Assignment for introduction to economics for AASTU

Students should form a group (i.e. between 10-12 members)

Work Out Items

1. Assume that a certain simplified economy produces only two goods, X and Y, with given
resources and technology. The following table gives the various possible combinations of
the production of the two goods (all units are measured in millions of tons). (all)

Opportunity Cost
Production Possibility Good X Good Y of Good X

A 0 100

B 2 90

C 4 60

D 6 20

a. Calculate the opportunity cost of the production of good X. What law does the trend in
those values exhibit?
b. What things are necessary for that economy to register economic growth?
2. Take an example of your own and show the conflict between scarce resources and the
unlimited human wants.(2)
3. Had there been no scarcity of economic resources (if all economic resources were as free as
oxygen, should there be economics as a field of study? why or why not? (3)
4. There the so called “diamond –water paradox” in economics to explain the reason behind
why water, which is very decisive for our very existence, is so cheap and diamond, which is
not important at all for our existence, is damn expensive. From our discussion so far explain
why this happened.(4)
5. What is the importance of Microeconomics?(5)
6. Why do we say inductive and deductive methods of economic analysis are complementary
rather than substitute?(5)
7. Why do we consider macroeconomics as a policy oriented branch of economics?(4)
8. Distinguish if the following variables are micro or macro variables and explain why you said
so.(3)

 The price of teff in Arsi

 Unemployment in Hareri region
 Total investment in Ethiopia in 2002 E.C
 Average Inflation in Ethiopia in over the last four years
 GDP of Germany

9. Identify whether the following statements are examples of Normative or Positive economics
and explain why you said so. (2)
 The GDP of Kenya has increased by 10 % in 2003
 Smoking ought to be banned in Addis Ababa
 Child labor should be strictly prohibited in Ethiopia.
 Inflation has reached 38% in urban Ethiopia last year.
 Gender violence has decreased significantly over the last five years in Ethiopia.
 There should be death penalty on those who involve in gender violence in Ethiopia.
10. Why does the quantity of salt demanded tend to be unresponsive to changes in its price?(1)
11. Why is the quantity of education demanded in private universities much more responsive
than salt is to changes in price?(1)
12. Summarize the relationship between price elasticity, changes in price, and changes in total
expenditure.(2)
13. To get the market demand curve for a product, why do we add individual demand curves
horizontally rather than vertically?(3)
14. The market for lemonade has 10 potential consumers, each having an individual demand
curve P = 101 - 10Qi, where P is price in dollars per cup and Qi is the number of cups
demanded per week by the ith consumer. Find the market demand curve using algebra. Draw
an individual demand curve and the market demand curve. What is the quantity demanded by
each consumer and in the market as a whole when lemonade is priced at P = $1/cup?(4)
15. For the demand curve P = 60 - 0.5Q, find the elasticity at P=10.(5)
16. If the demand curve shifts parallel to the right, what happens to the elasticity at P =10?(5)
17. Consider the demand curve Q =100 - 50P. Draw the demand curve and indicate which
portion of the curve is elastic, which portion is inelastic, and which portion is unit elastic.(4)
18. Suppose that at a price of $400, 300 tickets are demanded to fly from Ithaca, New York, to
Los Angeles, California. Now the price rises to $600, and 280 tickets are demanded.
Assuming the demand for tickets is linear; find the price elasticities at the quantity-price pairs
(300, 400) and (280, 600).(4)
19. The demand for schedule for beer is Xd=25-P, where Xd is the quantity demanded of beer in
millions of barrels per year and P is price in dollars per barrel.(3)
a) If the supply curve for beer is Xs = -20 +4P, what is the equilibrium price of a barrel of
beer?
b) Calculate and interpret price elasticity of demand and supply at the equilibrium point.
c) What would the effect on the price of a barrel of beer if a tax of $ 4 per barrel is imposed
by the government?
d) How much revenue does the government collect?
20. Suppose in a market there are 30,000 consumers of corm each have identical demand
function given by Qd=25-2P and 10,000 producers each with identical supply curve given by
Qs= -15+6P(2)
A. Find the market equilibrium price and quantity?
B. What would be the state of the market if market price was fixed at Birr 7 per unit?
C. Calculate and interpret price elasticity of demand at the equilibrium point.
D. Compute total revenue at market equilibrium.
21. Based on the following table which indicates expenditure of the household on a commodity,
answer the questions that follow. ( The price of the good is Br.10 ) (1)

Income Quantity Demanded

( Br. / month) ( units / month )
10,000 50
20,000 60
30,000 70
40,000 80
 50,000 90
a) Calculate income elasticity of demand, if income increases from Br.10, 000 to Br.
20,000 and if income increases from Br.40, 000 to Br. 50,000.
b) Is this a normal or an inferior or a luxury good? Justify.
c) Does the proportion of household income spent on this good increase or decrease as
income increases? .Why?
22. When price of tea in local café rises from Br. 10 to 15 per cup, demand for coffee rises from
3000 cups to 5000 cups a day despite no change in coffee prices. (5)
a) Determine cross price elasticity.
b) Based on the result, what kind of relation exists between the two goods?
23. Originally, the consumer faces the budget line Pl .Xl + P1. X 2= M. Then, the price of good 1
doubles, the price of good 2 becomes 8 times larger, and income becomes 4 times larger.
Write down an equation for the new budget line in terms of the original prices and income.
(4)
24. What happens to the budget line if the price of good X increases, but the price of good Y and
income remain constant? Show graphically (3)
25. If the price of good 1 doubles and the price of good 2 triples, does the budget line become
flatter or steeper? Show graphically(2)
26. Suppose that the government puts a tax of 15 cents a gallon on gasoline and then later
decides to put a subsidy on gasoline at a rate of 7 cents a gallon. What net tax is this
combination equivalent to?(1)
27. Suppose that a budget equation is given by P1Xl + P2X2 = M. The government decides to
impose a lump-sum tax of u, a quantity tax on good 1 of t, and a quantity subsidy on good 2
of s. What is the formula for the new budget line? (5)
28. If the income of the consumer increases and one of the prices decreases at the same time, will
the consumer necessarily be at least as well-off?(4)
29. Suppose that a consumer always consumes 2 spoons of sugar with each cup of coffee. If the
price of sugar is Pl per spoonful and the price of coffee is Y2 per cup and the consumer has M
dollars to spend on coffee and sugar, how much will he or she want to purchase?(5)
30. Suppose Eleni and Haweni have decided to allocate Birr 200 on refreshment in the form
of Coffee and Tea per month .But Eleni and Haweni differ in their preferences for the
product . Eleni prefer Tea to Coffee, while Haweni prefer coffee to Tea.(1)
a) Draw a set of indifference curves for Eleni and a second set for Haweni
b) Discuss why the two indifference curves are different from each other using the
concept of marginal rate of substitution.
c) If both Eleni and Haweni pay the same price for refreshments, will their marginal
rate of substitution of coffee for Tea be same or different? Explain.
31. Tamirat buys 2 new college text books during his first year at a school at a cost of Birr 50
each. Used text books cost only Birr 30. When the book store announces that there will be a
20% and 10% increase in price of new text books and used text books respectively for the
coming year. As a result, Tamirat’s family gives him Birr 80 extra. Is Tamirat better off or
worse off of after price change?(2)
32. The utility that Florence obtains by consuming food (F) and cloth (C) is given by
U=f( F,C)=FC.(3)
a) Suppose that food costs Birr 1 per unit, and clothing costs Birr 3 per unit, and
Florence has Birr 12 to spend on food and cloth. Graph the budget line she faces.
b) What is utility maximizing choice of food and clothing ?( solve the problem both
graphically and mathematically )
c) What is marginal rate substitution of food for cloth when utility is maximized?

33. Assume a firm with a production function given by and with a limited outlay of
15,000 birr. If input prices are as w=500 birr and r=1500 birr, answer the questions that
follow. (4)
(a) Determine following functions: APL, APK, MPL and MPK.

(b) Find and .

(c) How much L and K must be acquired at the optimum of the producer?
(d) How much is the maximum possible output at that cost of production?

2 3
5 5
34. A firm has the production function f ( x , y )=40 x y . The slope of the firm's isoquant at the
point (x, y) = (70, 50) is ______________________.(5)
35. suppose the production function for potato chips is a Cobb-Douglas production function that
can be written: QPC = 200K.6L.4

Where QPC = number of bags of potato chips producer per hour, K is the number of deep kettle
frying machines employed per hour and L is the number of persons working per hour.(1)

a) Derive expressions for the marginal product of capital and the marginal product of labor
in this particular production process.
b) You, as plant manager, are currently leasing 100 frying machines and employing 3000
employees. Distributors pay you $.65 per bag for the chips. At the moment, no more deep
kettle frying machines are available for leasing but you can choose to hire more if they
will add to your profits. If labor is currently receiving a wage of $12.00 per hour, would
you consider hiring one more person? More than one? Explain your reasoning. (To frame
the question, remember that an extra person would generate additional revenue via the
extra product they produce, and additional cost via the wage they are paid.)
c) Several months have passed and it is once again possible to release more deep kettle
frying machines if you choose to do so. Briefly describe the information you will need to
make that decision.
36. Compare and contrast the following cost concepts.(2)
a. Social cost and private cost
b. Explicit cost and implicit cost
c. Economic and accounting cost
37. Distinguish between short – run and long – run cost functions(3)
38. Why does long – run average cost curves fall, and then rise? Why do short – run average cost
curves first fall, and then rise?(4)
39. What happens to average total cost as(5)
a. Marginal product increases?
b. Average product increases?
c.When does average cost increase?
40. Answer this in terms of:(1)
a.The relation of average cost to marginal cost
b. The relation between the increase in AVC and the decrease in AFC.
41. Workout Questions (all group)

Fill in the blanks in the following table.

Output TC TFC TVC AFC AVC AC MC
(Q)
0
1 30
2 40
3 10 15
4 65
5 15

1
C= Q3 −2 Q2 +60 Q+100
42. Given a short run cost function as. 3 , Find the minimum value of
AVC and MC (2)
43. Why is the equality of marginal revenue and marginal cost essential for profit maximization
in all market structures? Also explain why price can be substituted for marginal revenue in
the MR = MC rule when an industry is purely competitive.(3)
44. In the long run, all firms under perfectly competitive conditions earn only normal profit. Why
is this true?(4)
45. Suppose that you are given the following information about a particular perfectly competitive
industry.(5)
Market Demand: QD = 6500 – 100P
Market Supply: Qs = 1200P
q2
Firm total cost function: C (q) = 722 +200
46. Assume that all firms are identical and that the market is characterized by perfect
competition.(1)
a. Find the market equilibrium price and quantity supplied by each firm.
 b. Determine the profit of a firm
c. Would you expect entry into or exit from the industry in the long –run? Explain
d. What is the lowest price at which each firm would sell in the long run?
47. Suppose that a competitive firm’s marginal cost of producing output q is given by MC (q) =
3+2q. Assume that the market price for the firm’s product is $9.
a. What level of output will the firm produce?
b. Suppose the firm’s fixed cost is known to be $3. Will the firm be earning positive,
negative or zero profit? (2)
48. Suppose a monopolist faces a market demand curve given by(3)
2
P= 55 – 2Q and its total costs of production given by TC = 100 – 5Q + Q

a. Determine the profit maximizing price and output.

b. Calculate the dead weight loss from the monopoly power.
49. Discuss those factors that create monopoly and help the monopolists to maintain monopoly
power.(4)
50. Suppose a Monopolistically Competitive firm faces a demand function Q = 160 – P and has a
Cost Function, C = 3200 + q2 where MC = 2q. What quantity and price does the firm
charge? Would you expect this firm to face increased competition in the Long Run?(5)