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ECOM4000 | Assessment 2: AssignmentDue date: Friday of Week 6Total marks: 15 marksWeighting: 15% of overall gradeNo. of questions: 3Word limit: 1500 words Question 1 (3 marks | word limit: 450 words) Read Extract 1 then answer the questions that follow. Illustrate your solutions with clearlylabelled diagram(s) where possible.Extract 1 Moreover, the price of oil usually falls in the autumn, after the summer surge in petrolconsumption has abated but before winter brings higher demand for heating oil.According to Sabine Schels, a commodity strategist at Merrill Lynch, seasonal swings infuel prices are becoming more pronounced, thanks to a shortage of refining and storagecapacity. At times of peak demand, she argues, the petrol price must rise high enough toprompt the reopening of old and inefficient refineries that would not normally beprofitable. Those refineries, in turn, use up a lot more oil, pushing up its price too.(The Economist 2006)(a)(b) Use the demand supply model to explain how changes in demand could cause seasonalvariation in the equilibrium price of oil.Use the demand supply model to show how the extent of seasonal variation in oil pricescan depend on the elasticity of supply. Why would ‘ … a shortage of refining and storagecapacity’ cause greater seasonal variation in oil prices? Question 2 (1½ marks) (1½ marks) (6 marks | word limit: 450 words) Read Extract 2 then answers the questions that follow. Illustrate your solutions with clearlylabelled diagram(s) where possible.Extract 2 This week average petrol prices in America reached a new record of $3.10 a gallon,according to the Department of Energy … The culprit is not the oil price, which hashovered above $60 a barrel for months. Instead the squeeze … comes from refiningcapacity … Demand for petrol has grown steadily and remains buoyant … Around theworld there has been little investment in new refineries since the Asian economic crisis ofthe late 1990s … At the same time, ever more exacting fuel specifications in Europe andAmerica have made refineries there less productive … The basic design of many olderrefineries has also contributed to higher petrol prices. These old refineries tend to churnout more fuel oil than petrol, but can often only sell the fuel oil at a loss. So a very highpetrol price is needed to lure them into production.(The Economist 2007, p. 69) ECOM4000_W06_AS2_v1 Page 1 of 2 Extract 2 describes how increases in demand have resulted in higher petrol prices, and howsupply responses have not entirely offset these price increases (i.e. even after increases in supply,prices remain higher than prior to the increase in demand). Supply responses have not fully offsetthe price increases for two reasons: petrol refineries (that convert oil to petrol) have become lessefficient; and there is a need to use older refineries as a source of increased supply of petrol.Assume the market for oil is perfectly competitive.(a) Explain how, in a perfectly competitive market, it is possible that the shift from the long-runequilibrium prior to the increase in demand to the new long-run equilibrium after theincrease in demand may involve an increase in equilibrium price. In your answer describewhat happens at both the market level and the firm level in the shift between long-runequilibria.(b) How does your answer in (a) match with what is observed in the extract about why supplyresponses have not fully offset the increase in price caused by higher demand? Question 3 (4 marks)(2 marks) (6 marks | word limit: 600 words) But if we want to understand our world – or how to change it – then understanding therational choices that shape it is a good place to start.(Tim Harford, The logic of life)Incentives are the cornerstone of modern life.(Steven Levitt, Freakonomics)Economists believe that in all aspects of life, humans make rational decisions that are influencedby a variety of incentives. In the books The logic of life and Freakonomics, the authors shed lighton how incentives and rationality help to explain some apparent mysteries in life.Steven Levitt asked the following two questions in Freakonomics. Provide responses to these two(2) questions based on incentives and rationality, and your analysis of the economic issue. Keep inmind that these questions are open-ended; there are no right or wrong answers.(a) Do real estate agents take a longer time and exercise more effort when selling their ownhomes than the homes of clients?(b) Are sumo wrestlers more likely to win a bout in which a loss would mean being removedfrom the list of the elite top 66 wrestlers, than lose a bout in which a loss does not have thisconsequence? (6 marks) END OF ASSESSMENT 2 ECOM4000_W06_AS2_v1 Page 2 of 2

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