Running head: ASSIGNMENT

PART: - A
Question: - 1
Answer: - 1
Price Quantity Demanded Quantity Supplied
$100 100,000 40,000
$300 90,000 60,000
$500 80,000 80,000
$700 70,000 100,000
$900 60,000 120,000

A part: - The equilibrium price of MRI test is $500 because at this price the quantity
demanded is equal to the quantity supplied in the market, that is 80,000 MRI tests. Here, the
market clears because neither there is excess demand nor the excess supply.
B part: - If the government fixes the effective price of MRI test to an individual equal to
$100, this is known as “price ceiling”. Price ceiling means maximum price of a product that
the seller can charge from the buyers. This maximum price is kept below the equilibrium
market price.
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At prices = $100, quantity demanded is 1,00,000 MRI test and quantity supplied is 40,000
MRI test. So, there will be excess demand. There will be a shortage of MRI test providers.
This will lead to a problem of black market. When black market is formed in the economy,
the producers in the legal market of that good feeling that the supply of goods in the black
market is more profitable and hence, reduces the supply in the legal market.
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Question: - 2
Answer: - 2
A part: - A new technology is adopted that allows production of watermelons to be increased
substantially. This will lead to a rightward shift of the supply curve because the introduction
of new technology will reduce the production cost. And hence makes it more profitable to
produce/supply watermelons.

Keeping the prices unchanged, the supply increases and the supply curve for watermelons
will shift toward rightward.
B part: - There is a substantial decrease in the price of cantaloupes. Cantaloupes are assumed
to be a substitute good for watermelons. Substitute goods are those which can be used in
place of each other. For example: - Coke and Pepsi, coffee and tea etc. Since cantaloupes
prices decrease, watermelon will become relatively expensive for the customers. Hence, the
demand for watermelons will reduce. Keeping the prices unchanged, the demand curve will
shift downwards.
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Initial equilibrium: price = Po and quantity = Qo

New equilibrium: price = P1 and quantity = Q1
C part: - Consumer’s income increases (assuming watermelon is a normal good) and the
number of sellers producing watermelons increases. If the income of the consumer rises, he
will substitute normal good for inferior goods. Hence, the demand for watermelon rises and
the demand curve shifts rightward. When the number of producers rises, the supply of
watermelons increases in the markets. Hence, the supply curve will shift rightward to the left,
keeping prices unchanged.
Case 1: - when the demand curve and supply curve shifts by the same magnitude.

Initial equilibrium: Price = Po and quantity = Qo

New equilibrium: Price = Po and quantity = Q new (prices remain unchanged)
Case 2: - When the demand curve shifts by higher magnitude than supply curve.
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Initial equilibrium: Price = Po and quantity = Qo

New equilibrium: Price = P new and quantity = Q new (higher prices and higher quantity)
Case 3: - When the supply curve shifts by a higher magnitude than demand curve.

Initial equilibrium: Price = Po and quantity = Qo

New Equilibrium: Price = P1 and quantity = Q1 (lower prices and higher quantity)
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Question: -3
Answer: - 3
Following are the components and the features of government expenditure: -
 Human Resource: - This category includes the expenditure on enhancing the
productivity of human capital to achieve sustained growth. This includes expenditure
on education, health care benefits, social security benefits like pensions and
unemployment allowances. During the initial stages of development, major
expenditure is on infrastructure, because most of the people shift from rural to urban
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areas. During the middle stages of development, expenditure is done on controlling

negative externality because of increased pollution, overutilization of resources and
many other market failures. During the last stage of development, most of the
expenditure done by the government is on education, health care and other social
security benefits. As we conclude from the table, the highest % of GDP is spent on
human resources, that is 70.5% in 2019. It is difficult to reduce such forms of
expenditure because of heightened expectations as well as because of aging pollution.
But as the government provides more and more education and skills, more people will
become employable in job markets. Because of better and reasonable health care
facilitates available to them their productivity rises. Hence, unemployment allowances
provided by the government may reduce in the given future. Rest, expenditure on
other components must rise in the near future but at a decreasing rate.
 National Defence: - Expenditure on defence equipment which was ranging between
60%-70% of GDP, now stands at around 15% of GDP. Expenditure was higher during
the war period and thereafter because of the rebuilding of equipment and protecting
their borders. But now there are no such wars, the country is neither losing their
soldiers nor their defence equipment. Hence, less expenditure is done by the
government on national defence.
 Physical capital: - Expenditure on the physical capital was initially higher because
for growth most of the countries relied on savings and huge machinery base. This can
only lead to a higher steady state level of per capita income, but is not sufficient to
sustain growth. So, to sustain growth expenditure on research and development is
crucial. For this people of that country must have tertiary knowledge that is higher
level knowledge. So, expenditure on physical capital has declined over time.
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Question 4: -
Answer 4: -
Part A

Change in demand
Change in demand occurs due to a number of factors. The various factors affecting demand
are discussed below: -
1. Income of the consumer: - The effect of change in income on demand depends on the
nature of the commodity.
 If the commodity is considered to be as a “normal good”, then an increase in income
leads to rise in demand, while a decrease in income reduces the demand.
 If the commodity is an “inferior good”, then an increase in income reduces the
demand, while a decrease in income leads to rise in the demand. For example: - as the
income rises a consumer shift to the consumption of full cream milk (a normal good)
and reduces the consumption of toned milk (an inferior good).
2. Price of Related goods: - There are two types of related goods.
 Substitute good: - are those goods which can be used in place of one another, like tea
or coffee. An increase in the price of substitute good say coffee will increase the
demand for say tea, because tea becomes relatively cheaper.
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 Complementary goods: - are those goods which are used together to satisfy a
particular want, like tea and sugar, pen and ink etc. An increase in the price of a
complementary good say sugar will reduce the demand for a given commodity say
tea. If we demand more of tea, we have to use more sugar, which is costlier now.
3. Tastes and Preferences: - Demand of a commodity changes with fashion, customs and
habits, etc. If a particular commodity is outdated or out of fashion, then its demand
will automatically reduce.
4. Expectation of changes in the future prices of a commodity: - If the price of onions is
expected to rise in the future, its present demand will increase.
Sandeep Garg, 2019, Introductory microeconomics for class XI (tenth revised edition), New
Delhi, published by Ish Kapur for Dhanpat Rai Publications, 3.2-3.4.

Change in supply
5. Prices of other goods: - As resources have alternative use, an increase in the price of
other goods make it profitable for a producer to produce other goods and use the
available resources to produce more of other goods. Hence, the supply of a given
commodity will decrease.
6. Price of the factors of production and inputs: - If the price of sugar rises, an input used
in the production of ice-cream, then production of ice-cream will become less
profitable and firms supply fewer ice-cream.
7. State of Technology: - Use of outdated and obsolete technology, rises the cost of
production and decreases the supply of a given commodity.
8. Government Policy (Taxes and Subsidy): - Increase in taxes raises the cost of
production, and thus reduces the supply, due to lower profit margins. On the other
hand, tax concessions and subsidies, will increase the supply.
Sandeep Garg, 2019, Introductory microeconomics for class XI (tenth revised edition), New
Delhi, published by Ish Kapur for Dhanpat Rai Publications, 9.2-9.3.
Part B
When the demand of a commodity changes due to change in any factors other than the price
of the commodity, it is known as change in demand.
Various reasons for the rightward shift of a demand curve: -
 Rise in prices of substitute good.
 Increase in the income of a consumer, demand for normal good rises.
 Decrease in the price of complementary good.
 Decrease in income, demand for an inferior good falls.
 Taste in favour of a commodity.
 Expectations of future increase in price.
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Various reasons for the leftward shift of a demand curve: -

 Decrease in the price of Substitute good

 Decrease in income of a consumer, demand for normal good declines
 Increase in the price of complementary goods
 Increase in income of a consumer, demand for an inferior good declines.
 Taste not in favour of a commodity
 Expectation of decrease in future prices of a commodity.

Various reasons for rightward shift of the supply curve: -

 Decrease in the price of other goods.

 Decrease in the price of factors of production or inputs
 Upgradation of technology
 Decrease in taxes/Increase in subsidy
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Various reasons for leftward shift of the supply curve: -

 Increase in the price of other goods.

 Increase in the price of factors of production or inputs
 Degradation of technology
 Increase in taxes/Decrease in subsidy

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PART: - B

Question: - 1
Answer: - 1 (B option: - 0.5 bushels of corn)
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In this diagram, the given curve is Production possibility curve. It depicts the combination of
two goods that can be produced by an economy, with given resources and technology.
Slope of a production possibility curve is = (- opportunity cost of one bushel of corn in terms
of
Soybean)
So, the opportunity cost of one bushel of corn is 2 bushels of soybeans. Because the slope is
calculated as:
Slope = (y2 – y1)/(x2-x1) here (x1; y1) = (0; 0) and (x2; y2) = (20,000; 10,000)
Slope = 20,000/10,000 =2
But we have to find the opportunity cost of one bushel of soybeans. Hence, the opportunity
cost of one bushels of soybean is 0.5 bushels of corn (which is the reciprocal of the
opportunity cost of one bushel of corn in terms of soybean).
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Question 2: -
Answer 2: - (B option: - an increase in supply)
The curve mentioned in this figure is a supply curve. When the quality supplied of a
commodity changes because of a change in its prices is known as the law of supply. As the
price rises, quantity supplied also rises and the price falls, results in fall in quantity supplied.
So, there is a positive relationship between price and quality supplied. Here is the supply
curve named as SS:
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Movement in the supply curve: - This occurs because quantity supplied changes as a result of
change in prices.
Shift of the supply curve: - Shift occurs because of the change in the factors affecting supply,
other than the price of that commodity. Factors other than price includes: - prices of the
factors used in production or inputs, state of technology, government policy (taxes and
subsidies), the price of other goods. Rightward Shift occurs:
I. Fall in the Factor/Inputs used in production: - As the price of milk used in the
production of ice-cream falls; it becomes cheaper for ice-cream producer to produce
it. So, the ice-cream supply rises.
II. State of Technology: - Technological changes can reduce the cost of production.
Hence, the supply rises.
III. Government Policy: - As the government imposes taxes, it raises the cost of
production. Similarly, subsidies reduce the cost of production and make it profitable
to produce that commodity.
IV. Price of other goods: - If the factors or resources or raw material, used in production
of one good can be used in the production of other goods also. As the price of other
goods rises, firms will start producing more of other goods.

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Question 3: -
Answer 3: - (B option: - 2)
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At a price of 2 cents, quantity demanded is 4 units of bubble gum and quantity supplied is 2
units. So, the market is not in equilibrium. There is excess demand of bubble gum. As a
result, for the available quantity of bubble gum customers will start competing and bid up the
prices of the commodity. As the price started moving upwards, supplier will supply more and
consumers will demand less. Eventually, the market will clear at the equilibrium price of 3
cents and equilibrium quantity of 3 units of bubble gum.
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Question 4: -
Answer 4: - (B option: - the quantity of apples demanded falls)
As the price of apples rises, according to the law of demand, the quantity demanded falls.
Similarly, in this case as the price rises from $6.50 to $ 7.50, apples become costly for the
customers, so they demand less of it. This leads to an upward movement along the demand
curve. This does not lead to any leftward or rightward shift of the demand curve. Shift only
occurs because of changes in other factors affecting demand. For example: - income of the
consumer, the price of substitute goods, the price of complementary goods, tastes and
preferences of customers, future price of a good changes.
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Question 5: -
Answer 5: - (C option: - The quantity demanded of that good will increase)
As the price of a good decreases, the quantity demanded will rise. This causes a downward
movement along the demand curve. There will be no leftward or rightward shift of the
demand curve. In this case, law of demand works that implies other factors affecting the
demand of a commodity keeping unchanged or unaffected, as the price rises, the quantity
demanded falls and the price falls, the quantity demanded will increase. As the other factors
are kept constant, hence there will be no leftward or rightward shift of the demand curve.
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Question 6: -
Answer 6: - (D option: - an increase in the number of firms making mountain bikes)
The increase in the number of firms producing a particular product will increase in the supply
of that commodity, even if the prices will be unchanged. Hence, this will lead to a rightward
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shift in the supply curve. The increase in taxes levied on mountain bikes manufacturer or
increase in the cost of components used to assemble mountain bikes, will reduce the supply
of mountain bikes in the market and leads to a leftward shift in the supply curve, keeping the
price of mountain bikes unchanged.
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Question 7: -
Answer 7: - (B option: - the supply curve of lime juice would shift upward to the left)
A terrible disease was to wipe out over one-half of the world’s lime trees, will reduce the
supply of lemons. Lemons are the main input used in the production of lime juice. Hence, the
supply of lime juice will decline. This will lead to a rise in the prices of lime juice as well as
fall the quantity demanded/supplied in the market.

Here, the market for lime juice was in equilibrium at E1 (initially) when price prevailing in
the market was P1 and quantity sold/purchased is Q1. When the supply of lime juice falls in
the market because of the decline in the lemons supply, the supply curve shifts upwards to the
left and results in rise in prices and fall in the quantity sold/purchased in the market.
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Question 8: -
Answer 8: - (C option: - the supply curve of the jeans will shift leftward)
The price of cotton used in making blue jeans increases, will raise the cost of production.
Hence, reduces the supply of jeans in the market. Keeping the price of jeans unchanged, the
cost of production rises because of the rise in the price of inputs used in the production which
is cotton in this case. So, this will lead to a leftward shift of the supply curve. The movement
along the supply curve occurs only when the prices change, and other factors are kept
unchanged.
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Question 9: -
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Answer 9: - (B option: - Progressive)

When the income of an individual is $50,000, he pays $5000 as income tax, that is 10% of
income.
Workings: - (5000/50000) *100 = 10%
When the income rises by $10000 per year, that means now he is earning $60000 and pays
$6500 as income tax, that is 10.83% of income.
Workings: - (6500/60000) *100 = 10.83%
As the tax base rises, tax rate also rises this implies it is a progressive tax. If the tax rate
remains the same, then it will become a proportional tax. If the tax rate declines as the tax
base rises, then it will become a regressive tax.
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Question 10: -
Answer 10: - Market equilibrium is determined when the quantity demanded of a commodity
becomes equal to the quantity supplied. The price determined corresponding to market
equilibrium is known as equilibrium price and the corresponding quantity is known as
equilibrium quantity.
Market Equilibrium: market demand of a commodity = market supply of a commodity
Suppose an example:

Prices in $ (per kg) Market Demand (in kgs) Market supply (in kgs)
20 320 200
30 300 220
40 280 240
50 260 260
60 240 280
70 220 300
80 200 320
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Here the market clears at the point of equilibrium at point “E”. At the point of equilibrium,
market demand is equal to market supply at the prevailing market price. In this example, at
the price Po = 50, quantity demanded is 260kg of apples and quantity supplied is 260kg of
apples.
 When market demand is in excess of market supply: - Below the equilibrium point,
we see that at price = 30, quantity demanded is 300 and quantity supplied is 220. So,
the market is not in equilibrium. Because of a shortage of apples in the market,
customers will start competing in the market for the available apples. They start
bidding up the prices. Hence, price start moving in upward. Because of higher prices
customers demand less and producers will be willing to sell more. Eventually, the
excess demand in the apple market will be eliminated.
 When market supply is in excess of market demand: - At price = 70 in the apple
market, the quantity supplied is 300kg of apple and quantity demanded is 220kg of
apple. Under such circumstances, the market will not clear and because there is
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“excess supply”. Here, at this price all the producers will not be able to sell their
apples and induces then to reduce the prices. As the prices decline, customers will
start demanding more and producers will supply less. Eventually, the excess supply of
apples will disappear.
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