Question 1: (a)Suppose that oil prices rise sharply for years as a result of a war in the Middle East. Illustrate with a diagram what happens to the: (i)Demand for automobiles? (ii)Demand for home insulation? (iii)Demand for coal? (iv)Demand for tyres? (v)Demand for bicycles? (b)Explain the impact of external costs and external benefits on resource allocation; (c)Why are public goods not produced in sufficient quantities by private markets? Question 2: (a)Explain why scarcity forces individuals and society to incur opportunity costs. Give specific examples. (2.5 marks for explanation and diagram plus 2.5 marks for specific examples) (b)Suppose a chocolate bar manufacturer promotes its products by advertising and opportunity to win a 'free car'. Is this carfree because the winner pays zero for it? (2.5 marks) (c)Why is the production possibility frontier bowed outwards? Question 3: In some large cities, motorists pay a fee when they bring their vehicles into the busiest part of the city (congestion charge). (alllustrate with a diagram and explain how this charge is an example of the price system at work; (2.5 marks for diagram plus 2.5 marks for explanation) (b)How do you think that the authorities would determine the level of the charge if they have a particular target for the reduction in the number of vehicles entering the congestion charge zone? (2 marks) (c)Given that revenues from these congestion charges are invested in the city's transport system, how will this affect the charge level holding all other variables constant? (3 marks) Question 4: (a)Suppose the income elasticity of demand for pre-recorded music compact disks is +7 and the income elasticity of demand for acabinet maker's work is +0.7. Compare the impact on pre¬ recorded music compact disks•and the cabinet maker's work of a recession that reduces consumer incomes by I 0 per cent. (2 marks) (b)How might you determine whether MP3 music players and the pre-recorded music compact discs are in competition with each other? (2 marks) (c)Suppose the income elasticity of demand for pre-recorded music compact disks is +7 and the income elasticity of demand for acabinet maker's work is +0.7. Compare the impact on pre¬ recorded music compact disks•and the cabinet maker's work of a recession that reduces consumer incomes by I 0 per cent. (2 marks) (d Interpret the following Income Elasticities of Demand (YED) values for the following and state if the good is normal or inferior; (3 marks total, 1.5 marks per part) YED=+0.23 YED=-2.4 e Interpret the following Cross-Price Elasticities of Demand (XED) and explain the relationship between these goods. (3 marks total, 1.5 marks per part) XED=+0.85 XED=-4.5 Question 5: (a)Discuss the following statement: 'In the real world there is no industry which conforms precisely to the economist's model of perfect competition. This means that the model is of little practical value'. (2.5 marks) (b)illustrate with a diagram and explain the short-run perfectively competitive equilibrium for both (i)the individual firm and (ii) the industry; (2.5 marks each) (c)Illustrate with a diagram and explain the long-run perfectly competitive eqiJilibrium for the firm (2.5 marks)