Microeconomics Assignment 1 Fall 22

There are FOUR questions in this individual assignment.

Use proper A4 paper. Type-written answers are advisable, though handwritten ones
are also acceptable, as long as they are tidy, clean, and organized.

Show all the steps (if necessary) to achieve your answers.

Due date: 21 Oct 2022 before midnight. No late submission is allowed.

1. (7 marks)
Suppose the market for raw cotton is a competitive market. It can be
represented by:
Q = 25,000 –4P3
Q = 5,000 + 16P3

a. Which one is the demand function? Which one is the supply function?
Find the market equilibrium price and quantity. (4 marks)

b. Calculate the price elasticity of demand at equilibrium.

(3 marks)

2. (11 marks)
Recently, toxic substances have been found in the imported eggs. As a result,
the retail price of these eggs drops by 20% and the selling quantity drops by
50%.

a. With the above figures, calculate the relevant price elasticity for
imported eggs. In particular, indicate whether it is the demand
elasticity or supply elasticity. (3 marks)

b. Show the above situation in a well-labeled supply-and-demand

diagram. Briefly explain the slope of the supply curve. (3 marks)

c. As time passes, the retail price of imported eggs falls by more.

Explain this gradual change in price of imported eggs using the

concept of supply elasticity. Be specific to the case of imported eggs.
(5 marks)

1
Microeconomics Assignment 1 Fall 22

3. (14 marks)
Suppose the linear demand function for cigarette is Q = 600 – 4P + 2PM - 0.2I.

where Q = units of cigarettes

P = Price of cigarette
PM = Price of marijuana
I = Income level

Cigarette is selling at a price of $25. The price of marijuana is $100. 500 units
of cigarette are sold in the market. Assume all goods are freely sold in the
market.

a. Using the given figures, find the price elasticity of demand for
cigarette. (2 marks)

b. Find the cross elasticity between cigarette and marijuana. Interpret the
result. (3 marks)

c. Suppose the police cracks down a major marijuana supplier such that
its price soars by 20%. Using the result in (b), calculate the impact on
the sales of cigarettes. (3 marks)

d. Using the result in (b), suggest ONE policy change on marijuana so to

discourage cigarette consumption. (3 marks)

e. How will the sales of cigarette change during economic recession?

Explain. (3 marks)

4. (18 marks)
Johnny has the following information about the consumption of x and y:

Johnny’s utility function: U = 4x2y2

Johnny’s income is $40 and the prices of x and y are both $2.

(a) Find marginal utility of x and marginal utility of y. What is the equation of
Budget line? (6 marks)
(b) Find his optimal consumption bundle. Depict your answer in the diagram.
Label x on the x-axis. (6 marks)
(c) Suppose government imposes a sales tax on good y. As a result, the price of y
becomes $4. Find his new consumption bundle. Depict your answer in the
diagram. (6 marks)

~the end~