ECON10004: INTRODUCTORY MICROECONOMICS

TASKS FOR TUTORIAL 3

(Week beginning March 18)

TASK 1

1. The market for netballs is perfectly competitive. Which of the following is

correct in answer to the question, “The existence of excess demand (shortage) in
this market would cause:
a) A decrease in demand for netballs.
b) A decrease in the price of netballs, together with a decrease in quantity of
netballs demanded and an increase quantity of netballs supplied.
c) An increase in the price of netballs, together with a decrease in quantity
demanded of netballs and an increase in quantity supplied of netballs.
d) A decrease in the quantity of netballs traded.

2. The market for wine is perfectly competitive. An increase in the incidence of

disease in wine grapes, and an increase in the price of beer (a substitute for wine)
occur. (Assume that the disease destroys some grapes, but does not affect the
quality of the surviving grapes.) The effect on the market for wine will be:
a) A decrease in supply of wine, and a decrease in demand for wine.
b) A decrease in equilibrium quantity traded of wine, and it is not possible to say
what will happen to equilibrium price.
c) An increase in supply of wine, and an increase in demand for wine.
d) An increase in equilibrium price, and it is not possible to say what will happen
to equilibrium quantity traded.

3. Microchips are an input to computer hardware. Both microchips and computer

hardware are traded in perfectly competitive markets. An improvement occurs
in efficiency of production of microchips. The effects on the markets for
microchips and computer hardware will be:
a) An increase in the equilibrium price of microchips, and an increase in the
equilibrium price of hardware.
b) An increase in the equilibrium quantity traded of microchips, and a decrease in
the equilibrium quantity of hardware traded.
c) A decrease in the equilibrium price of microchips, and an increase in the
equilibrium quantity of hardware traded.
d) A decrease in the equilibrium quantity of microchips, and a decrease in the
equilibrium quantity traded of hardware.
4. For the market for avocadoes suppose a demand function
Qd = 10 – 2P + Y and a supply function Qs = 2 + P + 0.5W
where Q is quantity, P is price, Y is income and W is an index of weather.
a) Suppose Y = 1 and W=2, specify the demand and supply curves, show them
on a graph, and derive the equilibrium price, quantity and producer
revenue
b) Assess the effects of poor seasonal conditions, such that W = 1, on the
market outcomes P, Q and revenue. What is the effect of the poor seasonal
conditions on producer revenue?
c) Assess the effects of a doubling of income Y = 2, W = 2, on market
outcomes

Qs = 2.5 + P Qs = 3 + P

5.5

2.833
2.667

Qd = 11 – 2P

2.5 3 5.33 5.67 11 Q

a) Producer revenue = P*Q=15.11

b) TR=P*Q=15.11
c) Qd=12 – 2P
Qs=P+3
P=3, Q=6, TR=18
TASK 2
Read attachment 1 (‘On your bike’, The Economist, 20 September 2008, p. 75).
Use the demand/supply model to answer the questions below:
a) What does the article describe as the main changes to demand for and supply
of bicycles?
b) How would you predict these changes would affect the equilibrium price of
bicycles? Does the article confirm your prediction?
c) The article suggests that the total quantity of bicycles sold has increased. What
does this suggest about the relative magnitudes of changes to demand and
supply?
d) What does the text ‘Each market has its own idiosyncrasies…’ suggest is an
important determinant of demand in any country?

Attachment 1
On your bike
The Economist, 20 September 2008, p. 75
These are tough times for carmakers, many of which are labouring under high oil
prices, slowing demand and financial weakness. For makers of human-powered,
two-wheeled vehicles, by contrast, business is booming. Giant Manufacturing,
the world’s largest bicycle-maker, sold a record 460,000 units last month, and is
heading for its best year ever…

After a slow 2006, sales took off last year in Europe and America as fuel prices
shot up. Suddenly a bicycle seems like the remedy for many modern ills, from
petrol prices to pollution, and to the desire for better health. Each market has its
own idiosyncrasies. Europeans mainly use bikes for commuting, but have the
habit of ignoring models made explicitly for that purpose in favour of sleeker,
faster models…Americans prefer off-road BMX trail bikes. Taiwanese demand is
led by racing-style bikes used for exercise.

Giant, as the largest producer, makes everything for every market. Its share
price has held up fairly well…despite dramatically higher costs for raw materials,
notably aluminium. Strong demand and a desire for better bikes have allowed
bikemakers to pass higher material costs on to buyers. Since 2004 wholesale
prices of bikes have gone up by 23% in Europe, 45% in America, and almost 50%
in Asia.