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DM19129 Micro Economics Assignment Pawan Asrani

1. In the figure below how many pounds of sugar are sellers willing to sell at a price of $20?
How much is demanded at this price? What is the buyer’s willingness to pay when the
quantity is 20 lb? Is this combination of $20 per pound and a quantity of 20 lb an
equilibrium? If not, identify the area of unexploited gains from trade.

Soln: At the price $20 the sellers are willing to sell 20lbs, whereas the demand at that price is 40lbs.
The buyer’s willingness to pay when the quantity is 20lbs is $45. The combination of $20 per pound
and a quantity of 20lbs is not the point of equilibrium. The point of equilibrium is when the demand
and supply are equal which at the quantity 30lbs; it can be seen in the above diagram. The area of
unexploited gain from trade would be the area ABC in the above diagram, which is also the shaded
region. That is the producer’s surplus region. The quantity demanded is more than quantity supplied
in that region.

2. The following is the market for sugar.

a. What would happen to the equilibrium quantity and price if the wages of sugar cane
harvesters increased? Draw the diagram
DM19129 Micro Economics Assignment Pawan Asrani

b. What if a new study was published that emphasized negative health effects of consuming
sugar? Draw the diagram

Soln: If the wages of sugarcane harvesters increased, then the cost of producing sugarcane increases
which would increase the price of the sugarcane. The supply curve would shift up to the left which
indicates increase in the price of sugarcane at the same quantity. The diagram would be as follows:

The equilibrium would change which is shown in the above figure. The equilibrium price would be at
more than $30 and the quantity demanded at the equilibrium i.e. the quantity at the equilibrium
would be less than 50000 pounds as shown in the above diagram.

Now if a new study published emphasizes negative health effects of consuming sugar, then the
demand would decrease irrespective of no change in price. The demand curve would shift to left
that is the demand would decrease at the same given prices. The diagram would be as follows:
DM19129 Micro Economics Assignment Pawan Asrani

In the diagram the new equilibrium point can be clearly seen. The new demand curve is drawn which
is to the left of the earlier one. The arrows depict the change because of the published study
regarding the negative effects of consuming sugar.

3. Draw the graph for the world demand/supply and the world price of computers. Assume,
India is an importer and purchases computers from the rest of the world. Graphically, show
the domestic equilibrium in India and rest of the world before international trade and after
the trade. 3 graphs – 1 for the Indian market, 1 for the world market, 1 for rest of the world

Soln: The 3 diagrams are as follows:

REST OF
INDIAN WORLD
THE WORLD
MARKET MARKET
MARKET
S
S’ S
S
S’
PRICE

PRICE
PRICE

D D D

Quantity Quantity Quantity

In the above diagram:

S: Supply before International Trade

S’: Supply after International Trade

In the Indian Market after the International Trade the quantity supplied would increase and whereas
in the rest of the world market quantity supplied would decrease as some quantity has been shifted
from there to the Indian Market.

4. What should happen to the “demand for speed” (measured by the average speed on
highways) once airbags are included on cars? Why? (no diagram, analytical)

Soln: As the airbags will be included in the cars, the drivers would feel safe and they will tend to
increase their speed. Thus the demand for average speed will increase. The demand curve will
shift to the right.