bPRACTICAL PROBLEMS EFM:

1 The cost of producing DVD players has fallen over the past several years. Let’s consider some implications
of this fact.
i. Draw a supply-and-demand diagram to show the effect of falling production costs on the price and
quantity of DVD players sold.
ii. In your diagram, show what happens to consumer surplus and producer surplus.
iii. Suppose the supply of DVD players is very elastic. Who benefits most from falling production costs?
2 Sneha views butter and cheese as perfectly substitutable for each other.
a) Draw a set of indifference curve that describes Sneha’s preferences for butter and cheese.
b) If butter costs rupees 20 per package while cheese cost rupees 10 and Sneha has a budget of only rupees
200/- to spend a month, which butter-cheese market will she choose. Explain with the help of a proper
schedule and graph.
2 Several studies have found that the overall demand for automobiles has an elasticity of about 1.3
i. How do you interpret this coefficient?
ii. After knowing about these results, a Ford dealer in Ahmedabad cut his price by 10 percent and sold 22
percent more cars. What is the elasticity of demand in this case? Does this mean the estimate of 1.3 is
incorrect? Explain.
3 Explain the circular flow of income model. Identify the parts of the model that correspond to the flow of
goods and services and flow of money for each of the following activities.
i. Leena buys onion for Rs. 10.
ii. Mr. Sameer is paid Rs. 2000 as an honorarium for Delivering a guest lecturer at an MBA institute.
iii. Prerna pays Rs.100 at Fun Republic to watch a movie.
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6 Pharmaceutical drugs have an inelastic demand and computers have an elastic demand. Suppose that
technological advance doubles the supply of both products (that is the quantity supplied at each price is
twice what it was )
a) What happens to the equilibrium price and quantity in each market?
c) Which product experiences a larger change in price?
d) Which product experiences a larger change in quantity?
e) What happens to total consumer spending on each product?
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8 Suppose the natural rate of unemployment is 6 percent. On one graph, draw two Phillips curves that describe
the four situations listed here. Label the point that shows the position of the economy in each case.
a) Actual inflation is 5 percent, and expected inflation is 3 percent.
b) Actual inflation is 3 percent, and expected inflation is 5 percent.
c) Actual inflation is 5 percent, and expected inflation is 5 percent.
d) Actual inflation is 3 percent, and expected inflation is 3 percent.
9 A firm Flair Pens Ltd. Supplied 2000 pens at the rate of Rs. 18 per pen to Geeta
stationary, Ahmedabad, next month, due to a rise in the price to Rs. 22.50 per
pen, the supply of the firm increases to 5250 pens. Find the elasticity of supply of
the pens written
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11 The price of coffee increases from Rs.50/ per Kg. to Rs. 70/per Kg, and as a result the demand for tea
increases from 5Kg. to 10kg. What is the cross elasticity of demand of tea for coffee?
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Omega enterprise has the following cost schedule. Calculate the AVC, ATC & MC. Compare the column
for Average Total Cost and the column for the marginal Cost. Explain the relationship between ATC and
MC
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What causes a movement along the demand curve? What causes a shift in the demand
curve?
Using Demand-and-supply diagrams show the effect a fall in production of sugarcane on
the price and quantity of sugar during the Diwali months (when demand for sugar
increases).
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Below are some data for an X economy, which produces only two goods A & B. Calculate Nominal
GDP, Real GDP & GDP Deflator for each year, using 2010 as a base year
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