HI5003: Economics for Business Online Exam, T3 2019, Final Assessment

This document presents the solutions to the HI5003 Economics for Business online exam from Trimester 3, 2019. The exam covers key economic concepts including demand and supply, cost of production, inflation, unemployment, market structure, and the business cycle. The first question analyzes the impact of a drought on food supply using demand and supply models and production possibility frontiers. The second question examines Happy's business decisions, calculating economic profit and assessing the viability of her food kiosk. The third question delves into inflation, calculating inflation rates and differentiating between types of unemployment. The fourth question focuses on market structure, analyzing Hungry Jacks' market position and calculating profit maximization. The fifth question explores the business cycle and GDP calculation using provided data. The solutions provide detailed explanations and calculations for each question, offering a comprehensive understanding of the core economic principles assessed in the exam.

Student Number: (enter on the line below)
APS2042
Student Name: (enter on the line below)
MARIA ROSARIO ENRILE
HI5003 Economics for Business
Online Exam
Trimester 3, 2019
Assessment Weight: 50% of the total marks
Instructions:
This exam consists of five (5)
All 5 questions must be answered by using the answer boxes provided in this paper.
Each question is worth 10 marks.
Total: 50 marks
HI5003 Online Exam T3 2019

Answer all five (5) following questions. Each question is worth 10 marks
Question 1 Demand and supply
Victoria is the food basket for Australia. In 2017, Victoria witnessed a severe drought that is reported
to be the worst in many years. Assume all factors constant meaning that there is no external
influence in the market except the drought.
(a) Use the demand and supply model figure below to explain the impact of the drought on
food supply to Northern Territory, a state that relies on food supplies from Victoria.
(8 marks)
Drought Demand and supply model
ANSWER: ** Answer box will enlarge as you type
Because of drought in Victoria, there is an interruption in the food supply in Victoria. Since,
Northern Territory is dependent on Victoria for supply of food, food supply in Northern Territory,
food supply in the Norther Territory will be hampered as well. Considering the above figure suppose
demand and supply of food in the Norther Territory market is given by DD1 and SS1 respectively. The
equilibrium in the market is achieved at Q3. The initial equilibrium price is P2 and that of equilibrium
quantity is Q4. Now, because of the severe drought in Victoria, food supply in Victoria will fall.
Because of lower supply of food in Victoria the food supply in the Northern Territory will decline as
well. As supply of food in Norther Territory falls, this shifts the supply curve to the left to SS 2. Since
there is no other external force except drought, demand for food remain the same. Given the
demand, new equilibrium is achieved at the intersection of new supply and old demand curve. The
new equilibrium is achieved at Q4. The corresponding equilibrium price is P4 and that of the
equilibrium quantity is Q2. Therefore, because of the drought available quantity of food in Norther
Territory falls while the price of food increases.
HI5003 Online Exam T3 2019

HI5003 Online Exam T3 2019

(b) Suppose in 2019 to promote food production, the Federal Government of Australia provided
high technology equipment to facilitate irrigation. Assume Victoria supplies machinery and
food, use a production possibility frontier (PPF) to explain the impact of high technology
equipment for irrigation on food supply in Australia. (2marks)
Victoria food and machinery production possibility frontier
ANSWER:
The government has given high technology equipment to facilitate irrigation. Because of
enhancement of irrigation technology more production of food will be possible with the
same input. Keeping the production of machinery constant, more food can now be supplied.
This will shift the production possibility curve outwards to the Food axis. Accordingly, the
PPF will shift from PPF1 to PPF2.
HI5003 Online Exam T3 2019

Question 2 Cost of Production
Happy quit her part-time job as a nurse earning AUD 60,000 per year to start her own food kiosk
business. To start the business Happy utilized AUD 50, 000 she was earning from her rental property.
Also, Happy used AUD 50,000 she had saved in Commonwealth Bank earning 5% interest per year.
Happy’s first year business was summarized as follows:
Item Amount (AUD)
Total Revenue 160,000
Labor cost 100,000
Cost of Materials 25,000
Equipment rental 30,000
Use the information provided to answer the following questions
(a) Calculate the business economic profit. If necessary use the table below. (7 marks)
Total revenue 160000
Part time job 60000
Rental property 50000
Savings commonwealth bank 50000
Interest 5% 2500
Labor cost 100000
Cost of materials 25000
Equipment rental 30000
Total (157,500 )
(b) Explain whether Happy made the right decision to quit her teaching job. (3 marks)
ANSWER:
The business economic profit is negative meaning that his total cost (explicit cost + implicit cost)
exceeds the total revenue earned from the business. Therefore, Happy made the wrong decision to
quit her teaching job.
HI5003 Online Exam T3 2019

Question 3 Inflation and unemployment
a) Suppose the Happy land Bureau of Statistics indicated that the Consumer Price Index (CPI)
increased 102.2 in 2017 to 105.5 in 2018. Use this information to answer the following
questions: (5 marks)
(i) Calculate Happy land’s inflation rate in 2018. (3marks)
ANSWER:
= ( 105.5- 102.2) / 102.2 * 100
= 3.229 %
(ii) Suppose a firm borrowed money from a bank, examine the effect of inflation to the
parties (firm and bank). (2 marks)
ANSWER:
Inflation affects the parties in two opposites way. The firm is the borrower. Because of inflation the
value of money falls. Therefore, when the firm return the same amount of money to the bank it
worth less than the original amount of money that was borrowed. Since the firm has to pay back
money having a relatively lower value in real terms to the bank, the firm gains because of inflation.
By similar rationale bank receives money from the firm which worth less than the money originally
lent. Therefore, the bank losses because of inflation.
b) Distinguish between structural unemployment and frictional unemployment. Examine the
most hard type of unemployment to address (5 marks)
Structural unemployment in contrast refers to the type of unemployment created by the
mismatch of skill of workers and the skills required for the existing job opportunities.
Frictional unemployment refers to the type of unemployment created because of search time
that workers require to switch their jobs or in times of either entering or re-entering the labor
market.
Structural unemployment is the hardest type of unemployment because it is association with a
long term problem for the economy. It usually takes a much longer time to resolve the
problem of structural unemployment since it is created due to lack of skills of the existing
labor force. Addressing this type of unemployment requirement arrangement of training
program to develop skills of the workers suitable for new job or new sector. This requires
both sufficient amount of money and time.
HI5003 Online Exam T3 2019

Question 4: Market Structure (10 marks)
Hungry Jacks is one of the fast foods firms in Sydney with the following short run cost curves.
(a) Use 2 characteristics to explain the market structure for Hungry Jacks company
(4 marks)
ANSWER:
The market structure of Hungry Jacks company is monopolistically competitive market. Two
characteristics of market structure are
i) There are large number of sellers selling similar but differentiated products
ii) Firms can freely enter or exit the market
(b) What price does Hungry Jacks charge and what quantity will the firm produce to maximize
profit? (2 marks)
ANSWER:
In order to maximize profit, Hungry Jacks charges a price of AUD 80 and equilibrium quantity of 300
(c) Calculate this firm’s profit or loss. (4 marks)
ANSWER:
Total revenue = (300 * 80) = AUD 24,000
Total Cost = (300 * 60) = AUD 18, 000
Profit = Total Revenue – Total Cost
= AUD 24, 000 – AUD 18, 000
= AUD 6,000
HI5003 Online Exam T3 2019

HI5003 Online Exam T3 2019

Question 5: Business Cycle and measuring the size of the economy (GDP)
a) The business cycle model shows short-term fluctuations in the level of economic activity
along a long-term trend. Examine the two business cycle phases that can occur in a nation. (5
Marks)
ANSWER:
Two business cycle phases that can occur in a nation are expansion and recession
Expansion: Expansion is considered as the first phase of business cycle. During this phase, the
economy continues to expand as measured in terms of increase in economic activities such as gross
domestic product, employment, profit, wages, supply and demand at the aggregate level. During this
time generally debtors are able to pay their debt on time, aggregate investment of the economy is
high along with a high velocity of money supply. This phase continues as long as favourable
conditions prevail in the economy.
Recession: The phase of recession is followed by the phase of boom. During this time economic
activity begins to slow down. There is a rapid decline in aggregate demand for goods and services in
the economy. Prices fall and unemployment increases. The economic indicators such as GDP,
average income, wage and other all contract during the recessionary phase.
b) Suppose the Following information was published by Happy land Republic in 2017:
Item Amount (AUD billion)
Household consumption 1029.81
Government consumption 340.92
Exports 386.39
Gross private domestic investment 352.69
Imports 386.95
Government investment 88.19
Use the information to calculate Happy land Republic’s GDP in 2017. If necessary use the table
below. (5 Marks)
PRIVATE CONSUMPTION 1029.81
GROSS INVESTMENT +352.69
GOVERNMENT INVESTMENT +88.19
Government Consumption +340.92
EXPORTS +386.39
IMPORTS -386.95
GDP 1811.05
HI5003 Online Exam T3 2019

END OF EXAMINATION PAPER
HI5003 Online Exam T3 2019

Bibliography
Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.
Mankiw, N.G., 2020. Principles of microeconomics. Cengage Learning.
HI5003 Online Exam T3 2019