ECO101: Introduction to Microeconomics
Problem Set 01| Spring 2024
Q.1. Consider the market for Good X.
Demand: Qd = 80 – 50P and Supply: Qs = 5P – 20
a) Given the information, find the market equilibrium price and quantity for good X
b) Calculate the consumer surplus, the producer surplus, and the total surplus for good X
Suppose the government decides to impose a tax of TK 5 per unit on good X which is shared
equally between buyers and sellers.
c) Given the tax, find the new price that buyers will pay and the new price that sellers will
receive
d) Find the new CS, PS and TS
e) Calculate the tax revenue generated by the government and the deadweight loss from the tax
Q.2. Using the same amount of time and resources, Ahmed can either build 6 chairs or 4 tables,
and Peter can either build 9 chairs or 6 tables. Who should specialize in the production of which
good?
Q.3. Judy’s income has increased from £13,000 to £17,000. Judy increased her demand for
concert tickets by 15 per cent and decreased her demand for bus rides by 10 per cent. Calculate
Judy’s income elasticity of demand for
a) concert tickets
b) bus rides
Q.4. Cyrus has a small pastry shop. His minimum willingness to sell small cupcakes is $5. When
the market price for cupcakes is $3 each, what will his surplus be?
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Q.5.
According to the graph shown, when the market price deviates from equilibrium price to $10,
which area(s) correspond to deadweight loss?
Q.6. For each of the following scenarios, use a supply and demand diagram to illustrate the effect
of the given shock on the equilibrium price and quantity in the specified competitive market.
Explain whether there is a shift in the demand curve, the supply curve, or neither.
a) An unexpected temporary heat wave hits Bangladesh. Show the effect in the market for air-
conditioners (ACs) in the country.
b) The government introduces a tax on air-conditioners which is paid by producers. What is the
effect in the market for air-conditioners?
Q.7.a) Jan heads to the store to buy burgers for dinner. Seeing a sale on hot dogs, she buys those
instead. The change in her demand for burgers is due to which factor?
Q.7.b) After getting a raise at work, Jennie now regularly buys steak instead of hamburger.
Based on this behavior, we can conclude, for Jennie which is a normal good and which is an
inferior good?
Q.8. Consider a market for ice cream that is in equilibrium. Unusually high temperatures have
caused the demand for ice cream to increase. At the same time, the price of cream to produce ice-
cream has decreased. What can be concluded about the new equilibrium price and quantity.
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Answers
Q.1. a) P* = 10; Q* = 30
Q.1.b) Initial: CS = 90; PS = 90; TS = 180
Q1.c) Buyers will pay Tk 12.5; Sellers will receive Tk 7.5
Q1.d) New: CS = 30.625; PS = 30.625; TS = 61.25
Q1.e) Tax revenue = 87.5; DWL = 31.25
Q.2. Both have identical opportunity costs. No comparative advantage. There is no benefit in
trading or specialization.
Q.3.a) YED for concert tickets = 0.487 (normal good but not luxury since YED < 1).
Q.3.b) YED for bus rides = - 0.325 (inferior good).
Q.4. Zero. Cyrus would not sell any cupcakes as he would prefer to avoid a negative surplus.
Q.5. It would be areas C & E. Because they were part of the total surplus under the equilibrium
but not after the price deviation.
Q.6.a) The temporary heat wave shifts the demand curve to the right (demand increases). As a
result, equilibrium price and quantity both go up.
Q.6.b) The supply curve shifts left (supply decreases due to increase in cost of production for
producers). As a result, the equilibrium price increases and the equilibrium quantity decreases.
Q.7.a) Price of related goods/substitutes.
Q.7.b) Steak is a normal good, and hamburger is an inferior good for Jennie.
Q.8. Due to high temperatures, demand for ice cream will increase (demand curve will shift to
the right). At the same time, due to the decrease in the price of cream (cost of production of ice
cream decreases), supply of ice cream will also increase (supply curve will shift to the right).
When both demand and supply increase, the equilibrium quantity increases and the equilibrium
price might increase, decrease or remain the same (as it depends on whose effect is greater – and
the effect is not specified in the question).
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Quiz 02 Questions
Q.1. Consider the market for apple juice. In this market, the supply curve is given by,
𝑄𝑆 = 10𝑃𝐽 − 5𝑃𝐴 and the demand curve is given by
𝑄𝐷 = 100 − 15𝑃𝐽 + 10𝑃𝑇 , where J denotes apple juice, A denotes apples, and T denotes tea.
(a) Assume that 𝑃𝐴 is fixed at $1 and 𝑃𝑇 = 5. Calculate the equilibrium price and quantity in
the apple juice market.
(b) Suppose that a poor harvest season raises the price of apples to 𝑃𝐴 = 2.
Find the new equilibrium price and quantity of apple juice. Draw a graph to illustrate the
change in the market equilibrium for apple juice. Show if there is a shift in either demand
curve or supply curve or both.
[Link] equation for a supply curve is P = 3𝑄𝑆 – 8.
What is the elasticity in moving from a price of 4 to a price of 7? State whether the supply is
elastic, inelastic or unit elastic.
Quiz 02 Answers
Q.1.(a) We have the system of equations Qs = 10PJ − 5 (1) and Qd = 100 − 15PJ + 10 (5).
At equilibrium, Qd = Qs. Solving for PJ and Q we get that P* = 6.2 and Q* = 57.
Q.1.(b) We now have to solve the system of equations: Qs = 10PJ – 10, Qd = 150 − 15PJ.
Solving for PJ and Q we get that P* = 6.4 and Q* = 54. In a supply and demand graph, the
supply curve shifts to the left, resulting in a higher equilibrium price and lower equilibrium
quantity.
Q.2. Price elasticity of supply = 0.407, which is less than 1, so PES is inelastic.
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