UNIVERSITY OF ZAMBIA

INSTITUTE OF DISTANCE EDUCATION

ECN 1115: INTRODUCTION TO MICROECONOMIC THEORY

Assignment 1 (group work)

Specifications
 Your answer should be typed
 Due: 28th March, 2024
 Work in groups of Four (4)
 Indicate active group members on the cover page
 Each group member is expected to submit a copy of the assignment.
 Make sure you upload a pdf file

Question One

a) It is argued that there are no pure command or pure market economies, all economies
are mixed. There are different types of mixed economies. Describe four (4) different
types of mixed economies, giving practical examples of Zambia’s economic journey from
1964 up to 2023.Word limit: 1500 (25 marks)
b) Explain why the shape of the production possibility frontier is bow-shaped. (6
marks)
Total: 31 marks
Question Two

a) The Law of demand states that ‘there is a negative relationship between the price of a
good and the quantity demanded’ ceteris paribus!
i) Explain the meaning of this statement. Give practical examples. (4 marks)
ii) How does the Law of supply differ from the law of demand? (2 marks)

iii) Explain, using practical examples any two (2) exceptions to the law of demand.

(4 marks)

b) Consider the following supply schedule for headsets

Price (ZW) Quantity Supplied

2 25
4 35
6 45
8 55
10 65
12 75

i) Plot the curve on a graph (4 marks)

ii) Calculate the elasticity of supply at price K4 and at price K10 (4 marks)
 iii) Suppose a rise in cost of production causes the producer to reduce supply by 15
units at every price. Repeat exercise (i) and (ii) above. (8 marks)
iv) Discuss any four (4) determinants of the supply of headsets. (4 marks)
(30 marks)

Question Three

a) Explain the term Total utility. (2

marks)
b) A consumer has a current income of K60, which can be spent only on
goods X and Y. The price of good X is K3, and the price of good Y is
K2.

i) Graph the consumer's budget constraint, clearly labeling the

intercepts and the slope of the budget line.
(4 marks)
ii) Suppose that the consumer chooses to purchase 12 units of good X.
On the same graph, show the consumer's utility-maximizing bundle
(quantities of X and Y) and the indifference curve through this
point. (4 marks)

c) Consider a consumer who consumes only two goods: rice and beans. She has an income
of K1, 000.00, the price of beans is K20 per kg while the price of rice is K40 per kg.
i) Suppose that the consumer consumes 30 kg of beans. Assuming that she spends
all her income. How many kg of rice is she going to consume? (1 mark)
ii) Assume that the price of rice falls from K40 to K20. Assuming that the consumer
still consumes 30 kg of beans. Find the new quantity of peas. (1 mark)
iii) Assume the income reduces to K760.00. Considering the new price of rice, she
now consumes 20 kg of beans. Find the quantity of rice she would have
consumed in this case.
(2 marks)
iv) Find the substitution effect due to the decrease in the price of rice. (3 marks)
v) Find the income effect (3 marks)
Total: 20 marks

Question Four

a) Suppose that the market for milk can be represented by the following equations:

Demand: P = 12 – 0.5QD

Supply: P = 0.1QS
where P is the price per gallon, and Q represents quantity of milk, represented in
millions of gallons of milk consumed per day.
i) Calculate the equilibrium price and quantity of milk. (2 marks)
ii) To help dairy farmers, the government sets a minimum price of K2.50 per gallon
of milk. What is the new quantity of milk sold in the marketplace? (3 marks)
 iii) Illustrate your answers to (i) and (ii) on a graph. (4 marks)
iv) Using this graph, calculate how the consumer surplus and producer surplus
change after the price supports are enacted. (4 marks)
v) Suppose that the government supports the K2.50 per gallon price by purchasing
any excess milk suppliers make available but are unable to sell to consumers.
How much milk must the government buy? (2 marks)
b) Suppose Mary was a book writer, who died a year ago. At the time of her death she had
written 600 books which have all been distributed to various book shops in Zambia.
Draw the supply curve for Mary’s Books (4 marks)
(19 marks)