University of the Philippines

SCHOOL OF ECONOMICS
Economics 11
PROBLEM SET 1

DR. ARCENAS HILARIO/MANALO/QUIZON

INSTRUCTIONS: Read the following instructions and questions carefully.

1. Answer all questions completely in a blue book individually.

2. For questions requiring computation, please show your solutions and box all final answers.
3. For graphs, please label them properly and identify the points clearly.
4. Answers which are not legible and/or intelligible shall not be given any points.

Submit your answers on/before 5:00PM, 31 January 2020 (Friday) at room SE 329. Late submissions
shall not be accepted.

CHAPTERS 1 AND 2 (30 points)

(10 points) Indicate whether the following statements are true or false. If false, change the identified word
or phrase to make the statement true

1. All economic problems ultimately stem from the fact that society is always in a situation of
scarcity.
2. The scientific method cannot be applied to the study of Economics, an inexact social science.
3. If two economies start with the same production-possibility frontier between capital goods and
consumer goods, then the one whose beginning point represents a smaller fraction of consumer
goods will probably, in the next period, have a production-possibility frontier located nearer the
origin.
4. Equitable distribution of resources and income is always assured by an efficient market economy.
5. When there are differences in individual abilities, specialization is not desirable.
6. “What,” “for whom,” and “how” are problems that must be solved by prices in a capitalistic
economy but which are solved automatically in a socialist economy
7. As society produces more and more of one good, the opportunity cost of doing so increases due
to specialization.
8. Private property rights can only be bestowed on tangible commodities.
9. Decisions about how much of current output to devote to the production of capital goods may
help determine the rate of growth of the economy.
10. The opportunity cost of an hour spent in a lecture is the same for the students and the teacher.

(5 points) Determine if any of the following statements demonstrate a logical fallacy. If it does, identify
what that logical fallacy is.

11. A bartender served lambanog to Jack, who is Irish. However, Jack found it too strong for his tastes
and asked for whiskey instead. The bartender never offered lambanog to Irish customers since,
opting to serve them whiskey first.
12. In studying the relationship between inflation and economic development in the ASEAN region,
Jane assumes that other conditions in the ASEAN countries do not differ significantly.

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 13. During an earthquake, Artemis commands the ground to stop shaking. Shortly after that, the
earthquake stops. Artemis concludes that she has been blessed with the power to stop calamities.
14. After the release of the Grand Theft Auto (GTA) V, a video game known for its violent content,
Michael noticed that there had been more reports of violent crimes committed by teenagers.
Michael concludes that the violence portrayed in GTA V is causing real-life violent tendencies in
teenagers.
15. Because total income in the Philippines has increased over time, every Filipino’s total income has
increased as well.

Give short answers (in 2 to 3 sentences, if possible and/or with the required graph/s) to the following
questions. Be sure to put your complete answers in your answer sheet, including all graphs.

16. (10 points) The table below shows the production possibilities for the country of Lucis for two
commodities: food and machine. It shows potential pairs of outputs that can be produced with the
given resources and available technological knowledge of Lucis, assuming that all resources are
fully employed. The country can choose one of the following combinations.

Possibilities Food Machine

A 0 175
B 25 165
C 45 145
D 55 75
E 65 0

a. (2 points) Given the information available in the preceding table, construct Lucis’s
production-possibility frontier (PPF). Take note of the appropriate use of the elements of a
graph (i.e., labels, axes, legends).
b. (3 points) Plot the following production point where Lucis is producing:
• 160 units of machines and 60 units of food (label as point F)
• 80 units of machines and 30 units of food (label as point G)
c. (3 points) Relative to its position from the PPF, what do points C, F, and G each represent?
d. (2 points) Assume that a devastating earthquake hit Lucis and resulted in the destruction of
the country’s infrastructure necessary in its production. How will this affect Lucis’s PPF?

17. (3 points) Define what is meant by the term progressive taxation. How might this help to
provide a more equitable distribution of income?

18. (3 points) McQueen Corp., one of the key players in the market for cars, recently developed an
innovation in car production allowing for lower production costs. This allows for a decrease in
the price of cars in the market. However, McQueen Corp. also found that the decline in its
production costs (and hence in the price of cars) comes at the expense of more toxic waste
emission. Given this, is the market for cars functioning properly?

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CHAPTER 3 (25 points)

19. (8 points) Assume there are only two consumers in the market for light sabers, Rey and Ben, who
have the following demand schedules:

Rey’s individual demand function: Qdr = 55 – 3p

Price of Light Sabers Quantity of Light Sabers
Demanded
Php 0.00 55
Php 5.00 40
Php 10.00 25
Php 15.00 10

Ben’s individual demand function: Qdb = 45 – p

Price of Light Sabers Quantity of Light Sabers
Demanded
Php 0.00 45
Php 5.00 40
Php 10.00 35
Php 15.00 30

a. (2 points) Derive the market demand equation, QD.

b. (2 points) Illustrate the corresponding market demand curve.

c. (1 point) What is the market quantity demanded at price Php 5.00?

d. (2 points) Why does quantity decrease when price increases? Explain the substitution
effect of the price increase. How is this different from the income effect?
e. (1 point) Given an increase in price from Php 15.00 to Php 20.00, what happens to the
market demand? Would this increase in price cause a shift in the demand curve? Why or
why not?

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20. (9 points) Assuming that there are two producers, the First Order and the Resistance, with
identical supply functions in the market for light sabers, and that the First Order’s individual
supply function is Qsf = –10 + 4p:
a. (2 points) Derive the market supply equation, QS.
b. (2 points) Illustrate the corresponding market supply curve.

c. (1 point) What is the market quantity supplied at price Php 5.00?

d. (3 points) Give three major elements behind the supply curve (aside from its own price),
and explain how each affects its shape/position.
e. (1 point) Given a decrease in price from Php 20.00 to Php 15.00, what happens to the
quantity supplied? Would this decrease in price cause a shift in the supply curve? Why
or why not?`

21. (6 points) Taking the market supply and demand curves for light sabers from nos. 19 and 20:
a. (2 points) Illustrate the market equilibrium.

b. (2 points) What is the equilibrium price and quantity for light sabers? Check
algebraically.

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 c. (2 points) Describe the market situation in terms of quantity demanded and quantity
supplied if the price is at Php 20.00. Will the market be stable at this price? Why or why
not?

22. (2 points) If Ben’s uncle, Luke, who prefers 75 more light sabers than him at each price point,
enters the market, what happens to the equilibrium price and quantity of light sabers? Show
algebraically, rounding off your answers to at most two decimal places if necessary.

CHAPTER 4 (30 points)

23. Give short answers (in 2 to 3 sentences) to the following questions.

a. (1 point) Explain the concept of price elasticity of demand.
b. (2 points) When is a good more likely to have elastic demand? When is it more likely to
have inelastic demand?
c. (2 points) Why is the demand for a good/service more likely to be price elastic over a
long period of time?
d. (2 points) Consider this pair of goods and services, rides of Enchanted Kingdom and
food for lunch, identify which goods or services will likely have a price elastic demand?
Explain.
e. (1 point) Differentiate arc-elasticity of demand and the point-elasticity of demand.

24. Suppose that there are only two reasons for a certain passenger to purchase an airplane ticket,
namely: business purposes or vacation purposes. Consider the following demand for such:
Quantity demanded (for Quantity demanded (for
Price
business purposes) vacation purposes)
P3,000 285 70
P2,500 300 100

a. (2 points) Compute the arc-elasticity of demand for both type of passengers when the
price of airplane tickets falls from P3,000 to P2,500):
b. (2 points) Determine whether their price elasticity of demand is elastic, inelastic, or unit
elastic. Explain why.

25. (2 points) Suppose the price elasticity of demand for Coke of Filipinos is at 0.95. Also, assume that
the TRAIN Law’s provision for the excise tax on sweetened beverages is to increase prices by
25%. By how much is the quantity demanded expected to fall (in percentage)?

26. (2 points) The rice industry of Central Luzon was devastated during the Pinatubo eruption in
1991. Using the concept of elasticity, explain what will most likely happen to the revenues of rice
farmers outside Central Luzon (e.g., CALABARZON)?

27. (3 points) Bulma has a demand function of Q=200-5P for calamansi. Calculate the point-elasticity
of demand at P=5, 20, 39 and identify if it is inelastic, elastic, or unit-elastic.

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28. Consider the graph below:

Suppose that this is the market for N95 masks after the Taal Volcano eruption, where the
equilibrium price is at P150. The government wanted to lower this price by setting a price ceiling
at P100.
a. (3 points) After the price ceiling, what is the quantity supplied? What is the quantity
demanded? Is there a shortage or surplus? By how much is the shortage/surplus?
b. (2 points) What are some of the ways to solve the shortage?

29. RA No. 10351, or the Sin Tax Law, was passed in 2012. One of its stipulations is to impose a P5.00
tax per stick of cigarettes by 2013, which is represented by the following:

a. (2 points) By how much did the price faced by the consumers rise?
b. (2 points) By how much did the price faced by the producers fall?
c. (2 points) Who bears the greater tax burden? Why?