Economics

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Economics

© All Rights Reserved

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Heman Lohano

Q1: In Pakistan, the domestic demand and supply functions for vegetable oil are given by:

Qd = 900 2 P

Qs = 4 P

where Qd is quantity demanded (in kilograms) per year, Qs is quantity supplied (in kilograms)

per year, P is the price in rupees per kilogram.

(b) Compute the consumer surplus (in rupees) at the equilibrium price and quantity

computed in part (a).

(c) Compute the producer surplus (in rupees) at the equilibrium price and quantity computed

in part (a).

(d) How much is the total surplus at the equilibrium price and quantity?

Key:

(a) The given demand and supply functions for vegetable oil are:

Qd 900 2P (1)

Qs 4P (2)

Market clearing condition of the equilibrium is:

Qd Qs (3)

Substituting equations (1) and (2) into equation (3) yields:

900 2P 4P

P 150 (4)

Now we substitute equation (4) for P in equation (1), and let Q be the equilibrium quantity in

equation (3), Qd Qs Q . This yields the following:

Q 900 2 *150

Q 600 (5)

Therefore, the equilibrium price and quantity of vegetable oil are:

P* = Rs.150 per kg

Q* = 600 units per year

(450 150)600

(b) CS = Rs.90,000

2

(150)600

(c) PS = Rs.45,000

2

Page 1 of 8

Q2:

In Pakistan, the domestic demand and supply functions for vegetable oil are given by:

Qd = 900 2 P

Qs = 4 P

where Qd is quantity demanded (in kilograms) per year, Qs is quantity supplied (in kilograms)

per year, P is the price in rupees per kilogram.

(a) Assume an open market with international trade. The vegetable oil is traded in a

competitive world market, and the world price is Rs. 100 per kilogram. Unlimited

quantities are available for import into Pakistan at this price. Under free trade, what will

be (i) the price of vegetable oil in Pakistan, (ii) total quantity demanded, (iii) quantity

supplied domestically, and (iv) quantity of vegetable oil imports?

(b) With free international trade, compute: (i) consumer surplus, (ii) producer surplus, and

(iii) total surplus (in rupees).

Solution:

(a)

Domestic price: P* = Rs.100

(b)

(450 100)700

CS = Rs.122,500

2

(100 0)400

PS = Rs.20,000

2

Q3: Compare the results of Q2 with those of Q1 on: price, CS, PS and TS.

Page 2 of 8

Q4:

In Pakistan, the domestic demand and supply functions for cars are given by:

where is the quantity demanded (in thousand cars), is quantity supplied (in thousand

cars), and P is the price (in lacs of rupees per car).

(b) Now assume an open market with international trade. The cars are traded in a

competitive world market, and the world price is 9 (in lacs of rupees per car). Unlimited

quantities are available for import into Pakistan at this price. Under free trade, what will

be the:

(ii) total quantity demanded,

(iii) quantity supplied domestically, and

(iv) quantity of imported cars?

Key:

(a) The given demand and supply functions for cars are:

(1)

(2)

(3)

Substituting equations (1) and (2) into equation (3) yields:

(4)

Now we substitute equation (4) for P in equation (1), and let Q be the equilibrium quantity in

equation (3), . This yields the following:

(5)

Q* = 200 thousand cars

(b)

(ii) total quantity demanded: 230 thousand cars

(iii) quantity supplied domestically: 170 thousand cars

(iv) quantity of imported cars: 60 thousand cars

Page 3 of 8

Q5:

Suppose a market for petrol is described by the following demand and supply functions:

Qd 80 P

Qs 40 P

liters, and P is the price in rupees per liter.

(a) What is the equilibrium price and quantity? (Note: Q is in thousand liters)

(b) Now suppose that the government imposes a tax of Rs.10 per liter to raise the

government revenue. What will be the new equilibrium price for buyers and sellers, and

the new equilibrium quantity?

(c) How much will be the burden of the tax on buyers and sellers each?

Key:

(b) Q* = 15 thousand liters, Pb* = Rs.65 per liter, Ps* = Rs.55 per liter

Q6:

Suppose the government imposes a tax on a good. If demand is relatively inelastic and supply

is relatively elastic, the burden of the tax will fall mostly on whom: Producers or Consumers?

Show graphically or explain briefly.

Key:

If demand is relatively inelastic and supply is relatively elastic, the burden of the tax will fall

mostly on consumers.

Page 4 of 8

Q7:

The demand function for a good is:

where is quantity demanded, P is the price of the good, and M is consumers income.

Key:

(a)

(c) If price increases by 1 percent, the quantity demanded decreases by 0.5 percent.

Q8:

The price elasticity of demand for cars in Pakistan is estimated to be 2, and the income

elasticity of demand is 3. The quantity demanded for cars is 200 thousand cars per year given

the current price and national income. If the price of cars increases by 5 percent and the

national income in Pakistan also increases by 5 percent, how many cars will be demanded?

Show your work.

Key:

Price effect: 20 thousand cars

Income effect: + 30 thousand cars

Page 5 of 8

Q9:

Determine the effect upon equilibrium price and quantity if the following change occurs in a

particular market: The price of inputs used to produce the good increases. Illustrate

graphically and explain briefly.

Q10:

(a) If the cross-price elasticity of demand for two goods is positive, then are the goods:

Substitutes or Complements? Explain briefly.

(b) What is the range of the income elasticity of demand for a necessity? Explain with its

interpretation.

Key:

(a) Substitutes

Q11:

(a) When price rises from Rs. 8 to Rs. 10, the producers' quantity supplied rises from 200 to

210. Compute the price elasticity of supply.

Key:

(b) Inelastic

MCQs

B) when income increases, the demand remains unchanged.

C) when income increases, the demand decreases.

*D) when income increases, the demand increases.

*B) demand is elastic at high prices.

C) demand is elastic at low prices.

D) demand is inelastic at high prices.

Page 6 of 8

The burden of a sales tax will fall mostly on buyers when demand is relatively ___________

and supply is relatively __________.

A) elastic; elastic

B) inelastic; inelastic

*C) inelastic; elastic

D) None of the above

To say that two goods are complements, their cross-price elasticities of demand should be:

A) greater than 0.

*B) less than 0.

C) equal to 0.

The long-run price elasticity of supply of crude oil is ________ the short-run price elasticity

of supply of crude oil.

A) equal to

B) not comparable to

*C) greater than

D) less than

The demand function for a product is given by: QD = 160 2P, where QD is quantity

demanded and P is the price. What is the price elasticity of demand at P = 30?

A) 0.33

B) 0.45

*C) 0.6

D) 2

Moving along a demand curve, the quantity demanded decreases by 8 percent when the price

increases by 10 percent. The price elasticity of demand is:

*A) 0.8

B) 1.25

C) 8.0

D) 10

The price elasticity of demand for cars in Pakistan is estimated to be 1, and the income

elasticity of demand is 2. The quantity demanded for cars is 200 (thousand) cars per year in

Pakistan given the current price and national income.

If the price of car increases by 1 percent and the national income in Pakistan also increases by

1 percent, what will be the quantity demanded for cars?

B) 201 (thousand) cars per year

*C) 202 (thousand) cars per year

Page 7 of 8

When price rises from Rs.8 to Rs. 12, producers' quantity supplied rises from 180,000 to

198,000. The price elasticity of supply is:

A) 5.0: elastic

B) 0.2: elastic.

C) 5.0: inelastic.

*D) 0.2: inelastic.

The demand function for a product is given by: QD = 160 2P, where QD is quantity

demanded and P is the price. What is the arc price elasticity of demand between P = 20 and

P = 30?

A) 0.33

*B) 0.45

C) 0.6

D) 2.2

Page 8 of 8

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