Microeconomics

Application of demand Analysis and elasticity of demand.

Assignment # 2

Name: ___________________ Enrolment number: _______________

Section: ______________ Last date: -------

Q1. The table below gives the demand and supply schedules for sandwiches in The Sandwich Factory.

a. Draw the demand and supply curves. Mention equilibrium price and quantity of
sandwiches sold.
b. Calculate the consumer and producer surplus.
c. Show the under and over production

Price Quantity demanded Quantity supplied

(Rupees per sandwich) (sandwich per day) (sandwich per day)

0 300 0

10 250 50

20 200 100

30 150 150

40 100 200

50 50 250

60 0 300

Q2. Assume that each of the markets below is initially in equilibrium. Then for each market below,
suppose that the indicated event occurs. Illustrate the effect of each event in a diagram and also
explain the effects on the equilibrium price and quantity.

a. The physician announces that eating oranges lowers the risk of a heart attack (market for
oranges).
b. Terrorists destroy a major oil pipeline in Iraq (market for oil)
c. Consumers start getting their news from the internet (market for newspapers)
d. Real income in the US increases (the market for BMW’s)
e. University professors unionize and use their increased bargaining power to increase their
salaries by 20% (for University enrolment.
Q3. Suppose the following demand schedule for compact discs

Price Quantity demanded Quantity demanded

Income = $10000 Income = $12000
8 40 50
10 32 45
12 24 30
14 16 20
16 8 12

a. Calculate the price elasticity of demand as the price of a compact disc increases from $8 to
$10 at income level $10,000.
b. Calculate the income elasticity of demand if income increases from $10000 to $12000 at
price 12

Q4. Calculate the cross price elasticity of demand between Toyota and Corolla.

Price Quantity Demanded Price Quantity demanded

Corolla 1000 10 1200 8

Toyota 11000 9 11000 12

Q5.

a. Define Absolute advantage and Comparative advantage theory.

b. With the help of following chart explain which country has an absolute advantage in
the production of wheat and Cotton.
Pakistan China

Wheat 500 kg/acre 100 kg/acre

Cotton 250 kg/acre 600 kg/acre

c. Identify the country which has comparative advantage in the production of Car and
Computer.
China America

Car 1000/day 200/day

Computer 1200/day 600/day