Microeconomic Principles (HE1001)
Assignment 1
Do come prepared
1. In the past, tofu was considered as a low quality food and available only from small businesses operating in some sections of large cities. Today tofu has become popular as a high-protein health food and is widely available in supermarkets throughout the country. At the same time, tofu production has evolved to become factory-based using modern food processing technologies. Draw diagrams with demand and supply curves depicting the market for tofu in the past and the market for tofu today. What does the demand-supply model predict about changes in the volume of tofu sold and the prices of tofu between then and now? 2. The market for durians is perfectly competitive. The demand curve equation is given by QD = 400 40P while the supply curve equation is given by QS = 40P. Draw the demand and supply curves on a well labeled graph and answer the following questions: a. What is the equilibrium price and quantity in this market? b. Suppose the Government believes that durians are priced too high and imposes a price ceiling of $3 on this market. What is the effect? c. Suppose the Government instead believes that durians are priced too low and imposes a price floor of $7 on this market. What is the effect? d. If the price floor regulation is subsequently abolished, explain how the market adjusts to return to equilibrium. 3. The inverse demand curve for product X is given by: PX = 25 - 0.005Q + 0.15PY where PX represents price in dollars per unit, Q represents rate of sales in pounds per week, and PY represents selling price of another product Y in dollars per unit. The inverse supply curve of product X is given by: PX = 5 + 0.004Q.
a.
b.
Determine the equilibrium price and sales of X. Let PY = $10. Determine whether X and Y are substitutes or complements.
4. Harding Enterprises has developed a new product called the Gillooly Shillelagh. The market demand for this product is given as follows: Q = 240 - 4P a.
b.
At what price is the price elasticity of demand equal to zero? At what price is demand infinitely elastic?
5.
The nominal price of milk was $2.25 in 1998 while the CPI was 163.0 that year. Also, the CPI in 1970 was 38.8. What was the real value of 1998 milk in terms of 1970 dollars?
Multiple Choice Questions (In each question there is one correct answer) 1. In a perfectly competitive market: a. b. c. d. There are a few buyers. There is a single seller. There is a cartel. No single buyer or seller can significantly affect the market price.
2. The assumption of transitive preferences implies that indifference curves must: a. b. c. d. e. not cross one another. have a positive slope. be L-shaped. be convex to the origin. all of the above.
3. Indifference curves are convex to the origin because of: a. b. c. d. e. transitivity of consumer preferences. the assumption of a diminishing marginal rate of substitution. the assumption that more is preferred to less. the assumption of completeness. none of the above.
