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Question 1. Explain why economic theory should never guide policy action.No citations are required for this answer.
A) The task is to describe multiplier effects in the Grapetown economy usingthree related industries. The first industry is Wine Manufacturing (ANZSIC Code1214), for which the proportion of local consumption is 0.6. Total employment inmetropolitan area is 20,000 in this industry and equilibrium wage is $7,000.
i. Select and define two additional related industries. Describe why theyare related to Wine Manufacturing and define their proportion of localconsumption in the language of economics [15 points].
ii. Describe the economic effects in dollars of the following changes: anincrease in export income in Wine Manufacturing by $1,000,000, a$750,000 increase in export income for your second industry, anddecrease of $300,000 in export income for your third industry [15points].
iii. Using graphs demonstrate the multiplier direct and indirect effects forone of the two industries you have chosen [10 points].
B) You are a Ministerial Advisor on questions of economics in your localDepartment of Transportation. As a method of mitigating traffic congestion onyour city’s motorway network, you have suggested to the Minister that a perkilometrecongestion price be levied.Unsure, the Minister requests a memorandum discussing the supply and demandeffects of implementing such a toll regime. The Minister’s main issue is that sheperceives two groups of stakeholders: one that owns large cars that consumelots of petrol, and one that owns small, fuel-efficient cars. The Minister wants anexplanation of how these two stakeholder groups will be impacted.In the initial equilibrium, there are 500,000 large, polluting vehicles on the roads,and 500,000 small, fuel-efficient vehicles on the road. For the small cars, theaverage cost per vehicle-kilometre is $0.30 (in direct fuel and maintenancecosts). For the large cars, the average cost per vehicle-kilometre is $0.50.
1) Use supply-demand graphs to the show the effects of the taxes on the twostakeholder groups. Be sure to label your axes with appropriate labels[10 points].
2) Explain the direction and relative magnitude of the shifts in the demandand supply curves you depict [15 points].
3) Compare the effects on costs and quantities after systems have reequilibrated,for both stakeholder groups [15 points].
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