ECONOMICS MAJOR ASSINGMENT

Q1. A) Suppose Hiram and Adasha each have 60 hours this week that they can devote to bread
baking and meatloaf cooking. Construct graphs depicting the production possibility frontiers for
Hiram and Adasha. In your graphs make sure you label the x-axis and y-axis clearly. In your graphs,
measure bread on the vertical axis and meatloaf on the horizontal axis.

Hiram 6 loaves = 3 Hours

3 Meatloaves = 2 Hours

Adasha 8 Loaves = 3 Hours

3 Meatloaves = 2 Hours

b). What is Hiram’s opportunity cost of producing one loaf of bread?

c). What is Hiram’s opportunity cost of producing one meatloaf?

d). What is Adasha’s opportunity cost of producing one loaf of bread.

e). What is Adasha’s opportunity cost of producing one meatloaf?

f). Given the above information, who should produce meatloaf? Explain your answer

g). Given the above information, who should produce bread? Explain your answer.
2. a) Draw demand and supply curve on the same graph by indicating different quantities of bulk
supplied and demanded at various prices.

b) What is the equilibrium price of bulb onion? What makes you think so

c). Assume that if the price of bulb onion increases to K10.00 per kilogram, how many bulb onions
will be sold?
Ans:

d). Assume that if the price of bulb onion decreases to K4.00 per kilogram, how many bulbs will be
sold? Will there be excess demand or supply and by how much?

3. ITI is currently charging K8,800 for all Diploma and Advanced diploma courses and students’
enrolment is approximately 1000 per semester, if the school fee increases to K9,000, student
enrolment decreases to 800 per semester. Calculate the price elasticity of demand for ITI
4. If you were in a position to set price for these goods, what would be your pricing strategy for each
product?

Ans: If the firm is experiencing serious cash flow problems, I as the Manager will have to increase
total revenue as soon as possible, then our pricing strategy will be built on assumption, that we
should increase price for products with inelastic demand and decrease price for products with elastic
demand, so we should increase price for Fanta and decrease price for Coke and Sprite.

Provide reasons for your answer to;

a). Coke – is elastic demand so the Manager should decrease the price of the Coke
b). Sprite – is also elastic demand and the price should be decreased as well
c). Fanta Pineapple- is inelastic demand and the price will be increased and the demand for it stays
the same, the total revenue will increase because the quantity demand has not changed.

5. a) When the price of DVD is increased from K10 to K14, the number of DVDs bought decreased
from 30 to 20. What is the consumers price elasticity of demand in this case? How did the
consumer’s total spending on DVDs change as a result of this?

b). When the price of product A decreased from K2 to K1, the consumer bought 28 units of product
B instead of 20. What is the consumer’s cross-price elasticity of demand for these two products?

Percentage change in quantity of B

_Q1 – Q2__ X 100

(Q1 + Q0)/2

Percentage change in price of A

_P1 – P0__ X 100

(P1-P0)/2
% change in quantity of B = (28-20)/2 = 0.33 x 100 = 33
% change in Product A = (1-2) /(1+2)/2 = -0.66 x 100 = -66
XED = 33/-66 = -0.5

Since the cross-price elasticity of demand is negative, A & B are complementary products.

5. c). When a consumers income increased from 5400 to K6600 they ate at a certain restaurant 36
times a year instead of 28. What is the income elasticity of demand in this case? Based on this
calculated elasticity, what type of good is eating at this restaurant as far as this consumer is
concerned?

Answer = The income elasticity of demand in this case is;

Ed = 36 – 28 x 6600 + 5400 = 5 = 1.25

6600 - 5400 36 + 28 4

So, this is a Normal good