Lecture 1

s.09.1
Lien and Laura both have bakeries. Laura can bake 1 cake or 1 brownie in 1 hour and Laura only works 5
hours every day. Lien can bake 4 brownies in one day or two cakes in one day and like Laura, Lien only
works 5 hours per day.
*What is the opportunity cost of 1 cake for Laura and Lien, in terms of the number of brownies?
*What about the opportunity cost of 1 brownie in terms of the number of cakes for Laura and Lien?

In 5 hours, Lien can bake 4 brownies or two cakes. It means that:

- To make 1 brownie, Lien needs: 5/4 = 1.25 hours
- To make 1 cake, Lien needs 5/2 = 2.5 hours
Laura Lien
Cake 1 hour 2.5 hours
Brownie 1 hour 1.25 hours

* Opportunity cost of 1 cake:

- Laura: 1 brownie
- Lien: 2.5/1.25 = 2 brownies
* Opportunity cost of 1 brownie:
- Laura: 1 cake
- Lien: 1.25/2.5 = 0.5 cake

Lecture 2, 3, 4 & 5
Exercise 1
For the following scenarios assume the market is in equilibrium.
a. Coca and Pepsi are substitute goods. How would an increase in the price of Coca affect the equilibrium
price and the equilibrium quantity of Pepsi?
If price of Coca increases, because Coca and Pepsi are substitutes, demand for Pepsi will increase and the demand
curve will shift to the right.

Therefore, according to the graph, the equilibrium price of Pepsi increases and the equilibrium quantity of Pepsi
increases.
b. Suppose there is an increase in the price of lemons and sugar, which are an input in the production of
lemonade. What will happen to the equilibrium price and equilibrium quantity of Lemonade?
If there is an increase in the price of lemons and sugar, supply for lemonade will decrease and the supply curve
will shift to the left.
Therefore, according to the graph, the equilibrium price of lemonade increases and the equilibrium quantity of
lemonade decreases.
c. At the Ut Ut craft beer restaurant, beer and potato chips are complements. Suppose that there is an
increase in the price of beer and an increase in the price of potato, an input in the production of potato
chips. How would these changes affect the equilibrium quantity and equilibrium price in the market for
potato chips?
If there is an increase in the price of potato, an input in the production of potato chips, supply for potato chips will
decrease and the supply curve of potato will shift to the left. Moreover, as beer and potato chips are complements,
an increase in the price of beer will decrease the demand for potato chips, and the demand curve of potato will
shift to the left.

Therefore, according to the graph, the equilibrium price of potato chips increases and the equilibrium quantity of
potato chips decreases.
d. What would happen to the equilibrium quantity and the equilibrium price of public bus, an inferior
good, if at the same time income increases and the price of petrol decreases? Assume for this question that
petrol is an input in the supply of public bus.
3 cases.
If income increases, people will use less public bus, an inferior good, and demand for public bus will decrease.
Meanwhile, the price of petrol, an input in the supply of public bus, decreases, means that supply for public bus
will increase.
According to the graphs, the way the supply curve and the demand curve shift will change the equilibrium price in
different ways. However, in three cases, the equilibrium quantity will decrease.
e. What happens to the equilibrium price and equilibrium quantity in the market for baby food if there are
technological advances in the production of baby food and at the same time a baby boom happens? Assume
a baby boom means that a greater than normal number of babies are born during a period of time?
3 cases.
If there are technological advances in the production of baby food, supply for baby food will increase and the
supply curve will shift to the right. At the same time, a baby boom happens so that the demand for baby food will
increase.

According to the graphs, the way the supply curve and the demand curve shift will change the equilibrium price in
different ways. However, in three cases, the equilibrium quantity will increase.

Exercise 2
Consider the market for electricity in Robinson Island. The price (P) is given in dollars per kilowatt hour
(kWh) and the quantity (Q) is measured in kilowatt hours (kWh). Demand and Supply equations for the
electricity are as follows:
Market Demand: P = 10 – Qd
Market Supply: P = 2 + Qs
a. Find the equilibrium price and equilibrium quantity in the market for electricity. Plot a graph to describe
the equilibrium. Be sure your graph is completely and clearly labeled (label all intercepts, label the axis,
label the equilibrium price and the equilibrium quantity, label any curves that your draw).
- Market Demand: P = 10 – Qd => Qd = 10 - P
- Market Supply: P = 2 + Qs => Qs = P – 2
- Equilibrium price: Qd = Qs => 10 – P* = P* – 2 => P* = 6
- Equilibrium quantity: Q* = 10 – P* = 4

b. What is the value of consumer surplus and producer surplus at the equilibrium? Use a graph to illustrate
your work and find the numerical values for both the consumer and the producer surplus.
- Consumer surplus: ½ x 4 x 4 = 8 $
- Producer surplus: ½ x 4 x 4 = 8 $
c. Assume that during the past summer, because of the record-breaking heat, the government set a price
ceiling in the market for electricity at 7 dollars per kWh. Is there a shortage or a surplus in the market once
the price ceiling is set? Calculate the value of consumer surplus, producer surplus, and deadweight loss due
to the implementation of this price ceiling.
- The price ceiling in the market for electricity is above the equilibrium price, so there is no effect on the market.
There is no shortage or surplus.
- The consumer surplus and producer surplus are still 8$ and there is no deadweight loss.

d. Assume that the government sets a price ceiling at 5 dollars per kWh. With this new price ceiling is there
a shortage or a surplus in the market once the price ceiling is implemented? Calculate the value of
consumer surplus, producer surplus, and deadweight loss due to the implementation of this price ceiling.
With the new price ceiling at 5$ per kWh, there is a shortage in the market (Qs < Qd)
Due to the implementation of this price ceiling:
- Consumer surplus: ½ x (2+5) x 3 = 10.5 $
- Producer surplus: ½ x 3 x 3 = 4.5 $
- Deadweight loss: ½ x 1 x 2 = 1 $

Exercise 3
f.08.3
Assume that in the market for LCD TV, demand and supply are described by the following equations
where Q is the quantity of LCD TV and P is the price per screen:
Demand: 𝑄𝑑=300−10𝑃
Supply: 𝑄𝑠=10P−200
a. Now assume the government imposes an excise tax of $5 per LCD screen sold. This excise tax is imposed
on the producers of the LCD screens. What will be the equation that describes the new supply curve,
written in x-intercept form, after the implementation of this excise tax?
- Equilibrium price: Qd = Qs => 300 – 10P = 10P – 200 => P* = 25$ per screen
- Equilibrium quantity: Q* = 10P* - 200 = 50 LCD screens
- When excise tax is imposed on the producers of the LCD screens, the supply curve will shift to the left by 5$ per
screen. It means that the new supply curve function is:
Qs = 10 (P – 5) – 200 = 10P – 250
Therefore, the new supply curve written in x-intercept form is: Qs’ = 10P – 250
b. Given the excise tax described in (b), calculate the new equilibrium quantity, the price consumers pay
with the tax, and the post-tax price producers receive once the excise tax is implemented.
- The price consumers pay with the tax equals the new equilibrium price:
Qs’ = Qd => 10P – 250 = 300 – 10P
=> P*’ = 27.5$ per screen
- The new equilibrium quantity:
Q*’ = 10P*’ – 250 = 25 LCD screens
- However, once the tax is implemented, the post-tax price producers receive is just: 27.5 – 5 = 22.5$ per screen