PRACTICE PROBLEMS

Avijit Mallik
Assistant Professor
IBA,DU
Demand-Supply Practice Problem
Consider the market for bottled soybean oil. Most of the supply of bottled soybean oil comes
from foreign countries whereas the demand for bottled Soybean oil is elastic. Draw the
changes in the demand supply situation and the market equilibrium of Bottled Soybean Oil
for each of the following cases. Also indicate the new equilibrium quantity and price under
each case. Each case is separate from the other.
■ Brazil is a major soybean oil exporter in the world. Due to a recent political unrest, the
supply of soybean oil from Brazil has been disrupted.
■ Government has recently reduced VAT from 15% to 5% on the import of Soybean oil.
■ Low income group of people has switched its consumption of bottled soybean oil to loose
soybean oil.
■ The per capita income of Bangladeshi people has gone up by 5%. Consider Soybean
bottled oil to be a “normal good”.
Elasticity Practice Problem

2022 2023

Price of Good X 100 Taka 120 Taka

Quantity demanded of good X 25 Unit 15 Unit
Quantity demanded of good Y 10 Unit 8 Unit

Please Calculate Own price, cross price and Income elasticity. Is Good X elastic or inelastic? What is
the relationship between Good X and Good Y based on the cross price elasticity? If Income of a
typical household increases by 10% the quantity demanded of good X increases by 12%. Is good X
normal or inferior? Necessity or Luxury?
Utility Maximization Practice Problem

■ Suppose you have 60 Taka of budget/Income. Good X costs 3

Taka and good Y costs 1 Taka each unit. Draw your budget
line. The Indifference curve you face is a regular one i.e
convex to the origin. Draw 3 indifference curves as we did in
the class lecture. Graphically show the utility maximization
process and conditions. At what situation the utility is
maximized?
PRODUCTION
THEORY
Salvatore#7
Production
Production Function

■ Total Product
■ Average Product
•Fixed Inputs ■ Marginal Product

•Variable Inputs ■ Law of Diminishing Return

•Short Run

•Long Run
 Isoquant
An isoquant is a curve that shows all the
combinations of inputs that yield the same level of
output.

• Negatively sloped

• Convex to the origin

• Never intersect

• The marginal rate of technical

substitution (MRTS) is an economic theory
that illustrates the rate at which one factor
must decrease so that the same level of
productivity can be maintained when another
factor is increased.
Economic
Region of
Production
• Firms will never produce on the
positively sloped portion of the Isoquant

• Ridge lines will separate the relevant

from the irrelevant portion of the
Isoquant
*Cobb Douglas Production Function

*Return to Scale Concept

Constant returns to scale
Increasing returns to scale
decreasing return to scale
 COSTS OF
PRODUCTION
Salvatore#8
Short run Costs
Cost Concepts

■ Explicit Cost
■ Implicit Cost/Opportunity Cost
■ Fixed Cost
■ Variable Cost
Per-unit Costs
Isocost
Least Cost Input Combination (LCIC)
In Class Activity

■ Suppose the total cost of production is

$120. The cost of capital is $4 per unit and
wage rate is $2. Draw the isocost line and
isoquant curve. What is the MRTS and
optimal combination of Labor-Capital to
minimize the cost?