Principles

of Microeconomics
Dr. Alexander Mack (Autumn 2017) CDM - MGT
Teaching assistants: Charles Ayoubi / Omar Ballester

Problem Set 1

Exercise 1 – Opportunity cost and PPF

In Ecoland’s country, only two goods are produced: corn and fabric. Table 1 shows the production
possibilities of these two goods per working hour in this country.

Table 1

Opportunity cost for the production
Corn Fabric
of one unit of fabric

7 0 -
6 10
5 19
4 27
3 34
2 40
1 45
0 49


Draw on a graph, the production possibility frontier (PPF) of Ecoland. What condition Ecoland has to
fulfill to be at a maximum level of production? Calculate the opportunity cost of the production of
one extra unit of fabric, and fill in Table 1. Discuss your results.

(i) Assume there is a population growth in the country. Show on the graphic the impact on the
PPF. Discuss your results.

(ii) Assume there is a technological progress in the production of fabric. Show this situation on a
graphic. Explain why technological progress in the production of fabric could increase the
production of the two goods.

1/2
 Principles of Microeconomics
Dr. Alexander Mack (Autumn 2017) CDM - MGT
Teaching assistants: Charles Ayoubi / Omar Ballester

Exercise 2 – Supply and demand

On the petrol market, the demand and supply functions are given by:

Demand: QD = -P + 15 (P : price of petrol)
Supply: QS = P - 5

(i) Construct the two curves of demand and supply on the same graph. Show graphically and
algebraically the price and the quantity exchanged at the equilibrium. Calculate the total
revenue of the producers as well as the total expenditures of the consumers on this market,
and show them graphically.

(ii) What is the quantity exchanged on this market if the price is artificially set at 6 francs per unit?
What is expected regarding the evolution of the price? What market price insures the largest
quantity exchanged?

(iii) Assume there is a decline in the price of cars that use petrol. The demand curve is now given
by:
QD = -P + 16
Calculate the new price and the new quantity exchanged at the equilibrium on this market.
Give other examples of events that can create such a shift.

(iv) From the situation of point (i). Assume there is a decline in the price of oil (component needed
to produce petrol) that modifies the supply function which is now given by:
QS = P - 3
Identify and evaluate the imbalance on the petrol market at the initial price. Calculate the new
price and the new quantity exchanged at the equilibrium on this market.

Exercise 3 – Supply and demand (bis)

For the following phenomenon, explain if it implies a shift of the supply and/or the demand curve,
and what are the consequences regarding the price and the quantity on the market for the new
equilibrium:

(i) On the fish market: At the end of the 60’s, the Church abandons the interdiction to eat red
meat and pork on Fridays.

(ii) On the petrol market: In 1973, the petrol producers decreased total production.

(iii) On the market of laptops: At the end of the 80’s, technological innovation improves the
production of laptops, decreasing their production costs.

(iv) On the globe market: In 1989, the end of the Soviet Union and the unification of Germany
made all the old globes obsolete.

2/2