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PART A
Question 1
(a)The given demand and supply curves for Anna’s blueberry pies have been drawn using
Excel resulting in the following graph.
(b)The equilibrium for the blueberry pies would be represented by the point where there is
intersection of the demand and supply curves (Arnold, 2017). Based on the graph shown
above, it is evident the equilibrium price is $5 per pie while the equilibrium quantity is
24,000 pies.
(c)Based on the given information, it is evident that there has been an increase in the demand
for Anna’s pies by 4,000 units. As a result, the original demand curve is adjusted by
adding 4,000 units for each price level (Mankiw, 2014). The revised demand curve and the
new equilibrium position is indicated as follows.

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(d)The equilibrium for the blueberry pies would be represented by the point where there is
intersection of the demand and supply curves. Based on the graph shown above, it is
evident the equilibrium price is $5.5 per pie while the equilibrium quantity is 26,000 pies.
It is evident that both the equilibrium price and equilibrium quantity have increased
(Arnold, 2017).
Question 2
It is known that the equilibrium price without rental control is $ 1,200 per month and the
equilibrium quantity is 4,000 rental dwellings. However, rental control has been imposed by
the government resulting in the price ceiling of $ 1,000 being applicable. The effect of this
move can be illustrated using the following diagram.

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It is evident from the above diagram that on account of imposition of rental control, there is a
demand supply mismatch that has been created. This is because the demand at $ 1,000
represented by QD is greater than the corresponding supply of rental dwellings at $ 1,000
represented by Qs. This clearly highlights that this move by the government would be
counter-productive as it would lead to the worsening of house crisis owing to further shortage
of rental dwellings (Mankiw, 2014). As a result, the government should not impose rental
control especially in the long term and allow the free market forces to operate. The
government should instead focus on increasing the supply of low cost housing or providing
incentives to first time home buyers for ensuring that rent remains under control (Arnold,
2017).
Question 3
The requisite market structure for fast good restaurants such as McDonalds, KFC would be
monopolistic competition. This is because this particular market structure tends to most
closely resemble the various features of the fast food restaurants. One particular feature of
monopolistic competition is that there are multiple sellers in the industry. This is the case
with fast food restaurants considering that there are a significant number of players such as
KFC, McDonalds, Hungry Jack, Pizza Hut, Burger King which are offering competing
products to essentially the same target customers (Mankiw, 2014).
An additional feature of monopolistic competition is that the entry and exit barriers tend to be
low. This is true for the fast food players since it is not very difficult to enter or exit
considering that the capital expenditure involved in opening the store is not very high.
Further, on an ongoing basis, the variable costs are quite dominant and therefore in case of

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losses, it would make sense for the given restaurant to close down business without
considering the sunk fixed costs. As a result, there is regular entry of new players in the form
of both established franchises along with domestic fast food restaurants. Also, there is regular
closure of these stores if the requisite financial performance cannot be achieved (Arnold,
2017).
Another pivotal factor of this market structure is product differentiation which is different
from perfectly competitive markets when the product is completely homogenous. Amongst
the fast food restaurant, there is product and service differentiation even when the given two
restaurants may be offering same product line such as burger or pizza. This is one of the key
features of this industry as the various players tend to focus on their superior product and
services rather than the prices. Hence, non-price based differentiation is quite common which
is commonly observed in monopolistically competitive markets (Mankiw, 2014).
Considering non – price differentiation, the players tend to engage in significant advertising
spend. This is true for the various fast food restaurant players as they tend to engage in
significant amount of marketing activities including advertisement spend. This is aimed at
differentiating their product, services and the experience as a whole from the other players.
Hence, it is fair to conclude that even though fast food restaurant industry is highly
competitive but there is differentiation based monopoly which allows players to make sizable
profit both in the short run and long run (Arnold, 2017).
Question 4
The requisite table is completed and indicated below.
The graph for the marginal and average cost curves is shown below.

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Based on the above graph, it is evident that the marginal cost initially declines from $ 20 to $
10 but from the third unit has continued to increase. The rate of increase for marginal cost is
increasing with every incremental unit. This is indicative of diseconomies of scale as average
variable cost continues to rise from the third unit onwards. With regards to the total cost
curve, there is a steep decline from increase in output from 1 to 2. This may be explained
owing to both lower average fixed costs and lower variable costs. From unit 3 onwards, even
though average variable cost starts increasing, the average fixed cost is still decreasing. The
net result is that the average fixed costs remains almost constant from unit 3 to unit 5. A
surge in total average costs is witnessed for output level 6 and 7 which is on account of steep
rise in average variable costs (Mankiw, 2014).
PART B
Question 1
The requisite plot for real GDP from 2000 to 201 for Australia is shown below.

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From the above graph, it is apparent that the real GDP has been on a steady growth path
during the period from 2000 to 2016. Minor hiccup in the growth trend has been witnessed in
2009 owing to the observed slowdown not only in Australia but globally because of the
global financial crisis. However, this event did not deter the Australian economy from the
growth path that it has been during the given period.
The economic growth during the period is represented in the following line graph.

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It is evident from the above graph that growth has been quite robust from 2001 to 2008.
However, it was negatively impacted on account of the crisis during 2008-2009. But the
economy recovered from 2010 onwards and this continued till 2014 with a minor blip in
March 2011. However, from 2015 onwards, a moderation int the economic growth is
observed. The three factors that have contributed to the growth during the period are
highlighted below.
1) There has been a boom in the Chinese economy and strengthening of the trade relations
between Australia and China which is a major factor for the economic growth observed in
Australia.
2) On account of increasing income levels, there has been an increase in the consumer
spending by the Australian consumers which has fuelled growth.
3) Another factor contributing to growth is the amount of private investment which has been
made in sectors such as mining, animal husbandry where there has been high demand from
key export markets.
Question 2
a) When the average level of prices of goods and services tend to rise, it is appropriate to
conclude that there would inflation. However, the given statement argues that increase in
average prices would lead to higher inflation. This is not necessarily true considering that

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the increase or decrease in inflation rate would depend on the previous inflation rate and
corresponding amount of price increases. Based on the average price increase, it can be
only concluded that inflation would be positive (Barro, 2015). As a result, I do not agree
with the given statement.
b) Amount invested = $ 5,000
Nominal interest rate =4.5 percent
Inflation rate during the year = 2.1 percent
Real interest rate during the year = 4.5 - 2.1 = 2.4 percent
Time period = 1 year
Actual amount of money after 1 year = 5000*1.024 = $5,120
c) The respective inflation rates for the period have been computed and shown below.
The relevant formula used for the computation of the inflation shown above is as explained
below.
Inflation (in period n) = (CPI in period n – CPI in period (n-1))/(CPI in period n)

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It is observed from the inflation computation that there is no particular pattern for movement
of inflation. However, for all quarters except one (i.e. March 2016), the inflation is positive
i.e. there is a general increase ein the prices of goods and services (Koutsoyiannis, 2013).
The annual inflation for 2016 can be computed as shown below.
Inflation rate for 2016 = (CPI in December 2016 – CPI in December 2015)/CPI in December
2015 = (110-108.4)/108.4 = 1.48 percent
d) The CPI for December 2013 is 104.8 while the CPI for March 2015 is 106.8. It is evident
that the CPI for March 2015 is higher than the corresponding value for December 2013.
This clearly highlights that there has been inflation during the period since the CPI value
in March 2015 exceeds that of the base i.e. December 2013. Owing to inflation, the
purchasing power would get eroded as the value of money would decline. Hence, the
purchasing power of dollar decreased during the given period (Krugman and Wells, 2016).
Question 3
a) If there is a cut in the personal income taxes, then the disposable income available with the
consumers would increase. This would imply that the consumer spending would increase
on account of higher disposable income as part of it might be saved but another portion
would be used for consumption. As there is increase in the consumer spending, the
aggregate demand would increase as one of the key components of aggregate demand is
consumer spending (Barro, 2015). The impact of this increase is indicated in the AD-AS
framework highlighted below.

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It is evident that the AD curve has shifted from AD0 to AD1. However, in the short run, the
aggregate supply remains constant as indicated by AS0. The net result is that there is a
change in equilibrium. This leads to higher real GDP coupled with higher prices. The cut in
personal income tax is an example of expansionary fiscal policy as it is a fiscal policy tool
which is aimed at providing a boost to the economic growth (Koutsoyiannis, 2013).
b) Owing to personal income tax cuts, there could be possible inflation fears which may be of
concern to the RBA. As a result, RBA would follow a contractionary monetary policy.
The objective of this policy would be to reduce the aggregate demand which would be
carried out by increasing the cash rate. Increased cash rate would lead to higher interest
rates and thereby reduce AD. This is because there would be lowering of consumer
spending and also private investment (Krugman and Wells, 2016). The impact of this is
exhibited through the AD-AS framework shown below.

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As seen from the above graph, there is reduction of AD leading to shift in aggregate demand
curve from AD1 to AD2. In the short run, the aggregate supply does not alter and hence AS
curve does not shift. The result of the change in AD is that the equilibrium position has
changed. The new equilibrium tends to reduce the real GDP and also the price. As a result,
the RBA through such policy prevents the overheating of economy (Dombusch, Fischer and
Startz, 2016).

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References
Arnold, A.R. (2017) Microeconomics. 9th edn. Sydney: Cengage Learning, pp. 103-105
Barro, J.R. (2015) Macroeconomics.2nd edn. New York: MIT Press, pp. 123-124
Dombusch, R., Fischer, S. and Startz, R. (2016) Macroeconomics. 10th edn. New York:
McGraw Hill Publications, pp. 141-143
Koutsoyiannis, A. (2013) Modern Macroeconomics. 4thedn. London: Palgrave McMillan,pp.
89-90
Krugman, P. and Wells, R. (2016) Macroeconomics.3rd edn. London: Worth Publishers, pp.
113-114
Mankiw, G. (2014) Microeconomics. 6th edn. London: Worth Publishers, pp. 88-90