NAME: SADIA SAEED

CLASS: BBA-2
SECTION:B
SUBJECT: MICROECONOMICS
SEAT NO: B19542060
SUBMITTED TO: SIR OMAR SHAIKH

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Name : SADIA SAEED
Seat No. : B19542060
Submitted to: Sir Omar Shaikh
1) 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?

Answer(1)
PRICE QD TR
RS 1 30 RS 30
RS 1.64 21 RS 34.50
64.29% 30% 15%
Price was increased, which led to a 30% decrease in sales (Qd). And, in the end, revenue
went up by 15%. So the price hike was more than enough to offset the decrease in sales.
Thus, because the percent change to price was more than the percent change in Qd, we
have inelastic demand.

2) Cups of coffee and donuts are complements. Both have inelastic demand. A hurricane
destroys half the coffee bean crop. Use appropriately labeled diagrams to answer the
following questions.
• What happens to the price of coffee beans?
Answer (2-A) When the supply for coffee decreases the price for coffee increases

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 • What happens to the price of a cup of coffee? What happens to total expenditure on cups of
coffee?
Answer (2-B) As we can determine given the diagram, for goods with an inelastic demand the increase
in price raises total expenditure on coffee. This is due to the smaller total decrease in sales in relationship
to the increase in price

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 • What happens to the price of donuts? What happens to total expenditure on donuts?

Answer (3-C When demand for coffee goes down, demand for donuts also goes down as well. This is
reflected by a shift to the left in the demand curve for donuts resulting in a lower price. Because donuts
are an inelastic good the reduction in price results in an overall decrease to total expenditures.

3)The New York Times reported (Feb.17, 1996) that subway ridership declined after a fare
increase: “There were nearly 4 million fewer riders in December 1995, the first full month after
the price of a token increased 25 cents to $1.50, than in the previous December, a 4.3 percent
decline.”

• Use these data to estimate the price elasticity of demand for subway rides.
Answer : Price elasticity of demand = %Δ in quantity demanded / %Δ in price= 4.3 / (0.25/1.25x100)=
0.215 The elasticity of demand for subway rides is 0.215

• According to your estimate, what happens to the Transit Authority’s revenue when the fare
rises?
Answer : When price elasticity is less than 1, demand is inelastic, so when prices go up, then total
revenue will also increase Because the demand is inelastic, the Transit Authority's revenue rises when the
fare rises.

• Why might your estimate of the elasticity be unreliable?

ANSWER: This estimation could be unreliable because one month is too short a period for bringing a
definite conclusion. The elasticity estimate might be unreliable because it is only the first month after the
fare Increase. As time goes by, people may switch to other means of transportation in response to the
price increase. So the elasticity may be larger in the long run than it is in the short run.

4) The price of coffee rose sharply last month, while the quantity sold remained the same.
Each of five people suggests an explanation: (c)
Tom: Demand increased, but supply was perfectly inelastic.
Dick: Demand increased, but it was perfectly inelastic.

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Harry: Demand increased, but supply decreased at the same time.
Larry: Supply decreased, but demand was unit elastic.
Mary: Supply decreased, but demand was perfectly inelastic.
Who could possibly be right?
Answer E (Dick, Harry and Mary) are right.
5) Consider the markets for DVDs, TV screens, and tickets at movie theaters.
a. For each pair, identify whether they are complements or substitutes:
• DVDs and TV screens
Answer DVDs and TV screens are likely to be complements because you cannot watch a DVD without a
television. DVDs and movie tickets are likely to be substitutes because a movie can be watched at a
theater or at home. TV screens and movie tickets are likely to be substitutes for the same reason.

b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw a diagram
to show what happens in the market for TV screens.

The technological improvement would reduce the cost of producing a TV screen, shifting the supply
curve to the right. The demand curve would not be affected. The result is that the equilibrium price will
fall, while the equilibrium quantity will rise.

c. Draw two more diagrams to show how the change in the market for TV screens affects the
markets for DVDs and movie tickets.

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Answer: The technological improvement would reduce the cost of producing a TV screen, shifting the
supply curve to the right. The demand curve would not be affected. The result is that the equilibrium
price will fall, while the equilibrium quantity will rise.

MULTIPLE CHOICE QUESTIONS

1. Which of the following is a microeconomic topic?

a) The reasons why Kathy buys less orange juice b) The reasons for a decline in average prices.
c) The cause of why total employment may d) The effect of the government budget deficit on
decrease. inflation.
2. Economics is best defined as the study of how people, businesses, governments, and societies
a) choose abundance over scarcity b) make choices to cope with scarcity.
c) use their infinite resources. d) attain wealth.
3. When a farmer decides to increase the amount of acreage devoted to wheat and grow fewer acres of
soybeans, the farmer is facing the
a) “what” tradeoff b) “how” tradeoff
c) “for whom” tradeoff d) macroeconomic question
4. The loss of the highest-valued alternative defines the concept of
a) marginal benefit. b) scarcity.
c) entrepreneurship. d) opportunity cost.
5. If two variables both increase at the same time or decrease at the same time, they are
a) unrelated to each other b) positively related.
c) negatively related. d) conversely related.
6. The production possibilities frontier illustrates
a) all goods that can be produced by an b) the combination of goods and services
economy that can be produced efficiently
c) all goods and services that are desired d) all possible production of capital goods
but cannot be produced due to scarce
resources
7. Which of the following statements regarding the production possibilities frontier is true?
a) Points outside the frontier are attainable. b) Points inside the frontier are attainable.
c) Points on the frontier are less efficient d) None of the above because all of the
than points inside the frontier. above statements are false

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8. Which of the following is consistent with the law of demand?
a) An increase in the price of a tape causes an increase in the quantity of tapes demanded.
b) An increase in the price of a soda causes a decrease in the quantity of soda demanded.
c) A decrease in the price of a gallon of milk causes a decrease in the quantity of milk demanded.
d) A decrease in the price of juice causes no change in the quantity of juice demanded.
9. Each point on the demand curve reflects
a) all the wants of a given household. b) the highest price consumers are willing
and able to pay for that particular unit of
a good.
c) the highest price sellers will accept for all d) the lowest-cost technology available to
units they are producing. produce a good.
10. Suppose people buy more of good 1 when the price of good 2 falls. These goods are
a) complements. b) substitutes.
c) normal. d) inferior.
11. A decrease in the price of a game of bowling shifts the
a) demand curve for bowling balls leftward. b) demand curve for bowling balls
rightward.
c) supply curve of bowling balls leftward. d) supply curve of bowling balls rightward.
12. An inferior good is a good for which demand
a) increases when income increases. b) decreases when population increases
c) increases when population increases d) decreases when income increases.
13. .Which of the following would NOT shift the demand curve for beef?
a) An increase in income. b) A decrease in the price of chicken.
c) Change in tastes for beef. d) A change in the price of a beef.
14. Which one of the following statements is true?
a) If the marginal cost is greater than the b) If the marginal cost is positive total costs
average cost the average cost falls are maximized
c) If the marginal cost is greater than the d) If the marginal cost is negative total costs
average cost the average cost increases increase at a decreasing rate if output
increases
15. If marginal cost is positive and falling:
a) Total cost is falling b) Total cost is falling at a decreasing rate
c) Total cost is increasing at an increasing d) Total cost is increasing at a falling rate
rate
16. The price decreases from £2,000 to £1,800. Quantity demanded per year increases from 5000 to 6000 units.
Which of the following is correct?
a) The good is inferior b) Income elasticity is + 0.5
c) Income elasticity is + 2 d) The price elasticity of demand is -2
17. If the price elasticity of demand is unit then a fall in price:
a) Leaves revenue unchanged b) Reduces revenue
c) Increases revenue d) Reduces costs
18. The price elasticity of demand is a negative number this means:
a) The demand curve is downward sloping b) Demand is price elastic
c) Demand is price inelastic d) An increase in income will reduce the
quantity demanded
19. If the marginal cost is increasing at a falling rate
a) Total cost is falling b) Total cost is increasing at a falling rate
c) Total cost is falling at a decreasing rate d) Total cost is increasing at an increasing
rate
20. A supply curve shows the relation between the quantity of a good supplied and

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 a) income. Usually a supply curve has b) income. Usually a supply curve has
negative slope. positive slope.
c) the price of the good. Usually a supply d) the price of the good. Usually a supply
curve has negative slope. curve has positive slope.
21. As the quantity produced increases,
a) average fixed cost increases. b) variable cost always decreases.
c) average fixed cost decreases. d) none of the above
22. A production function is a relationship between
a) inputs and quantity of output. b) inputs and revenue.
c) inputs and costs. d) inputs and profit.
23. A price below the equilibrium price results in
a) a surplus. b) a shortage.
c) excess supply. d) a further price fall.

price / disc Qd Qs
4 36,000 4,000
24. The table gives the demand and supply schedules for 8 32,000 8,000
compact discs. If the price of a compact disc is $8, there is 12 28,000 12,000
a ____ and the price of a compact disc will ____. 16 24,000 16,000
a) Shortage; rise
b) Shortage; Fal 20 20,000 20,000
c) Surplus; rise 24 16,000 24,000
d) Surplus; fall 28 12,000 28,000
32 8,000 32,000
36 4,000 36,000

25. Diminishing marginal product of labour occurs when adding another unit of labour
a) increases output, but not by as large a b) decreases output.
margin as previous units of labour.
c) increases output by more than the d) none of the above.
margin of previously employed labour.
26. In the below figure, of the quantities listed below (X axis), for which is the total deadweight loss the largest?

a) 0 units
b) 30 units
c) 10 units
d) 20 units

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27. In the above figure, suppose that the government sets a quota at 10 units of output and the price rises to
$4. The total deadweight loss would be
a) $0. b) $15.
c) $20. d) $10.

28. In the figure, when the efficient quantity of gloves is produced, the
total consumer surplus equals
a) $15,000.
b) $45,000.
c) $22,500.
d) $3,000.

Note:
• Failing to comply with the instructions will lead to your disqualification from the examination.
• Students are not allowed to possess, receive or use any printed or written documents, illustrations,
mobile phones, digital devices or any other unauthorised aids in the examination hall.
• Students should not indulge in conversation, or in any mean o communication with other students.

1. The accompanying table shows the price and yearly quantity sold of T-shirts in the town of
Crystal Lake.

Price of T Shirt Qd
4 3,000
5 2,400
6 1,600
7 800
Using the midpoint method, calculate the price elasticity of demand when the price of a T-shirt rises from $5 to $

ANSWER

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 2. Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will increase, decrease, o
same when each of the following events occurs? Explain your answer. (4 marks)

a) Other car manufacturers, such as General Motors, decide to make and sell SUVs.
Answer : The price elasticity of demand for Ford SUVs will increase because more substitutes are
available
b) SUVs produced in foreign countries are banned from the American market.
Answer : The price elasticity of demand for Ford SUVs will decrease because fewer substitutes are
available
c) Due to ad campaigns, Americans believe that SUVs are much safer than ordinary passenger cars.
Answer The price elasticity of demand for Ford SUVs will decrease because other cars are viewed as less of a substitute
d) The time period over which you measure the elasticity lengthens. During that longer time, new models s
wheel-drive cargo vans appear.
Answer The price elasticity of demand for Ford SUVs will increase over time because more substitutes (such as four
cargo vans) become available

3. Assume a situation where producer surplus is decreased with a greater margin than
consumer surplus as a result of a tax imposed by government. With the help of a graph
explain (4 marks)

a) Which side of the market is more elastic than the other

Answer The demand side is more elastic, supply is more inelastic.

b) Which side of the market is likely to share the larger portion of the tax
Answer the black shaded area the share of the tax producer has to pay. Blue area is the share of tax for
consumer.

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4. Teacher's Helper is a small company that has a subcontract to produce instructional
materials for disabled children in public school districts. The owner rents several small rooms
in an office building in the suburbs for $600 a month and has leased computer equipment
that costs $480 a month. Show computations (5 marks)
Output Fixed Variable Total AFC AVC ATC MC
Cost Cost Cost
0 1080 0 0 0 0 0 0
1 1080 400 1480 1080 400 1480 400
2 1080 850 1930 540 425 965 450
3 1080 1350 2430 360 450 810 500
4 1080 1900 2890 270 475 745 550
5 1080 2500 3580 216 500 716 600
6 1080 3200 4280 180 533.8 713.8 700
7 1080 4100 5180 154.2 585.7 739.9 900
8 1080 5400 6480 135 675 810 1300

SOLUTION
1) F.C= 600+480=1080 AFC=1080/1=1080 AVC=400/1=400
ATC=1480/1=1480
2) TC=450+1480=1930 VC=1930-1080=850 AFC=1080/2=540 AVC=850/2=425
3) AFC=1080/3=360 AVC=1350/3=450 ATC=2430/3=810 MC=2430-1930=500
4) TC=1080+1900=2980 AFC=1080/4=270 ATC=2980/4=745 MC=2980-2430=550
5) TC=1080+2500=3580 AVC=2500/5=500 ATC=3580/5=716 MC=3580-2980=600
6) VC=4280-1080=3200 AFC=1080/6=180 AVC=3200/6=533.33 ATC=4280/6=713.8
7) TC=1080+4100=5180 AFC=1080/7=154.28 AVC=4100/7=585.71 ATC=5180/7=7
MC=5180-4280=900
8) TC=5400+1080=6480 AVC=5400/8=675 ATC=6480/8=810 MC=6480-5180=1300

5. Your firm is currently producing and selling 100 brushes for $2 each. It has average fixed
costs $0.5 and average variable costs $0.75 at this production level. Calculate the firm‘s total
revenue, total fixed cost, total variable cost, and total profit at this production level. (2 marks)
Answer
Total revenue = PXQ
TR=100X2 = 200
TOTAL FIX COST =125

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 TATOL VARIBLE COST =75
PROFIT= REVENUE – TOTAL COST
PROFIT = 200-125 = 75 IS PROFIT

6. What are the two conditions under which total utility is maximized? (1 mark)
Answer
1) Spend all available income
2) Equalize the marginal utility per dollars of goods
7. If total utility from good X were to reach a maximum and then start to decline for additional
units of good X, what would this imply about the marginal utility from additional units of
good X? Make up a numerical example to show this. (2 marks)

Answer The MU of good X would start declining because of law of diminishing marginal utility.
GOOD X TU MU
0 0
1 10 10
2 18 8
3 24 6
4 26 2
5 27 1

Here with this schedule, it is clear that TU is increasing and MU is declining.

8) From the following total utility schedule

Qx 0 1 2 3 4 5 6 7
TUx 0 4 14 20 24 26 26 24
a) derive the marginal utility schedule. (2 marks)
QUANTITY TOTAL UTILITY MARGINAL UTILITY
0 0 4
1 4 10
2 14 6
3 20 4
4 24 2
5 26 0
6 26 -2
7 24 -4

b) plot the total and the marginal utility schedules. (2 marks)

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 c) determine where the law of diminishing marginal utility begins to operate. (2 marks)
ANSWER at point 2.

9) A survey indicated that chocolate is Americans’ favourite ice cream flavour. For each of the
following, indicate the possible effects on demand, supply, or both as well as equilibrium price
and quantity of chocolate ice cream. (use graphs to explain your answers) (6 marks)
a) A severe drought in the Midwest causes dairy farmers to reduce the number of milk-
producing cattle in their herds by a third. These dairy farmers supply cream that is
used to manufacture chocolate ice cream.
Answer : By reducing their herds, dairy farmers reduce the supply of cream, a leftward shift of the supply
curve for cream. As a result, the market price of cream rises, raising the cost of producing a unit of chocolate
ice cream. This results in a leftward shift of the supply curve for chocolate ice cream as ice-cream producers
reduce the quantity of chocolate ice cream supplied at any given price. Ultimately, this leads to a rise in the
equilibrium price and a fall in the equilibrium quantity

b) A new report by the American Medical Association reveals that chocolate does, in
fact, have significant health benefits.
Answer :Consumers will now demand more chocolate ice cream at any given price, represented by a
rightward shift of the demand curve. As a result, both equilibrium price and quantity rise

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 c) The discovery of cheaper synthetic vanilla flavouring lowers the price of vanilla ice
cream.
Answer : The price of a substitute (vanilla ice cream) has fallen, leading consumers to substitute it for
chocolate ice cream. The demand for chocolate ice cream decreases, represented by a leftward shift of the
demand curve. Both equilibrium price and quantity fall.

d) New technology for mixing and freezing ice cream lowers manufacturers’ costs of
producing chocolate ice cream

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Answer Because the cost of producing ice cream falls, manufacturers are willing to supply more units of
chocolate ice cream at any given price. This is represented by a rightward shift of the supply curve and
results in a fall in the equilibrium price and a rise in the equilibrium quantity

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