a) What price is the cafe currently charging for gourmet burgers? (2 marks)
b) Since the introduction of the customising option, the local franchise has noticed that average daily sales of gourmet burgers increased from 56 to 60 and average daily sales of traditional fast-food burgers increased from 83 to 85. Over the same period, consumers’ incomes have risen by 6%. Specify and calculate the elasticities that the local franchise can use to explain the changes in sales. State any assumption you are making. State whether gourmet burgers and traditional fast-food hamburgers are a normal, inferior or luxury goods. Explain your answers. (6 marks)
c) A competitor offers a similar gourmet burger at a price of $12.50. The restaurant chain is contemplating whether to match the price. Would the franchise lose revenue on gourmet burgers sales if it charged $12.50? Justify your conclusion based upon your estimate of the own-price elasticity of demand. State any assumptions you are making. Interpret the value and meaning of this elasticity (use the mid-point method to calculate the own-price elasticity of demand). (6 marks)
d) The chain estimates that daily sales of fast-food hamburgers would decline by 21.22% if the price of gourmet burgers was reduced to $12.50. Specify and calculate the elasticity that can be used to explain this relationship between the price of gourmet burgers and sales of fast-food hamburgers. State any assumptions you are making. Interpret the value and meaning of this elasticity (use the mid-point method to calculate the elasticity). (6 marks)
e) Using the information from parts a), b), c) and d) of this question, provide a recommendation as to whether the cafe should reduce the price of a gourmet burger to $12.50 to increase total revenue. Use a price for hamburgers of $7.00 each and assume the supply of hamburgers is perfectly price elastic. State any other assumptions you make. (5 marks)
Question 3 (35 marks – ALL CALCULATIONS MUST BE SHOWN)
The market for 4WD cars has been described by the following supply and demand functions:
Supply: P = 15 + 2Q
Demand: P = 100 – 3Q
where P is the price per car in thousands of dollars and Q is the quantity of 4WD cars per month .

a) Find the equilibrium prices and quantities. Construct a graph of supply and demand for this market, showing all intercepts, and showing the equilibrium prices and quantities you have calculated. (5 marks)
b) At the market equilibrium price, what would be the total monthly revenue? (1 mark)
c) Calculate consumer surplus at the market equilibrium and indicate this surplus as an area on your diagram. Interpret the meaning of this value. (3 marks)
d) Calculate producer surplus at the market equilibrium and indicate this surplus as an area on your diagram. Interpret the meaning of this value. (3 marks)
e) A per-unit tax of $4,000.00 per car is imposed by the government on the firms that sell 4WD cars. Depict this on your demand and supply diagram. (Hint: the new tax inclusive supply function will be: P = 19 + 2Q). What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive? (5 marks)
f) How much is the government revenue from the tax on suppliers? (1 mark)
g) Calculate consumer surplus and producer surplus after the imposition of the tax and any deadweight loss associated with the tax. Indicate these surplus and tax revenue areas on your diagram. Explain what the deadweight loss represents. (6 marks)
h) Now examine the case where instead of imposing a per-unit tax of $4,000.00 per car on suppliers the government decides to apply the same per-unit tax on 4WD buyers. Depict this on your demand and supply diagram. (Hint: the new tax inclusive demand function will be: P = 96 – 3Q). What is the new market equilibrium quantity? What price will consumers now pay and what price will suppliers now receive? (5 marks)
i) How much is the government revenue from the tax on consumers? (1 mark)
j) Who bears the greatest burden of the tax in each of the two taxation cases, producers or consumers? (5 marks)
Question 4 (20 marks)
a) Draw a graph that illustrates the average total cost, average variable cost, average fixed cost and marginal cost curves for a firm. List any assumptions you have made in constructing this graph. (5 marks)
b) Assume that your answers to part a) represent the cost curves for a wine making firm. Illustrate and explain how each of the following affects the firm’s average total cost, average variable cost, average fixed cost and marginal cost.
(i) An increase in the price of labour. (5 marks)
(ii) A reduction in the annual rent the company pays on its warehouse. (5 marks)
c) With the aid of relevant diagrams, illustrate and explain the shapes of short-run and long run average total cost curves, and the logic behind the points at which these curves meet. (5 marks)