ECO111 Microeconomics

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Individual Assignment 02

Question 1. (2 points)

1. You can allocate your time for the next four years between studying and working at a car
wash. Each semester you spend studying you can earn 15 credit hours and each semester you
work at the car wash you wash 800 cars. If you have 8 semesters to allocate, label each of the
following on a graph.
a. Your production possibilities curve (0.5)
b. A point that is unattainable (0.5) Point B
c. A point that is efficient (0.5) Point A
d. Plot and label a point on your graph that represents a decision to take a semester off from

both studying and working. (0.5) Point C

 2. Refer to the graph provided to answer the following questions. (2 points)
Price
Supply

3
Demand

0
100 175 220 Quantity demanded

a. What are the equilibrium price and quantity in this market? (0.5)
The equilibrium price = 5
The equilibrium quantity = 175

b
b. What is the effect of a price ceiling of $3 placed on this market? (0.5)

S=100
D=220
=> lacking of 120 products
c. What is the effect of a price ceiling of $7 placed on this market? (0.5)
S=220
D=100
=> surplus of 120 products
d. If price in this market is $7, explain the adjustment process that will bring the market
back to equilibrium. (0.5)
Supply shift left and demand low up

3. Graph the effect on equilibrium price and quantity in the market for oranges for each
of the following changes (graph each one separately). (2 points)
a. A chemical routinely sprayed on orange orchards is found to cause cancer.(0.5)
Demand low and supply raise
b. The wages of farm workers increase. (0.5)
 Supply raise and demand low
c. A new orange picking machine is invented. For the same cost, it can pick more
oranges, faster, and with less damage than other machines. (0.5)
Supply raise and demand low.
d. Consumer income falls. (0.25)
Supply raise and demand low
e. The price of tangerines falls. (0.25)
Supply raise and demand low
Question 2 (2 points)
1. You operate your own business selling college t-shirts. The demand schedule for
your t-shirts is as follows: P = 25 - 0.5Q.
a. Graph the demand curve for your t-shirts. (0.5)
P=10 => Q=30
P=15 => Q=20 P
P=20 => Q=10

b. Calculate the price elasticity of demand when price equals $10. (0.5)
E = P/Q x 1/0,5 => e = 0,6
c. In what range does price elasticity of demand fall at $10 (elastic, unit elastic,

inelastic)? (0.5) Inelastic

d. If your goal is to maximize total revenue, how should you change price if you
are currently charging $10? (0.5)

Increasing P to the maximum, Q decreasing, we will get the maximum revenue

2
a.Use the information in the graph below to find price elasticity of supply at point A. (0.25)
4 = x + 20y => x = -2 => e = 4/20 x 1/0,3 = 0,67
7 = x + 30y => y = 0,3

Price Supply

4 A

0 20 30 Quantity Demanded

2b. Based on the elasticity of supply in part a, if price increases by 10%, by how much
will quantity supplied change? (0.25)
If the price increases by 10% then the supply increases by 20% because
elasticity = 2

2c. What will happen to the price elasticity of supply, in each of the following cases
(becomes more inelastic, more elastic, or does not change)? (0.5)
i. inputs become easier to transport
Increase S and decrease D
ii. new inputs into production of the good are found
Increase S and decrease D
iii. the firm moves from the short-run to the long-run
Increase S and decrease D. Because when you
sell short-term you have to sell low price to
attract buyers, while you sell long-term you
 can let higher prices

Question 3. Which of the following is true for a vertical supply curve? (1point)
a. Price elasticity of supply is perfect elastic
b. Quantity supplied is very responsive to price changes
c. Price elasticity of supply is inelastic
d. Price elasticity of supply is infinite
e. Quantity supplied is negatively related to price
CHOOSE D. Price elasticity of supply is infinite.