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Principles of Micro Economics by Mankiw
Principles of Micro Economics by Mankiw
Principles of Micro Economics by Mankiw
Q2. How can elasticity explain why drug interdiction could reduce the supply of drugs, yet
possible increase drug related crimes? (Marks 2.5)
Ans : Drug interdiction would increase drug related crimes in the short run while decreases it
in short run. Explain with Demand Supply and comparative statics
Q.3 Consider the market for gasoline that is initially in equilibrium with a market price of P 1
and a market quantity of Q1. Suppose that there is a war in the Middle East that disrupts
petroleum production while at the same time people’s incomes in the United States increases.
Assume gasoline is a normal good. Draw a graph illustrating the initial equilibrium and the
new equilibrium after these described changes. Provide a description of the possible
outcomes in this market due to these changes.
a. The market demand curve for gasoline will shift to the right since it is a
normal good while the market supply curve for gasoline will shift to the left
since petroleum is a major input to the production of gasoline: the equilibrium
quantity may rise, fall or stay the same while the equilibrium price will
increase. The graphs below illustrate this idea.
(Marks 2.5)
OR
(a)A group of leaders from the coffee producing nations recently met to lament the large
harvest of coffee beans that had occurred in their countries. It was proposed that each country
should destroy a major produce of its crop so as to increase the price of coffee beans. Discuss
the economic rationale behind it.
Ans The coffee producers obviously believe that the demand for coffee beans is inelastic, i.e
TR would increase if P is increased. If the demand is inelastic then reducing the quantity
available for sale will increase TR received.
(b) What will be the value of Marginal revenue (MR) if demand curve is rectangular
hyperbola?
Ans Zero. Since for rectangular hyperbole e=1
E=AR/AR-MR
1=AR/AR-MR
AR=AR-MR
MR=0
(Marks 2+1=3)
MR=0