Assignment

No-1

Course Title: Engineering Economics

Course code: GED-219

Submitted To:

Tuhinur Rahman Chowdhury

Lecturer
Department of Cse
Metropolitan University, Sylhet

Submitted By:

Tareq Mahmud Chowdhury

ID:123-115-031
Batch:28th
Metropolitan University, Sylhet

(RETAKE)
Q1# Write down ten principles of Economics.

Ans:
Principle 1: People face trade-offs.
Principle 2: The cost of something is what you give up to get it.
Principle 3: Rational people think at the margin.
Principle 4: People respond to incentives.
Principle 5: Trade can make everyone better off.
Principle 6: Markets are usually a good way to organize Economic
activity.
Principle 7: Government can sometimes improve market outcomes
property rights.
Principle 8: A country’s standard of living depends on its ability to produce goods
and services.
Principle 9: Prices rise when the government prints too much money
inflation.
Principle 10: Society faces a short-run trade-off between inflation and
unemployment.

Q2# Give three examples of important trade-offs that you face in your life. Why should
policymakers think about incentives?

Ans:
Three examples of important trade-offs that i face in my life…

1.Trade-off between studying one subject over studying another subject.

2.Spending 15 dollars to buy a pizza or to buy a study guide.
3.Trade-off society faces is between efficiency and equality.

Policy makers think about incentives because policies change the cost or benefits
people face and therefore, alter behaviour. When policymakers fail to consider how
their policies affect incentives, they can end up with results that they did not intend.
Q3# What are the demand schedule and the demand curve, and how are they related?
Why does the demand curve slope downward?

Ans:
Demand schedule: A table that shows the relationship between the price of a good
and the quantity demanded.
Demand curve: A graph that shows the relationship between the price of a good and
the quantity demanded.

Curve slopes downward because a lower price increases the quantity demanded.

Q4# Does a change in consumers’ tastes lead to a movement along the demand curve or
to a shift in the demand curve? Does a change in price lead to a movement along
the demand curve or to a shift in the demand curve? Explain your answers.

Ans:
The demand curve change when the taste of consumers changes. If the change in
consumers tastes leads to an increase in demand, consumers want to buy more of this
good at every price level. The price is indicated by the vertical axis,and the price
change are displayed by changing the length of the demand curve..

Q5# What are the supply schedule and the supply curve, and how are they related?
Why does the supply curve slope upward?

Ans:
Supply schedule: Supply schedule is a table that shows the relationship between the
price of good and the quantity supplied.
Supply curve: Supply curve is a graph that shows the relationship between the price
of a good and the quantity supplies.

Curve slopes upward because of a higher price increases the quantity supplied.
 Q6# Define the equilibrium of a market. Describe the forces that move a market
toward its equilibrium.

Ans:
Equilibrium of a market is the price where supply and demand are equal to one
another. Buyers and sellers naturally move the market towards equilibrium as they
changes their actions according to market changes such as price changes, changes to
production technology, and changes to income.

Q7# The market for Orange has the following demand and supply schedule…

Price(P) Quantity of Demanded(Qd) Quantity of Supplied(Qs)

4 135 26
5 104 53
6 81 81
7 68 98
8 53 110
9 39 121

I. Graph the demand and supply curves. What are the equilibrium price and
quantity in this market?

II. If the actual price in this market were above the equilibrium price, what
would drive the market toward the equilibrium?

III. If the actual price in this market were below the equilibrium price, what
would drive the market toward the equilibrium?
Ans: (I)

Graph the Demand Curves:

Price(P) Quantity of Orange Demanded(Qd)

4 135
5 104
6 81
Price Of an Orange

7 68
8 53
9 39

9
8

7
An decrease 6
in price .
5
4

0 39 53 68 81 104 135 Quantity Of an Orange

Increases quantity of Orange

demanded

Figure: Demand Curves

 Graph the supply Curve

Price Of an Orange
Price(P) Quantity of Supplied(Qs)

4 26
5 53
9 6 81
8 7 98
7 8 110
9 121
6
An increase
in price . 5

0 26 53 81 98 110 121 Quantity Of an Orange

Increases quantity of Orange supplied

Figure: Supply Curves

The equilibrium price is 6.00 and the equilibrium quantity is 81.This is the amount of
quantity requested to be equal to the quantity delivered.

(II)

If the price was 7.00, only 68 would be required, but 98 would be shipped. This
causes a excess of goods, and manufacturers will have to reduce the price until they
discover their excess stock. This will happen when the price return to the original 6.00.

(III)

If the price is 5.00, it will cause a shortage. There will be a demand for 104,but will
be delivered 53.Suppliers will raise the price and will produce more until it is again
the price as at the beginning.
Q8# Define the price elasticity of demand and the income elasticity of demand.
Ans:

Price Elasticity of Demand: Price elasticity of demand is an economic measure of the

change in the quantity demanded or purchased of a product in relation to its price
change. Expressed mathematically, it is:-
% Change in Quantity Demanded
Price Elasticity of Demand =
% Change in Price

Income Elasticity of Demand:

Income elasticity of demand refers to the sensitivity of the quantity demanded for a
certain good to a change in real income of consumers who buy this good, keeping all
other things constant.

The formula for calculating income elasticity of demand is the percent change in
quantity demanded divided by the percent change in income. With income elasticity of
demand, you can tell if a particular good represents a necessity or a luxury.

Q9# If demand is elastic, how will an increase in price change total revenue? Explain.

Ans:
When demand is elastic, an increase in price will reduce total revenue.
When the demand curve is elastic the extra revenue from selling at a higher price is
less than the lost revenue from selling.

Q10# What do we call a good with an income elasticity less than zero?

Ans:
It's called an inferior good, because an income elasticity less than 0 means that when
your income increases, you demand less of the good. High elasticity of income have
luxurious things.
Q11# How is the price elasticity of supply calculated? Explain what it measures.

The price elasticity of supply measures how much the quantity supplied responds to
changes in the price.
% change in quantity supplied
Price Elasticity of Supply Elasticity =
% change in price

Or,
% change in Qs
Price Elasticity of Supply Elasticity =
% change in P

Q12# Suppose that business travelers and vacationers have the following demand for
airline tickets from Dhaka to Bangkok.
Price(P) Quantity of Demanded(Qd) Quantity of Supplied(Qs)
Business Travelers Vacationers
150 2100 tickets 1000 tickets
200 2000 800
250 1900 600
300 1800 400

I. As the price of tickets rises from 200 to 250, what is the price elasticity of
demand for
(i) Business travelers and
(ii) Vacationers? (Use the midpoint method in your calculations.)
II. Why might vacationers have a different elasticity from business travelers?

Ans: (i)

The business travellers- The price elasticity of demand when the price of tickets rises
from $200 to $250 is-
[(2,000 – 1,900)/1,950]/[(250 – 200)/225] = 0.05/0.22 = 0.23.
The vacationers- The price elasticity of demand when the price of tickets rises from
$200 to $250 is-
[(800 – 600)/700] / [(250 – 200)/225] = 0.29/0.22 = 1.32.
(ii)
The price elasticity of demand for vacationers is higher than the elasticity for business
travellers because vacationers can choose more easily a different mode of
transportation. Business travellers are less likely to do so because time is more
important to them and their schedules are less adaptable.

Q13# A price change causes the quantity demanded of a good to decrease by 30

percent, while the total revenue of that good increases by 15 percent. Is the
demand curve elastic or inelastic?Explain

Ans:
Since the revenue increases as a result of price increase, it suggest that the demand is
inelastic. Price increased because quantity demand decreased.

Q14# You are the curator of a museum. The museum is running short of funds, so you
decide to increase revenue. Should you increase or decrease the price of
admission? Explain
Ans:
If demand is elastic an increase or decrease in price of admission will decrease or
increase the number of admission respectively and in turn can change the revenue of
the museum and that change will depend on the elasticity. If the demand is inelastic an
increase in price will lead to an increase in the revenue of the museum.