1. What does the term “ceteris paribus” mean? How does it relate to the distinction between a change in quantity demanded and a change in demand?
2. The table below is a demand and supply schedule for oranges. The quantity is measured in boxes of 48 oranges each. Price per Box Quantity Demanded Quantity Supplied (48 per box) (millions of boxes per year) (millions of boxes per year) 6 25 125 5 50 100 4 75 75 3 100 50 2 125 25 1 150 0
a. What are equilibrium price and quantity in the orange market?
b. At a price of $6 per box, does a surplus or shortage exist in the market? What is the magnitude of this disequilibrium condition? c. If the government controlled the price of oranges at $3 per box, what would happen in the orange market? d. Suppose that the world price of oranges is $2 per box. Will there be imports into or exports from the domestic market? Why? By how much?
3. The price elasticity of demand for table salt is very small. Why is this the case? Could this explain why table salt is seldom advertised at a “special price” by grocers?
4. Over the past few years, college and university administrators have been increasing tuition rates (sometimes quite substantially), even though there have been significant declines in student enrollment. Is this a rational decision on the administrators’ part? What assumptions do they make about the price elasticity of demand for higher education? 5. Suppose products A and B are produced by different firms and are substitutes. Do you think that a change in the price of product A will affect the marginal revenue of the firm producing B? explain your answers with diagrams.
6. Show that commodities which take up a large percentage of a consumer’s budget
generally have relatively small income elasticities of demand.
7. We have stated that if preferences are transitive then indifference curves cannot intersect. Is tangency of indifference curves also ruled out? Why? Prove graphically.
8. Suppose that we have constructed a budget line where the two commodities are apples and bananas. The slope of the budget line equals – 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑏𝑎𝑛𝑎𝑛𝑎𝑠 − 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑎𝑝𝑝𝑙𝑒𝑠 Which commodity is measured on which axis? Why? What impact can be observed if the price of bananas increases keeping price of apples unchanged? Price of apples decreases keeping price of bananas unchanged. Rate of increase in price of apples is more than rate of increase in the price of bananas. Explain with suitable illustrations.
9. Graph the budget line for a consumer in a two-commodity world with an income of $100, Px = $5 and Py = $10 where the two commodities are X and Y. label both intercepts and compute the slope. Now graph her budget line if she is given a non- transferable coupon redeemable for three units of commodity Y.
!"! !"" 10. A consumer suddenly realizes that #! < #" with his current commodity bundle. Is
he maximizing his utility? If not, which commodity should he consume more of, to !" improve utility, without increasing total expenditure? What happens to the # ratio for each good as he begins to adjust consumption? Why?
11. Why is the convexity assumption so important in indifference curve analysis? Would a consumer equilibrium exist if indifference curves were concave? Explain. 12. Define carefully what is meant by a demand schedule or curve. State the law of downward-sloping demand. Illustrate the law of downward-sloping demand. Illustrate the law of downward-sloping demand with two cases from your own experiences.
13. Explain why each of the following is false:
a. A freeze in Brazil’s coffee-growing region will lower the price of coffee b. The high price of oil resulting from political chaos in Russia will lower America’s demand for oil c. The rapid increase in college tuitions will lower the demand for college d. The war against drugs, with increased interdiction of imported cocaine, will lower the price of domestically produced marijuana.
14. In each of the following, explain whether quantity demanded changes because of a demand shift or a price change, and draw diagrams to illustrate your answer: a. As a result of decreased military spending, price of Army boots falls b. Fish prices fall after the Pope allows Catholics to eat meat on Friday c. An increase in petrol taxes lowers the consumption of petrol d. After a disastrous flood, bread sales go down e. After a disastrous flood, concert-ticket sales go up f. After the Black Death struck Europe in the fourteenth century, wages rose.
15. “A good harvest will generally lower the income of farmers.” Illustrate this proposition using a supply-demand diagram.
16. For each pair of commodities, state which you think is the more price elastic and give your reasons: perfume and salt; penicillin and ice cream; automobiles and automobile tires; ice cream and chocolate ice cream.
17. “The price drops by 1 percent, causing the quantity demanded to rise by 2 percent. Demand is therefore elastic, with Ep > 1.” If you change 2 to ½ in the first sentence, what two other changes will be required in the quotation?
18. Explain the meaning of utility. What is the difference between total utility and marginal utility? Explain the law of diminishing marginal utility and give a numerical example. 19. Which pairs of the following goods would you classify as complementary, substitute, or independent goods: beef, kitchen, lamb, cigarettes, gum, pork, radio, television, air travel, bus travel, taxis and paperbacks? Illustrate the resulting shift in the demand curve for one good when the price of another good goes up. How would the change in income affect the demand for air travel? The demand curve for bus travel?
20. Suppose Mr. X is very rich and very fat. His doctor has advised him to limit his food intake to 2000 calories per day. In this situation what does Mr. X need to do to achieve his equilibrium for food consumption. Illustrate your answer.
21. Describe the role of Price Mechanism in market economies.
22. “An increase in the demand for notebooks raises the quantity of notebooks demanded but not the notebook supplied.” Is this statement true or false? Explain.
23. Two drivers – Tom and Jerry – each drive up to a petrol pump. Before looking at the price, each places an order. Tom says, “I would like 5 lt of petrol.” Jerry says, “I would like ₹500 worth of petrol”. What is each driver’s price elasticity of demand?
24. You are a curator of the museum. The museum is running short of funds, so you decide to increase revenue. Should you increase or decrease the price of admissions? Explain.
25. Which causes a shortage of a good – a price ceiling or a price floor? Binding or non- binding? Which causes a surplus?
26. Suppose that you have asked James whether he would like a hamburger or a hot dog for lunch, and he said that he wanted a hot dog. Five hours later you ask him what he would like for dinner, a hamburger or a hot dog. James answers, “A hamburger.” Do James’s preferences for hot dogs versus hamburgers obey the consumer’s preference axioms? Why or why not?
27. A buyer makes a contract to purchase a parcel of land for residential use for $10,000. In the process of preparing for development, however, the buyer discovers a mineral deposit worth of $500,000. The seller learns about the discovery and sues to invalidate the contract, claiming mistake. a. Is the discovery of the mineral deposit socially valuable? b. Did the buyer discover the information deliberately or casually? c. Will a decision by the court to invalidate the contract affect the discovery of valuable mineral deposits in the future? Now suppose that prior to making the contract, the buyer had conducted an aerial survey of the property that indicated a high probability of a mineral deposit. The buyer then went ahead with the purchase for $10,000 without revealing his discovery to the seller. d. How does this change affect your answers to the preceding questions?
28. In contract law, promises are enforceable if supported by consideration – that is, if they are mutual. In contrast, promises to give gifts are not generally enforceable unless the intended recipient incurs some expenses in anticipation that the promise will be honored. Discuss this distinction from an economic perspective.
29. How is the law of diminishing returns reflected in the shape of the total product curve? If the total product increases at a decreasing rate from the very beginning what would be the shapes of corresponding marginal and average product curves?
30. Explain what considerations manager of a firm will keep in view while hiring labour. Explain and illustrate graphically how much labour a firm will employ to maximise profits?
31. Explain the following concepts of cost:
a. Average fixed cost (AFC)
b. Average variable cost (AVC) c. Average total cost (ATC) d. Marginal cost (MC) Why does ATC curve reach its lowest point after the AVC curve? Why does the MC curve intersect below the AVC and ATC curves at their minimum points ? 32. Define marginal cost. How is it related to marginal product of a factor? As output is increased, marginal cost first falls and then beyond a certain point it rises. How would you explain it?
33. Asymmetrical valuation makes a good hostage. In general, a good hostage is something that the hostage-giver values highly and the hostage-taker values little. Given this information consider the following situation – Medieval kings used to guarantee the peace among themselves by exchanging hostages. Ask yourself this question: Suppose that a king wants to exchange hostages with another monarch to guarantee the peace. Assume that the king likes diamonds as much as he likes his children. That is, he values a diamond ring just as much as—neither more nor less than—he values his own son. Which would make a better hostage: the king’s diamond ring or his son?
34. Analyze the shape of short term production function. Explain the three stages of production.
35. What is expansion path? How does a change in the price of one input change the firm’s long-run expansion path? Is the firm’s expansion path always a straight line?
36. Discuss the relationship between average cost and marginal cost with a suitable diagram.
37. Explain the equilibrium condition of output and price determination in a monopoly market.
38. “At equilibrium, monopoly market produces lesser output at a higher price compare to a perfectly competitive market” – verify this argument with an appropriate explanation.
39. Consider a cost function 𝑇𝐶 = 10 + 2𝑄 − 3𝑄$ + 𝑄%
Calculate TC, VC, AFC, AC, AVC and MC for Q = 1, 2, …, 10. Also plot the AC, AVC and MC curve. 40. Suppose the market for widgets can be described by the following equations: Demand: P = 10 - Q Supply: P = Q - 4 where P is the price in dollars per unit and Q is the quantity in thousands of units. Then: a. What is the equilibrium price and quantity? b. Suppose the government imposes a tax of $1 per unit to reduce widget consumption and raise government revenues. What will the new equilibrium quantity be? What price will the buyer pay? What amount per unit will the seller receive?
41. Suppose you are the manager of a watchmaking firm operating in a competitive market. Your cost of production is given by C = 200 + 2q2, where q is the level of output and C is total cost. a. If the price of watches is $100, how many watches should you produce to maximize profit? b. What will the profit level be? c. At what minimum price will the firm produce a positive output?
