ECO111 Microeconomics

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Individual Assignment 02
Question 1. (2 points)

1. You can allocate your time for the next four years between studying and working at a car wash.
Each semester you spend studying you can earn 15 credit hours and each semester you work at the
car wash you wash 800 cars. If you have 8 semesters to allocate, label each of the following on a
graph.
a. Your production possibilities curve (0.5)
b. A point that is unattainable (0.5)
c. A point that is efficient (0.5)
d. Plot and label a point on your graph that represents a decision to take a semester off from both
studying and working. (0.5)

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2. Refer to the graph provided to answer the following questions. (2 points)
Price
Supply

3
Demand

0
100 175 220 Quantity demanded

a. What are the equilibrium price and quantity in this market? (0.5)
b. What is the effect of a price ceiling of $3 placed on this market? (0.5)
c. What is the effect of a price ceiling of $7 placed on this market? (0.5)
d. If price in this market is $7, explain the adjustment process that will bring the market back
to equilibrium. (0.5)

3. Graph the effect on equilibrium price and quantity in the market for oranges for each of the
following changes (graph each one separately). (2 points)
a. A chemical routinely sprayed on orange orchards is found to cause cancer.(0.5)
b. The wages of farm workers increase. (0.5)
c. A new orange picking machine is invented. For the same cost, it can pick more oranges,
faster, and with less damage than other machines. (0.5)
d. Consumer income falls. (0.25)
e. The price of tangerines falls. (0.25)

Question 2 (2 points)
1. You operate your own business selling college t-shirts. The demand schedule for your
t-shirts is as follows: P = 25 - 0.5Q.
a. Graph the demand curve for your t-shirts. (0.5)
b. Calculate the price elasticity of demand when price equals $10. (0.5)
c. In what range does price elasticity of demand fall at $10 (elastic, unit elastic,
inelastic)? (0.5)
d. If your goal is to maximize total revenue, how should you change price if you are
currently charging $10? (0.5)

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 2a.Use the information in the graph below to find price elasticity of supply at point A. (0.25)

Price Supply

4 A

0 20 30 Quantity Demanded

2b. Based on the elasticity of supply in part a, if price increases by 10%, by how much will
quantity supplied change? (0.25)

2c. What will happen to the price elasticity of supply, in each of the following cases
(becomes more inelastic, more elastic, or does not change)? (0.5)
i. inputs become easier to transport
ii. new inputs into production of the good are found iii.
the firm moves from the short-run to the long-run

Question 3. Which of the following is true for a vertical supply curve? (1point)
a. Price elasticity of supply is perfect elastic
b. Quantity supplied is very responsive to price changes
c. Price elasticity of supply is inelastic
d. Price elasticity of supply is infinite
e. Quantity supplied is negatively related to price

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ANSWER:

Question 1:
1.
a. Each semester you spend studying you can earn 15 credit hours and each semester you
work at the car wash you wash 800 cars.
=> Three hour you spend for studying requires 160 cars you wash
In 8 semesters:
Hours of studying Cars
A 120 0
B 90 1600
C 60 3200
D 30 4800
E 0 6400

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Credit
hours

120

G
90

60 E

D
30

0
2400 3400 4800 6400 Cars
PRODUCTION POSSIBILITIES CURVE

b. Point G (90 credit hours, 3400 cars) is unattainable, because point G is beyond the PPF
curve.
c. Point D (30 credit hours, 4800 cars) is efficient, because point D is on the PPF curve.
d. To take a semester off from both studying and working means you have to allocate in 7
semesters.
=> Point E (60 credit hours, 2400 cars), which is on the curve representing your PPF in 7
semesters, represents a decision to take a semester off from both studying and working.

2.

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 a. At the equilibrium:
The price equals: P = 5
The quantity equals: Q= 175
b. When the price ceiling of $3 placed on this market, a shortage occurs.
Then, the quantity of demand equals: QD= 220
and the quantity of supply equals: QS= 100
=> The shortage equals: 220 – 100 = 120
c. The price ceiling of $7 placed on this market does not effect on the market outcomes;
because the price ceiling is above the equilibrium price.
d. If the price in this market is $7, a surplus occurs (the surplus equals 120).
This event leads the firms to lower their price until there’re no more surplus (at the
equilibrium price)

3.
a. Event: A chemical routinely sprayed on orange orchards is found to cause cancer.
=> The demand for oranges falls => The D curve shifts left.
The shift causes a decrease in equilibrium price and quantity.

P S

P1
P2

D1
D2

Q2 Q1 Q

b. Event: The wages of farm workers increase.

=> S curve shifts left.
The shift causes price to increase and quantity to fall.
S2
P S1

P2
P1

Q2 Q1 Q 6
c. Event: A new orange picking machine is invented. For the same cost, it can pick more
oranges, faster, and with less damage than other machines
=> The firms will supply more oranges => The S curve shifts right
The shift causes price to fall and quantity to increase.

P
S1
S2

P1
P2

Q1 Q2 Q

d. Event: Consumer income falls => base on how good the oranges are
Case 1: normal good
=> The demand for oranges falls => The D curve shifts left
The shift causes a decrease in price and quantity.

P S

P1
P2

D1
D2

Q2 Q1 Q

Case 2: inferior good

=> The demand for oranges increases => D curve shifts right
The shift causes an increase in price and quantity

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 P S

P2

P1

D2
D1

Q1 Q2 Q

e. Event: The price of tangerines falls

=> The demand for oranges falls => The D curve shifts left.
The shift causes a decrease in price and quantity.

Question 2:
1.
a. P = 25 – 0.5Q
P Q
25 0
20 10
15 20
10 30
5 40
0 50

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 P

25 D

20

15

10

0
10 20 30 40 50 Q

b. Price elasticity of demand when the price is $10 equals:

% change in QD ∆QD/ Q P 10
ED = = = x 1/0.5 = x 1/0.5 = 2/3 = 0.67
% change in P ∆P/P Q 30
c. Price elasticity of demand fall at $10 in inelastic demand curve (E<1)
d. TR = P x Q
If you are currently charging $10, to maximize total revenue, you have to raise your price
(between $10 and $20).
2.
a.

Suppose the supply schedule is as follows: P = a + b.Q

When P = 4, Q = 20 => 4 = a + 20b a = -2
When P = 7, Q = 30 => 7 = a + 30b b = 0.3
=> The supply curve is as follow: P = 0.3Q – 2
The supply elasticity at point A equals:

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 ES = P/Q x ∆QS/∆P = 4/20 x 1/0.3 = 2/3 = 0.67
b. If the price increases 10%,
% change in QS 2
ES = =
% change in P 3

=> % change in QS = 2/3 x % change in P = 2/3 x 10% = 6.67%

=> The supply quantity will increase 6.67%
c.
i. inputs become easier to transport => the S curve is more elastic
ii. new inputs into production of the good are found => the S curve is more elastic
iii. the firm moves from the short-run to the long-run => the S curve is more elastic
Question 3: Which of the following is true for a vertical supply curve?
a. Price elasticity of supply is perfect elastic
b. Quantity supplied is very responsive to price changes
c. Price elasticity of supply is inelastic
d. Price elasticity of supply is infinite
e. Quantity supplied is negatively related to price

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