1.
The demand for software in India is given by the following equation: Qd = 1000 − 5P − PC
+ I, where P is the price of software, PC is the price of computers, and I is average consumer
income.
a) What will happen to demand for software when price of computer goes up? Are software
and computer complement or substitutes?
b) If average consumer income increase, what will happen to demand for software?
c) If PC = 40,000 and I = 70,000, draw a graph for software.
2. Suppose the demand curve in a particular market is given by Q = 5 − 0.1P.
a) Plot this curve in a graph.
b) At what price will demand be unitary elastic?
3. Julie has preferences for food F and clothing C described by a utility function U(F,C) = FC.
Her marginal utilities are MUF = C and MUC = F. Suppose that food costs $1 a unit and that
clothing costs $2 a unit. Julie has $12 to spend on food and clothing. What is the marginal rate
of substitution of food for clothing at her optimal basket? Find the optimal choice of food and
clothing.
4. Dhiraj currently consumes 10 sandwiches and 6 bottles of Pepsi each week. At his current
consumption basket, his marginal utility for sandwiches is 6 and his marginal utility for bottles
of Pepsi is 2. If the price of one sandwich is $3 and the price of one soda is $0.75, is Dave
currently maximizing his utility? If not, how should he reallocate his spending in order to
increase his utility?
5. Jason’s preferences over books (B) and coffee (F) are given by the utility function: U(B, F)
=BF+5(B+F). The price of a book is $8, the price of a cup of coffee is $4, and Jason can spend
a total of $48 per week on these two goods. Find Jason’s optimal consumption bundle.
6. What can you say about the income elasticity of demand of a normal good? of an inferior
good?
7. Every year there is a shortage of Coldplay tickets at the official prices P0. Generally, a black
market (known as scalping) develops in which tickets are sold for much more than the official
price. Use supply and demand analysis to answer these questions:
a) What does the existence of scalping imply about the level of demand/supply in the black
market?
b) If stiff penalties were imposed for scalping, how would the average black market price be
affected?
8. A firm is required to produce 150 units of output using quantities of labor and capital (L, K)
= (5, 8). For each of the following production functions, state whether it is possible to produce
the required output with the given input combination. If it is possible, state whether the input
combination is technically efficient or inefficient.
a) Q = 6L + 9K
b) Q = 30√KL
c) Q = max(15L, 19K)
d) Q = 3(KL + L + 2)
9. Suppose the production of airframes is characterized by a Cobb–Douglas production
function: Q = LK. The marginal products for this production function are MPL = K and MPK =
L. Suppose the price of labor is $100 per unit and the price of capital is $10 per unit. Find the
cost-minimizing combination of labor and capital if the manufacturer wants to produce 144,000
airframes.
10. In response to rising obesity and public health concerns, many governments impose taxes
on sugary drinks such as sodas and sweetened beverages. Using the tools of demand and supply
analysis, answer the following: Explain how the introduction of a government tax on sugary
drinks would affect the demand and/or supply curves in the short run. What impact would this
tax have on the equilibrium price and quantity of sugary drinks sold in the market?
11. Consider the market for crude oil. Suppose the demand curve is described by Qd = 100 –
P, where Qd is the quantity buyers will purchase when the price they pay is P (measured in
dollars per barrel). The equation representing the supply curve is QS= P/3, where QS is the
quantity that producers will supply when the price they receive is P. The market for crude oil
is initially in equilibrium, with no tax and no subsidy. Because it regards the price of oil as too
high, the government wishes to help buyers by announcing that it will give producers a subsidy
of 4 dollars per barrel. A local television station reporter announces that the subsidy should
lower the price consumers pay by 4 dollars per barrel. Analyze the reporter’s claim by
determining the price buyers pay before and after the subsidy, and provide intuition to explain
why the reporter is correct or incorrect.
12. In a perfectly competitive market, the market demand curve is given by Qd = 200 − 5Pd,
and the market supply curve is given by Qs = 35Ps.
a) Find the equilibrium market price and quantity demanded and supplied in the absence of
price controls.
b) Suppose a price ceiling of $2 per unit is imposed. What is the quantity supplied with a price
ceiling of this magnitude? What is the size of the shortage created by the price ceiling?
c) Find the consumer surplus and producer surplus in the absence of a price ceiling. What is
the net economic benefit in the absence of the price ceiling?
d) Find the consumer surplus and producer surplus under the price ceiling. What is the net
economic benefit in this case? Does the price ceiling result in a deadweight loss? If so, how
much is it?
13. The current equilibrium price in a competitive market is $100. The price elasticity of
demand is −4 and the price elasticity of supply is +2. If an excise tax of $9 per unit is
imposed, who will face more burden of the tax, suppliers or buyers?
Ans. Suppliers have a more inelastic supply curve than the buyers’ demand curve. They will
face a higher burden of the tax.
14. The following table shows selected input quantities, total products, average products, and
marginal products. Fill in as much of the table as you can.
15. A firm uses the inputs of fertilizer, labor, and hothouses to produce roses. Suppose that
when the quantity of labor and hothouses is fixed, the relationship between the quantity of
fertilizer and the number of roses produced is given by the following table:
a) What is the average product of fertilizer when 3 tons are used?
b) What is the marginal product of the seventh ton of fertilizer?
c) Does this total product function exhibit diminishing marginal returns? If so, over what
quantities of fertilizer do they occur?
d) Does this total product function exhibit diminishing total returns? If so, over what quantities
of fertilizer do they occur?
