BML 200 MICROECONOMICS WBA

SEP – DEC 2021 SEM

QUESTION ONE

Read the Case Study below carefully and answer the questions that follow:

Copper Pricing

The price of copper was highly unstabble over the year 2008 to 2009. It collapsed from a record

level of $ 8,940 in April 2008 to $ 2,871 per tonne by December 2009. The steep drop in price

followed lower economic growth. The decrease in demand was most noticeable in the motor

vehicle and construction industry which use vast amounts of metal. Its impact was to reduce

profit and share prices of major copper mining companies.

However, by much 2010 copper prices recovered to almost $ 7,500 per tonne. This followed

disruption to supply in several copper mines in Chile due to a severe earthquarke and a series of

strikes by miners, demanding a pay rise. Morover in the year 2010 the world enonomy recorded

a recovery from the recession experienced. The dramatic price fluctuations of copper led to

analysts proposing the implementation of a guaranteed minimum price scheme. Rising copper

prices made it profitable to open new mines all over the world and two major mining companies

jointly proposed to create North Americas largest pit mine at Pebble Mill in Bristol Bay,
Alaskas. The joint proposal also included the construction of a dam to hold the vast amount of

toxic waste emitted during the mining process.

However, Bristol Bay is home to the world’s most productive salmon fishery and there is

concern that pollution from the mines would destroy the thriving fishing and canning industries

as well as having a negative impact on tourism. A strong resistance to the establishment of the

mine has been brewing and remains unsettled to date.

Required:

A. Answer questions (i) to (iv) using the case study above

i. With reference to the case study identify and explain the cause of the decrease of copper

prices between April and December and illustrate your answer using a demand and

supply curve. (4 Marks)

Solution:

The price fall from $ 8,940 in April 2008 to $ 2,871 per tonne by December 2009, the

Quantity demanded of copper also fall from Q1 to Q2. This is due to lower economic

growth. There is a decrease in demand for industries that use large metal, like motor

vehicle and construction sector.

ii. From the case study is copper a normal or inferior good? Explain your answer.

(2 Marks)

Solution:

A normal good is a good with positive YED, as the real income increases, the quantity

demanded increases.

YED=ΔQ÷ Δ real income

 As the real income rose after the recovery from the recession, the quantity demanded of

copper rose.

Therefore copper is a normal good. An inferior good has a negative YED.

iii. Explain the nature of the price elasticity of copper. (2 Marks)

Solution:

The price elasticity of supply measures the responsiveness of supply due to change in

price.

The supply of copper is likely to be price inelastic due to time period required to find

and mine copper out of ground. This is shown by fluctuating prices from $ 8940 to $

2,871 to $ 7500. This shows supply cannot keep up demand and price rising rapidly.

However copper is a non-renewable good, so it can be stockpiled due to low prices april

and december 2009, producers may have stockpiled copper to sell when prices rise

again. Therefore this will make copper more price elastic.

Also, due to lower economic downturn,there would be potentially be a lot of unused

resources such as labour. When prices rise again, the spare capacity in the market from

higher income people, and copper can be extracted easily making it more price elastic.
iv. Evaluate the likely economic effects of a guaranteed minimum price scheme to

reduce fluctuation in the price of copper. Illustrate your answer with the help of a

demand and supply curve. (4 Marks)

Solution:

The minimum price is the minimum price ceiling that can be legally paid to producers of a

commodity in the market.

It is set by the government to prevent the price from falling below a certain level. A

reduction of copper price fluctuation makes it easier for firms to budget spending as they are

able to estimate of their cost of production to relocate on copper.

The price increase to P1, supply expand to point B(Q2) while demand contract to point

C(Q1). There is greater certainty in the market. Producers incomes are increased and

established, leading to greater investment in the firms. Better technology and machinery are

invested. Besides that, an increase in price may prevent redundancies among workers, which

maintain the employment in the industry. This may increase the living standards and

improve inequalities among workers. However, since the price of copper is set above the

equilibrium level, the price will increase. This may lead to increase the cost of production of

firms that use copper as a raw material. They may not afford the increase in variable cost

and lead to bankruptcy. Copper producers are guaranteed an income which might cause

them to be less efficient.

 Government spending on scheme purchasing excess supply(Q2-Q1) involves an opportunity

cost. It may have to rise taxes and cut spending on other programmes such as merit goods,

education. The financial cost often fall on taxpayers who don’t deliver direct benefit from

the scheme.

QUESTION TWO

a) The market supply and demand functions for a product are given by:

Qs =3,000+200 p

Q D=13,500−500 p

Determine the market equilibrium quantity and price. (3 Marks)

Solution:

Market equilibrium is struck when:

          Market Demand = Market supply
Or,           Qd=Qs
               3000+200p=13,500-500p
⇒200p+500p=13500-3000
⇒700p=10500
⇒p=15
Qd= 3000 + 200(15)

=6000
Equilibrium price = 15
Equilibrium quantity = 6000