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SECTION A

This section consists of 3 questions. Please answer any 2 of the 3 questions. You should

provide relevant diagrams while answering the questions.

1. Suppose that the government decides Australians should reduce the consumption

of tobacco and, therefore, it imposes a tax on tobacco products.

a. Should this tax be imposed on producers or consumers? Explain using

both words and a diagram.

b. If the demand for tobacco becomes more elastic, will this tax be more

effective or less effective in reducing tobacco consumption? (Hint: Draw two

diagrams, side by side, with the same supply curve and different demand

curves.)

c. If the government also wants to maximise the tax revenue, should it impose

taxes on tobacco products with high demand elasticity or low elasticity?

Explain.

[6+6+6 = 18 marks]

2. We have demand equation: P = 6-Q and supply equation: P = Q.

a. Calculate the equilibrium price, equilibrium quantity and the total surplus.

b. Suppose government imposes a per-unit tax of $1 on producers. Derive the

new supply curve and calculate the new equilibrium price and quantity. Is

there any dead weight loss?

c. Now suppose demand becomes more elastic and we have a new demand

equation P=4-Q/3. How much is the deadweight loss from a tax of $1 per unit

sold? Is the deadweight loss greater or smaller than that in question (b)? Why?

[6+6+6 = 18 marks]

3. Using the AS/AD model, discuss the likely short-run and long-run impacts of the

following events with proper diagram(s), assuming that the government takes

no further action:

a. A sudden health crisis (such as the coronavirus pandemic in the first half of

2020) that lowers workersÂ’ income (starting from the full-employment level).

b. An income tax cut by the government to support the economy (starting from

the full-employment level).

[9+9=18 marks]

SECTION B

This section consists of 2 questions. Please answer 1 of the 2 questions. Useful

statistics formulae and a cumulative standardised normal distribution table can be

found in the subsequent pages of this exam paper.

1. To study the relationship between weekly expenditure and weekly income of

recent graduates, the following data have been obtained from 10 alumni:

a. Calculate the sample covariance. How do you interpret this value?

b. Calculate the coefficient of correlation. How do you interpret this value?

[12+12 = 24 marks]

2. The manager of a firm that owns several stores in Australia wants to examine the

effects of advertising campaigns on the sales revenue of the stores in January 2021.

They collect data on advertising expenditure ($000s) and sales revenue ($000s) from 20

stores located in different cities, and estimates the following regression equation:

?????????????????? = ??0 + ??1 ???????????????????????????? + ????????

The output when using Excel to estimate the equation is given below:

SUMMARY OUTPUT

Regression Statistics

Multiple R

0.43

R Square

A

Adjusted R

Square

0.14

Standard Error

36.77

Observations

20

ANOVA

Regression

Residual

Total

df

1

18

19

SS

5658.89

24334.86

29993.75

MS

5658.89

1351.94

F

4.19

Intercept

Advertising

Coefficients

197.12

2.12

Standard Error

27.70

C

t Stat

B

2.05

P-value

0.00

0.06

Significance F

0.06

a) Find the value of A, B, and C, and interpret their meanings.

b) Find the simple regression line and interpret the coefficients.

c) Can the manager conclude that there is a positive relationship between

advertising expenditure and revenue at (i) 1% significance level, (ii) 5%

significance level and (iii) 10% significance level? Briefly explain your answer.

d) The manager concludes that the advertising campaigns have been successful

because higher advertising expenditure caused higher sales. Why might the

manager be wrong?

[6+6+6+6 = 24 marks]

END OF EXAMINATION

Sample Mean: ?

X=

???

USEFUL STATISTICS FORMULAE

????????

????=1

??

????????

? 2

??? (???????? ????? )

Sample Variance: ?? =

= ????=1

???1

???1

????X =

(X???? ? X? )2 =

X 2 ??2

???

???

??X

2

????=1

????=1

2

???? ???????? 2

???

=

????=1 ??

??

???1

????

Sample Standard Deviation: ?? = ???2

?????? )

????????F

??? (????

(F ?????F? )

Sample Covariance: ??????(X, ??) =

????=1 ????

=

???1

????X?? = ??? (X???? ? X? )(?????? ? ??? ) =

???

????=1

????=1

???????? F???? ???????? F?

???

=

???1

????=1

???1

X???? ?????? ?

??X? ???

Sample Coefficient of Correlation: ?? =

??????(????,F)

????????F

=

??X ??????

??????????????F

General Addition Rule of Probability: ??(?? ???? ??) = ??(??) + ??(??) ? ??(?? ?????? ??)

General Addition Rule for Disjoint Events: ??(?? ???? ??) = ??(??) + ??(??)

Conditional Probability: ??(??|??) =

??(?? ?????? ??)

??(??)

General Multiplication Rule: ??(?? ?????? ??) = ??(??|??)??(??) = ??(??|??)??(??)

General Multiplication Rule for Independent Events: ??(?? ?????? ??) = ??(??)??(??)

Expected Value of a Discrete Random Variable:

?? = ?? (X) = ???

????=1 X???? ?? (X???? )

Variance of a Discrete Random Variable: ?? 2 = ??? [X???? ? ??(X)]2 ?? (X???? ) =

??

?????=1 X???? 2 ??(X???? ) ?

[??(X)]2

X??

Z-value in a Normal Distribution: Z =

?

Standard Deviation of the Sample Means: ?? =

X

????=1

?

?N

The Predicted Line for Simple Linear Regression Equation: ??????? = ??0 + ??1 X????

????????F

(???????? ?????? )(F???? ?F? )

and

(???????? ?????? )2

??????=1

??1 = ???????? = ?

???

??0 = ??? ? ??1X?

????=1

Coefficient of Determination: ?? =

2

???????????????????????? ?????? ?????? ??????????????

??????

?????????? ?????? ?????? ??????????????

= ?????? =

??????

??? (F???? ?F? ???? )2

Standard Error of the Estimate: ??F???? = ? ???2 = ?

????=1

???2

??? (F? ???? ?F? )2

?? (

?????=1

F???? ?F? )2

????=1

Source: Berenson et al. (2012).

Page 6 of 7

Source: Beren

son et al. (2012).

END OF EXAMINATION

Page 7 of 7

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attachment

Tags:

Reduce the Consumption of Tobacco

will make tobacco products costly

the tax burden to the consumer

price and demand are inversely related

Initial quantity demanded

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