DEV 300: Economics and Development

Fall 2008
BRAC University

Assignment 1
Due at the beginning of the class 15th October 2008

1. The values in the Table refer to the change in an individual’s

consumption of coffee and tea at home when the prices of coffee rises
(everything else, including the price of tea, remains the same). (a)
Draw a figure showing these changes and (b) explain the figure drawn.

Before After
Price Quantity Price Quantity
(cents/c (cups/mon (cents/c (cups/mon
up) th) up) th)
Coffe 40 50 60 30
e
Tea 20 40 20 50

[Hints: Draw two figures, one is for Coffee and another is for
Tea. Put price in the vertical axis and Quantity in the horizontal axis.
Accuracy doesn’t matter but need to understand the concept.]

2. There are 10,000 identical individuals in the market for

commodity X, each with a demand function given by Qdx = 12 – 2Px
and 1000 identical producers of commodity X, each with a function
given by Qsx = 20Px. (a) Find the market demand function and market
supply function for commodity X. (b) Plot, on one set of axes, the
market demand curve and market supply curve for commodity X and
show the equilibrium point. (c) Obtain the equilibrium price and the
equilibrium quantity mathematically.

[Hints: Market demand or supply is found by adding all quantity

demanded and quantity supplied by each individual at each price.]

3. Suppose that from the condition of equilibrium in the previous

problem, there is an improvement in the technology of producing
commodity X (ceteris paribus) so that a new market supply curve is
given by QSx’ = 40000 + 20000Px. (a) show the new market supply
curve (SX’) on the graph of the previous problem and (c) state the new
equilibrium price and the new equilibrium quantity for commodity X.

4. Suppose that from the condition of equilibrium in the previous

problem, the government decides to collect a sales tax of $2 per unit
sold from each of the 1000 identical sellers of commodity X. (a) What
effect does this have on the equilibrium price and quantity of
commodity X? (b) Who actually pays the tax? (c) What is the total
amount of taxes collected by the government?

[Hints: The supply curve does shift upward by $2 and consider

that the demand for the commodity X is relatively price inelastic.]

5. Illustrate the impact of each of the following on price and

quantity demanded:

a. Improvements in transportation lower the costs of importing

oil into the United States in the 1960s.
b. After the 1973 war, oil producers cut oil production sharply.
c. After 1980, smaller automobiles get more miles per gallon.
d. A record-breaking cold winter in1995-1996 unexpectedly
raises the demand for heating oil.
e. A global economic recovery in 1999-2000 leads to a sharp
upturn in oil prices.

[Hints: This particular problem is taken from Samuelson’s book,

chapter 3. You can review figure 3.1 (Gasoline prices move with
demand and supply changes) to get an insight about the problem.]