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?

Lecture 2, 3, 4 & 5
f.08.2

Exercise 1

For the following scenarios assume the market is in equilibrium.

When both S and D shift, there are 2 cases (D shifts in larger volume than S, D shifts in smaller volume
than S) and an extreme case (D and S shift with the same volume)

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?

b. Suppose there is an increase in the price of lemons and sugar, which are an input in the production of le
monade. What will happen to the equilibrium price and equilibrium quantity of Lemonade?

c. At the Ut Ut craft beer restaurant, beer and potato chips are complements. Suppose that there is an incre
ase in the price of beer and an increase in the price of potato, an input in the production of potato chips. How woul
d these changes affect the equilibrium quantity and equilibrium price in the market for potato chips?

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 i
nput in the supply of public bus.

e. What happens to the equilibrium price and equilibrium quantity in the market for baby food if there are t
echnological advances in the production of baby food and at the same time a baby boom happens? Assume that a b
aby boom means that a greater than normal number of babies are born during a period of time?

f. The government price floor above the equilibrium price in the market for dragon fruits. Please compare
the quantity supplied and the quatity demanded after the price floor was applied in the market. Does the shortage
or the surplus happen in the market as the consequence of the price floor.

Exercise 2
Consider the market for electricity in Robinson Island. The price (P) is given in dollars per kilowatt hour (kWh) an
d the quantity (Q) is measured in kilowatt hours (kWh). Demand and Supply equations for the electricity are as fol
lows:
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 equili
brium. Be sure your graph is completely and clearly labeled (label all intercepts, label the axis, label the equilibriu
m price and the equilibrium quantity, label any curves that your draw).
Qs= P-2
Qd= 10-P
Set Qs=Qd: P-2=10-P => P=6
Replace P=6 into the demand equation: Q= 10-6=4
=> Equilibrium price is 6 and quatity equilibrium is 4

b.
What is the value of consumer surplus and producer surplus at the equilibrium? Use a graph to illustrate yo
ur work and find the numerical values for both the consumer and the producer surplus.

- Consumer surplus: CS= 1/2*4*(10-6)=8

- Producer surplus: PS= 1/2*4*(6-2)=8

c.
Assume that during the past summer, because of the record-breaking heat, the government set a price ceili
ng in the market for electricity at 7 dollars per kWh. Is there a shortage or a surplus in the market once the price ce
iling is set? Calculate the value of consumer surplus, producer surplus, and deadweight loss due to the implementa
tion of this price ceiling.

- Because the price ceiling is above the equilibrium, it doesn’t affect the market. There is no shortage or surplus
and DWL in the market.
- Consumer surplus: CS=8
- Producer surplus: PS=8

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.
- The price ceiling causes the shortage in the market
- Consumer surplus: CS=1/2*3*(10-5+7-5)=21/2
- Producer surplus: PS= 1/2*3*(5-2)=9/2
- DWL= 1/2*(4-1)*(7-5)=1

Exercise 2
f.08.3
Assume that in the market for LCD TV, demand and supply are described by the following equations where Q is t
he quantity of LCD TV and P is the price per screen:
Demand: 𝑄𝑑=300−10𝑃
Supply: 𝑠=10𝑃−200

a. Now assume the government imposes an excise tax of $5 per LCD screen sold. This excise tax is impos
ed 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?

The new supply curve: Qs1= 10(P-5)-200= 10P -250

b. Given the excise tax described in (b), calculate the new equilibrium quantity, the price consumers pay w
ith the tax, and the post-tax price producers receive once the excise tax is implemented.
Set Qs1= Qd: 10P - 250=300-10P => P= 27.5
Replace P=27.5 into the demand equation: Q=300-10*27.5= 25
Price consumers pay with tax: P=27.5
The post-tax price producers receive: Ppost-tax= P - tax = 27.5-5=22.5

c. Find the consumer surplus, producer surplus, and the government’s tax revenue given this excise tax. Ill
ustrate these areas on a clearly labelled graph.
- Consumer surplus: CS= 1/2*25*(30-27.5)=31.25
- Producer surplus: PS= 1/2*(27.5-25)*25=31.25
- Tax revenue=5*25=125

Lecture 6 & 7 (with answers)

f.08.4

Exercise 1
A poor graduate student survives on two types of food items, pizza (P) and mushroom soup (S). He spends all of h
is monthly income of $80 on food. One slice of pizza and one cup of soup both cost $1. You are also provided the
following information about the graduate student’s utility function:
U = P*S
MUP = S
MUS = P

a. Graph the budget line (BL1), with pizza on the x-axis and soup on the y-axis. Under current price levels, how m
any slices of pizza and how many cups of soup does the student consume? Show how you found this optimal bund
le and then label this optimal bundle as Bundle A in your graph. What is his total utility at this optimal bundle?
- Budget line equation: P + S=80 (1)
- Indifference equation: U=P*S
- Optimal choice: BL tangents IC => MUp/MUs=Pp/Ps => S/P=1=> S=P (2)
Replace (2) into (1): P=S=40
- Total utility: U=P*S=40*40=1600

b. To encourage healthy living, the mayor imposes an excise tax of $3 on each slice of pizza (it causes a rise in the
price of pizza). How does this tax affect the graduate student’s budget line? Provide an equation for this new budg
et line, BL2. What is his optimal consumption bundle, Bundle B, now? Show how you found this optimal consum
ption bundle. When this student maximizes his utility now, how much utility will he have? Show how you found t
his answer. How much tax revenue is collected from this student? Illustrate in your graph BL2 and Bundle B. Mak
e sure your graph identifies all intercepts as well as the coordinates of any known points. Also in your graphs inclu
de the indifference curves that represent the level of utility this student has at Bundle A and at Bundle B. Label the
se indifference curves IC1 and IC2, respectively.

New budget line equation: 4P+S=80 (1)

Optimal choice: BL tangents IC: MUs/MUp=Ps/Pp => P/S=1/4 => S=4P (2)
Replace (2) into (1): 8P=80 => P= 10 and S=40
Utililty: U=P*S=10*40=400
Tax revenue= 3*10=30

Lecture 8-12

If you are provided information for TC or TR, you are expected to calculate MC or MR after finishing
lecture 9.

These following exercises are for lecture 10-12, but you can also read it for reference of the midterm test

Exercise 1

Suppose there is a perfectly competitive rice market with a market demand curve:    P = 100 – (1/10)Q  
where P is the market price and Q is the market quantity.  
Furthermore, suppose that all the farmers in this market are identical and that a representative  farmer’s 
total cost is:  TC = 100 + 5q + q2   where q is the quantity produced by this representative  farmer. 
The representative farmer’s marginal cost is:  MC = 5 + 2q.    (Unit of Q : MT, unit of P : USD 1000) 

Questions:
a.  What is the average total cost for the representative farmer?   
b. In the long run, how many units will this farmer produce and what price will it sell each unit for in  this market?
c. What is the total market quantity produced in this market in the long run?   
d. How many farmers are in the industry in the long run?   
e. How do long‐run profits change for each farmer if demand decreases?  Increases?  

f.08.5

Exercise 2

Suppose you are given the following information about a monopolist:

Market Demand Curve: P = 200 – 2Q

Total Cost for the monopolist: TC = 20Q + Q + 100  MC(Q) = TC’(Q)

2

Use this information to answer this set of questions.

1) What is the profit maximizing price and quantity for this monopolist given the above information? Show how y
ou found your answer and what your reasoning was. Calculate the monopolist’s profit.

2) Calculate the monopolist’s consumer surplus (CS), producer surplus (PS), and deadweight loss (DWL). In a wel
l-labeled graph illustrate this monopolist: be sure to include the areas that represent CS, PS, and DWL in your grap
h.

3) Suppose demand increases by 90 units at every price. Find the equation for the monopolist’s new demand curve.
Then, calculate the new profit maximizing price and quantity for this monopolist given the new demand curve. Ca
lculate the new level of monopoly profits.

4) Calculate the value of consumer surplus (CS’), producer surplus (PS’), and deadweight loss (DWL’) for this mo
nopolist given the information in (3). In a well-labeled graph illustrate this monopolist: be sure to include the areas
that represent CS’, PS’, and DWL’ in your graph.