consumers are happy to pay an extra $40 to buy the mask (at any quantity), graphically, the entire demand curve will be shifted up by exactly $40. This shift means that the intercept for the new demand curve will be $10+$40=$50. As a result, the new demand function is: P=50-6Q.
- Since the NZ mask importer has to pay an extra fixed cost of $32 for importing the mask, their fixed cost has been increased from $2 to $34 (that is $2+$32). As a result, the new supply function is: P=34+2Q.

Now, we can solve the new market equilibrium quantity and price:

New Demand= New Supply

50-6Q=34+2Q

16=8Q

Q=2 (in 10,000 pcs)

P=50-6Q=50-6*2=$38

The market will now clear (at the new equilibrium) where price is much higher at $38, and a larger quantity of 2 (in 10,000 pcs) is bought.

6. Draw a new graph that shows the new demand and supply graph of the market for N95 respirator market in the city in May 2020, and the original demand and supply in December 2019, clearly indicating the new equilibrium quantity and price. (Remember to label the axes and draw your diagram to scale!)

(5 marks)

7. At this new market equilibrium, is demand price elastic? Explain.

(2 marks)

According to the demand function (P=50-6Q), the consumer’s maximum willingness to pay is $50.

- Therefore, when the price is more than $25 (half of this maximum willingness to pay, that is 50/2=25), demand is price elastic;
- When the price is lower than $25, demand is price inelastic;
- When the price is exactly $25, demand is price unit elastic.

The new market equilibrium price is $38, which is higher than $25. Therefore, at the market equilibrium price demand is price elastic.

8. In September 2020, the NZ Government required people to use a facemask or face covering while using public transportation services.

(a) If the government wished to make the N95 respirator masks more affordable to the public, is it a good idea to place a price ceiling of $35 per mask? Use your economics knowledge, to clearly explain the outcomes of this policy.

(6 marks)

When the government placed a price ceiling of $35, we can see what the quantity demanded and supplied would be at that price:

- Quantity of Demand: 35=50-6Q –> Q=2.5 (in 10,000 pcs)
- Quantity of Supply: 35=34+2Q –> Q=0.5 (in 10,000 pcs)

(1) It creates a shortage of masks in this case. The quantity of supply is smaller than the quantity of demand, and there will be a shortage of 20,000 pcs of masks! (Quantity of Demand-Quantity of Supply=2.5*10000-0.5*10000=20000).

The shortage results in dissatisfaction for several consumers who want to buy the masks but are not able to obtain it. Therefore, there will be a large proportion of consumers who were able to obtain masks under free market conditions, who will become unable to obtain it with the price ceiling. As a result, this policy does not help consumers to buy more masks, but it reduces the quantity of supply.

(2) It will also potentially create a ‘black market’. When there is no price ceiling, the market is able to satisfy all demand and supply of 10,000 pcs. After the price ceiling has been set, there will be only 5000 pcs of masks supplied but 25,000 pcs demanded. Therefore, this can lead to a black market, where masks will be traded at a higher price for the consumers in the black market.

(b) Use a graph and refer to it in your answer to assist your discussion of the answer to the question.

(4 marks)

9. An alternative policy option to make face masks more affordable and used is for the government to provide a subsidy to suppliers of face masks. A subsidy is the opposite of a tax. For example, suppliers of face masks could have received a government subsidy (bonus) for each face mask by $1 per piece supplied in May 2020.

(a) Use your economics knowledge to clearly explain the outcomes of this policy. Explain briefly whether, or not, it is an advisable policy, if the government needed to

make the N95 respirator masks more affordable to the public.

(6 marks)

The subsidy is going to help suppliers to supply more as it helps to reduce their cost of production. Therefore, we will expect the supply curve to shift to the right (costs are reduced to the producer and supply will be increased). When supply increases, it will cross the demand curve at a new equilibrium level, with a lower equilibrium price and higher equilibrium quantity. The market equilibrium quantity increases, and the equilibrium price decreases, meaning that the facemasks will become cheaper for consumers. Therefore, consumers become able to buy more face masks as more consumers can afford the face masks.

(b) Use a graph and refer to it in your answer to assist your discussion of the answer to

the question.

(4 marks)

10. Use the internet to find two examples of subsidies currently enacted by the governments of the countries you obtain information on. Also note the economic rationale for each subsidy policy being implemented. (Give the internet link to the site where you obtained your information).

(2 marks)

**Wage subsidy schemes in New Zealand**(https://www.employment.govt.nz/leave-and-holidays/other-types-of- leave/coronavirus-workplace/wage-subsidy/)

This wage subsidy is given to the companies that are significantly impacted by COVID-19.

The economic rationale for the policy is to minimise job losses due to the pandemic in New Zealand. The subsidy is going to lower the company’s labour cost. Therefore, it can help these companies to keep operating. As a result, more wage earning workers can keep their jobs (employment hours), rather than becoming unemployed.

**Out of School Care and Recreation (OSCAR) Subsidy in New Zealand**- (https://www.workandincome.govt.nz/products/a-z-benefits/oscar- subsidy.html#:~:text=Out%20of%20School%20Care%20and%20Recreation%2 0(OSCAR)%20Subsidy%20is%20a,to%2050%20hours%20a%20week. )

The subsidy is a payment which helps New Zealand families to meet the demand for their children’s after school care, so parents can still work from 3 pm to 5 pm.

The rationale for the policy is to reduce the cost of childcare for young parents who work, so that more parents of young children can keep their jobs (employment hours). It can maintain New Zealand’s productivity, and it can also result in more jobs in the child care industry.