Part A:  Answer the following questions.  
Australia produces ethanol from sugar cane, and the land used to grow sugar cane is used to grow food crops. Suppose that Australia’s production possibilities for ethanol and food crops are as in the table.
(a)    If Australia increases its production of ethanol from 40 barrels per day to 54 barrels per day, what is the opportunity cost of an additional barrel of ethanol?  (2 marks)
(b)    Does Australia face an increasing opportunity cost of ethanol? What feature of Australia’s PPF illustrates increasing opportunity cost? Explain.  (2 marks)

The table sets out the demand and supply schedules for banana.  
(c)    Suppose a cyclone destroyed some banana farms in QLD and the quantity of banana supplied decreased by 100 boxes a week at each price. But at the same time the demand for banana increased by 100 boxes a week at each price. Explain what would happen to the market supply and demand curves? How and why would the market equilibrium price and quantity adjust at the end?  What would be the new equilibrium price and quantity? Draw a graph and illustrate the changes on your graph.  (4 marks)

Part B:  Answer the following questions.  
(d)    When Yeon’s income was $2,200, he bought 5 kgs of rice a month. Now his income is $3,300 and he buys 4.75 kgs of rice a month. Calculate Yeon’s income elasticity of demand for rice. Show your calculation. Is rice income elastic or inelastic? Is rice normal good or inferior good?  (3 marks)



Suppose an outbreak of mad cow disease cuts the quantity of beef demand by 10 per cent.  
(e)    If the price elasticity of demand for beef is –1.25, by how much would the price of beef have fallen if the demand for beef increased by 10 per cent? Show your calculation.  (3 marks)

(f)    Market analysts estimate that the change in the price of beef will decrease the price of pork by 20 per cent and decrease the quantity demanded for beef by 10 per cent. What is the cross price elasticity of demand for beef with respect to the price of pork? Does the elasticity indicate that beef and pork are substitutes or complements?  (3 marks


(g)    Market analysts estimate that, a 10 per cent increase in the change in the price of pasta sauce will decrease the quantity of spaghetti noodle demanded by 6 per cent. What is the cross elasticity of demand for spaghetti noodle with respect to the price of pasta sauce?  Does the elasticity indicate that spaghetti noodle and pasta sauce are substitutes or complements?