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1rst set of problemsBusiness Economics, Micro & MacroVilnius-Kaunas FALL SEMESTER 2009
 
ECONOMICS 1RST SET OF PROBLEMSFall Semester 2009
Lecturer P U E R T A S, J. M.
1rst SET OF PROBLEMS
Welcome to the fantastic Republic of Uzupis where according to itsConstitution a dog has the right to be a dog. You have been chosenby the Uzupian Parliament as advisor of the Minister of Economy. They will pay you not a lot of money (only 20.000 UKR, Uzupiankronu)and it is a very difficult job! The Uzupian Economy faces many problems. But the people of thefree and bohemian Republic of Uzupis trust you because you haveattended the lectures of the famous Lecturer Mykolas Durys andstudied the book “Principles of Economics” of Gregory Mankiw.I wish you good luck!!
(*)
The Uzupian Kronu is the currency of the country. Ukr (Uzupian kronu. 10 Ukr = 1euro)
I remind you that you have to hand in all the exercises and readings before thedead-line!!!!
EVALUATION CRITERIA: Sum A+B.
A) 2 points if you hand in the exercises before the dead-.line. If you hand in it afterthe dead-line you will not get any point.B)8 points if there are not important mistakes in your answers.5 points if there are some important mistakes in your answers.3 points if there are many important mistakes.0 points if you don’t hand in the exercises before or after the dead-line.
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1rst set of problemsBusiness Economics, Micro & MacroVilnius-Kaunas FALL SEMESTER 2009
1
)
Construct graphically the production possibilities frontier for the Republicof Uzupis, using the data given in the following table. Does the principle of increasing cost hold the Uzupian economy? (check the slides)
Republic of Uzupis 2009 Production PossibilitiesCANS OF BEANS (millions peryear)CANS OF SOUP (Millions peryear)750606451130151518020
2)
 
Still you are living in the fabulous Republic of Uzupis where
”everybody has the right to make mistakes” 
(article 6 Republic of Uzupis Constitution) The only free republic of artists in the world (it isnot a joke).
 The thing is that they are great in Arts but not in dealing with Economics. They have now some problems with the supply and demand of cans of beans. Can you help them?
Republic of Uzupis 2009 supply and demand schedules forcans of beans
PRICE QUANTITY DEMANDED QUANTITY SUPPLIED70201490191511018181201620140 14221601224(*)Quantities expressed in millions of units (cans of beans)A)Try to graph the demand curve and the supply curve and show theequilibrium price and quantity
B)
Now suppose that it becomes not popular to eat beans, so thequantity demanded at each price falls by 4 million cans peryear.
What is the new equilibrium price and quantity. Show thissolution graphically.
C)
Suppose instead that the most important Uzupian factories (thatproduce cans of beans) decide to go out and to reduce the quantity of product supplied (inside Uzupis) reducing the quantity supplied by 4
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1rst set of problemsBusiness Economics, Micro & MacroVilnius-Kaunas FALL SEMESTER 2009million cans of beans at every price. Find the new equilibrium priceand quantity and show it graphically.D)What are the equilibrium price and quantity if the shifts described inquestion B and C happen at the same time?
3)
Alberto Pinto is a student enjoying his Erasmus at the fabulous Republicof Uzupis. The republic experiences high level of inflation in the basicproducts as french fries, pizzas, burgers, hot dogs and beer. Those productsconstitute the basic diet of Alberto and their room mates. Last month theprice for fries increased from 20 Ukr (*) per kg to 22Ukr per kg. The amountbought by Alberto falls from 10 to 8 kg. Calculate the elasticity of demandusing the midpoint formula (that is preferable when calculating the priceelasticity of demand because it gives the same answer regardless of thedirection of the change). Check the sample of slides “The elasticity and itsapplications”.
(*)
The Uzupian Kronu is the currency of the country. Ukr (Uzupian kronu. 10 Ukr = 1euro)
After reading
Chapter 6
” Supply and demand and government policies”(G.Mankiw book) solve the following problems:
4)
The demand and supply schedules for hot-dogs are as follows
Price per hot-dog Quantity demanded QuantitySupplied
11 ukr10 ukr98761 milion of units24681015 milion of units129631a)What are the equilibrium price and quantity of hot-dogs sold?
b)
Hot-dog manufacturers persuade the Government of Uzupis that hot-dog consumption is good for the economy of the country. TheUzupian Parliament votes to impose a price floor 2 Ukr above theequilibrium price. What is the new market price? How may hot-dogsare sold?
c)
Irate college students (the main consumers of hot-dogs) march onUzupian Parliament and demand a reduction in the price of hot dogs. The Parliament votes to repeal the price floor and impose a priceceiling 1Ukr below the former price floor. What is the new marketprice? How many hot dogs are sold?
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Misfit09

First Set of problems

reply12 / 08 / 2009
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