Microeconomics Assignment

Instructor: Madiha
Hussaini

BBA-2F
Feroz Ahmed – 2311295
Sameer Aman – 2311306
Syed Safi Burney – 2311314
Syed Affan Uz Zaman – 2311311
Muhammad Nafay - 2311302
 Positive or Normative:
Q1:
a) The relationship between wealth and demand is inverse in the case of inferior goods.
= POSITIVE ECONOMICS
b) The government should implement strict wealth tax laws to decrease the uneven
distribution of wealth.
=NORMATIVE ECONOMICS
c) No individuals should be entitled to inheritances as it belongs to society.
=NORMATIVE ECONOMICS
d) Import duties should be increased on goods coming from nations with humble human
rights record.
=NORMATIVE ECONOMICS
e) House prices reduce once the interest rate on loans get higher.
=POSITIVE ECONOMICS
f) Investors ought to be more socially responsible and stop investing in vice stocks.
=NORMATIVE ECONOMICS
g) Monopolies have proved to be inefficient.
=POSITIVE ECONOMICS
h) It is unfair to increase taxes on imported items.
=NORMATIVE ECONOMICS
i) Developing countries should only accept democracy when their entire population
is educated and liberated.
=NORMATIVE ECONOMICS

j) The tax rate on luxury goods doubled this year.

=POSITIVE ECONOMICS
Q2: A consumer spends his income of 300 on good A or on good B or on any
combination of A and B. One unit of A costs $3 and one unit of B $5.
a) Draw a budget line.

80Y
70

60

50
Pri

40

30

20

10
X
20 40 60 80 100 120
0
Quantity
0

b) Income rises from 300 to 360, other things remaining equal. Draw an additional
new budget line to illustrate the change.
80Y
70

60

50

40
Pri

30

20

10
X
120
0 0 20 40 60 80 100
Quantity
Q3: Assume that there are two goods. The price of the first good is $10 and the price of
the second good is $20. The income is m=200.

a) Determine the budget constraint.

 First good: 200/10 = 20

Second good: 200/20 = 10

b) Determine the slope and the intercepts of the budget line?

Slope  20/10 = 2

Intercept (20,0) (0,10)

c) Graph the budget set.

25Y

20

15
Pri

10

0 X
0 2 4 6 8 10 12
Quantity

d) If the individual consumes 5 units of the second good. How many units of the first
good can he consume?

18 Units of the first good

Q4: An Individual consumes two products only. Fruit basket and pita bread. He has a
total of $1400 to spend. The price of a fruit basket is $50 and the price of a pack of pita is
$ 25.
a) If the consumer decides to consume 5 baskets of fruits how many packets of pita
bread will he buy?

5x50 = 250

1400-250=1150

1150/25 = 46 baskets of pita bread

b) Draw the budget line.

60

50

40

30

20

10
X

16 18 22 24 26 28
c) If the income reduces to half the amount, what will happen to the budget line?
Show on graph and discuss reason for such a change.

60

50

40
BL0
30

20
BL1
10

X
16 18 22 24 26 28
Q5: The following hypothetical data shows that African republic produces only two
goods. Figs and dates.

Figs (tons) Dates (tons)

20 0
18 2
14 4
8 6
0 8

a) Draw PPF for African republic?

25Y

20

15
Fi

10

0 X
0123456789
Dates

b) What is the opportunity cost of increasing dates production from 2 tons to 4

tons?

 4 (tons)

c) What pattern do you see in opportunity cost of dates?

For every extra 2(tons) units of Dates produced,2 or more units of Figs are
held as opportunity cost.
d) If new technology has been introduced the production of both figs and dates,
what do you think will happen to the PPF of this country? Draw on graph as
well and state reason for such a change.

The newly introduced technology will cause economic growth of the country
causing the PPF to shift outwards.
25Y

20

15
Fi

10

0 X
0123456789
Dates
Q6: Suppose you are producing two goods. One is capital good and the other is consumer
good. The data is shown below:

a) Draw the PPC for the above data?

60Y

50

40
Pri

30

20

10

0 X
012 3 4 5 6
Quantity

b) What is the opportunity cost of producing the 3rd unit of consumer good?

4

c) Why is the PPC bowed outwards?

 Because of increasing opportunity cost to obtain the first consumer goods, you trade
off capital goods.
 Q7: Suppose that the total demand for wheat and the total supply of wheat per month in
the Kansas City grain market are as follows:

a) What is the equilibrium price?

→ 4.0

b) What is the equilibrium quantity?

→ 75

c) Calculate and fill in the empty Surplus or Shortage column. Mention surplus/shortage
along with the answer.

Thousands of Price per Bushel Thousands of Surplus(+) Or

Bushels demanded Bushels Supplied Shortage(-)
85 3.4 72 13 shortage
80 3.7 73 7 shortage
75 4.0 75 0
70 4.3 77 7 surplus
65 4.6 79 14 surplus
60 4.9 81 21 surplus
d) Graph the demand and supply curve for wheat.

3
Pri

50 55 60 65 70 75 80 85 90
Quantity

e) If the price of corn flour (substitute) increases, what do you think will happen to the
equilibrium price and quantity of wheat? Show on graph as well.

4
Pri

0
50 55 60 65 70 75 80 85 90
Quantity
f) Why are $3.4 and $4.5 not equilibrium prices?

→Due to the quantity demanded not equaling the quantity supplied.

Q8: Below data shows the price and quantity demanded of generators

a) Plot the demand and supply schedule on a graph and identify the equilibrium
price and quantity.

 Equilibrium Price=400, Equilibrium Quantity=600

600 Y

500

400

300
PRI

200

100

X
0200400 600 800 1000 1200
QUANTITY
b) If income of people decreases and this good is considered a normal good what
do you think will happen to the equilibrium price and quantity? Show on graph
as well.

Leftward shift in demand. Equilibrium price = 350, Equilibrium Quantity = 400

600 Y

500

400

300
PRI

200

100

0
0
X
200 400 600 800 1000 1200
QUANTITY

c) If the price of petrol increases, what do you think will happen to the equilibrium
price and quantity of generators? Show on graph as well.

Petrol P
Price

10

Q
100 200 Quantity
Generator
 d) If government imposes a price of €350 what will this price be called? Will
it result in a shortage or a surplus?
= Shortage

e) If government imposes a price of €450 what will this price be called? Will
it result in a shortage or a surplus?
=Surplus

Q9: Below is the price and quantity of two goods Y and X

Good Y Good X
Original Price $20 $50
Original Quantity 250 units 600 units
Revised Price $25 $50
Revised Quantity 230 units 500 units

Find Cross Price Elasticity of demand between good X and good Y. Are the two goods substitute
or complements?

 Good y  25-20/22.5 = 0.22

 Good X 50-50/50 = 0

 Good Y quantity  230-250/240 = -0.083

 Good X quantity 500-600/550= -0.181

 Good X  -0.181/0 = 0

 Good Y  -0.083/0.22= -0.377 →Substitute

Goods
Q10: a) Discuss what factors affect the elasticity of demand of a good?

AVAILABILITY OF SUBSTITUTES:
The availability of substitute goods will allow the consumers to switch between
alternatives if the price changes. An increase in the price of a good, will enable the
consumer to shift to it’s alternatives, making it affect the elasticity of demand of a good.

NECASSITY VS LUXARY:
Goods which are necessary to consumers remain inelastic as customers will still buy the
good regardless of the changes in price. Whereas in the case of a luxury good, if the
prices change, the consumers can easily cut the consumption of that good making it
elastic in nature.

b) If the cross elasticity od demand between two goods is positive, what does it indicate?

→It indicates that they are substitute goods.

c) When the price of brownies was $15, quantity demanded was 30 units. When price
increase to $20, the quantity demanded changed to 24 units. Find price elasticity of
demand and state whether demand is elastic or inelastic?

Price = 20-15/17.5 = 0.28

Quantity = 24-30/27= -0.22

-0.22/0.28= -0.785(Elastic)