ECON1000 Open Campus
Micro Paper – contributes 20% [DUE: October 23rd @ 11:55pm]
Case Study: Demand and Supply Analysis (Units 4 and 5)
This Micro paper is designed to apply the theories and principles of
Microeconomics to the real world. The paper is divided into two sections. Each
section is marked out of 30 and contributes 10% to your final course grade.
• Your response should be typed, with at least 1 ½ line-spacing, and a 12point font size.
• Where necessary, graphs can be drawn by hand and scanned into
• Plagiarising your colleagues’ work or allowing your work to be plagiarised
will be penalized with a score of zero. 1 Section A: The Market for Coffee (10%) Read the following four extracts and answer the questions below
Extract 1: Coffee prices on the rise
Coffee prices hit a record 14-year high this month, and it’s only a matter of time
before coffee lovers will have to pay more in stores and coffee shops. A series of
bad news has affected the market for coffee – bad weather in South America is
threatening crops; Brazil and Vietnam are talking about hoarding their stocks;
and US stockpiles are reportedly at 10-year lows. Moreover, the current behavior
of prices reflects uncertainties concerning short-term coffee supplies. As
uncertainties persist, investors are placing significant bets on where prices are
Adapted from CNNMoney.com (February 2011) Extract 2: Colombian government extends subsidies to the coffee sector
In South America, despite a budget deficit, the Colombian government
announced a subsidy package in November 2008, aimed at controlling the
escalating price of coffee. The subsidy package includes assistance to farmers
by extending discounts of up to 50% on fertilizer to farmers and provision of cash
credits to farmers for the replacement of old and poor-yielding coffee trees with
newer and higher-yielding varieties
Adapted from USDA Foreign Agricultural Service Report (April 2009) 2 Extract 3: Venezuela maintains strict price regimes on basic foods
Since 2003, the Venezuelan President has maintained a strict price regime on
some basic foods like coffee, beans, sugar and powdered milk. But this measure
designed to curb inflation has alienated Venezuela’s coffee importers who say
their profit margins have been reduced to nothing.
For at least a week, there has been no roasted coffee available on the shelves of
Venezuelan supermarkets, as wholesalers and coffee importers have been
withholding their coffee from sale. The situation is so bad that authorities have
successfully stepped in to seize coffee, which is deliberately being withheld from
Yet several food stores in Venezuela’s capital city Caracas say the coffee raids
are not addressing the fact that shops are also running low on sugar, maize,
powdered milk and beans. Store managers insist they are not being supplied with
new stock from wholesalers and importers.
Three days ago, street sellers working in the country’s black market were still
able to provide the roasted coffee that the supermarkets were not stocking.
However, even they have since admitted defeat.
Adapted from the BBC (January 2006) Questions
(a) Using Extract 1, illustrate and explain the impact on the market for coffee
(b) Using Extract 2 and 3,
Examine the government intervention In Colombia. To what extent
were the objectives of the Colombian government met. Justify your
(ii) Examine the government intervention In Venezuela. To what extent
were the objectives of the Venezuelan government met. Justify
(10 marks) (iii) Which intervention is more effective? Justify your response.
(4 marks) 3 Section B: Rent Subsidy (10%)
Assume there is a well-defined geographic area of a city. The area is composed
exclusively of apartments and is populated by low-income residents. The people
who live in the area tend to stay in that area because (1) they cannot afford to
live in other areas of the city, (2) they prefer to live with people of their own ethnic
group, or (3) there is discrimination against them in other areas of the city. Rents
paid are a very high percent of peoples’ incomes.
(a) Would the demand for apartments in this area be relatively inelastic or
relatively elastic? Explain.
(b) Would the supply of apartments in this area be relatively inelastic or
relatively elastic? Explain.
(c) Draw the demand and supply curves as you have described them,
showing the initial equilibrium price and quantity. Label carefully.
(d) Now assume the government creates a rent supplement program.
Under this program, the renter is required to pay 30% of income in rent
any additional rent is paid by the government (up to a limit). For example,
a low-income person with an income of $1,000 a month would be required
to pay $300 in rent (30%). If the rent were $500, the government would
pay the other $200. Analyze the results of this program. Show the
changes on the graph and explain what will result. Who gains and who
loses from this program?
(e) Instead, now assume that the government decides to provide a building
subsidy to people who build apartments in this low-income area. The
government will pay a certain percent of their costs. Analyze the results of
this program. Show the results on the graph and explain what will result.
Who gains and who loses from this program?
(f) From the point of view of improving housing for the poor, which is the
better public policy? Justify your response.
(4 marks) 4