INTRODUCTION TO ECONOMICS EXERCISE

CHAPTER TWO
1. Given market demand Qd = 50 - P, and market supply P =Qs+ 10
A. Find the market equilibrium price and quantity.
B. If the market price is 20, is there surplus or shortage? (show graphically)
C. Calculate price elasticity of demand at the equilibrium point, and interpret
the result.
D. If the demand increases with constant supply, what will be the new
equilibrium price and quantity? (Show the change with graph).
2. When the price of a particular commodity is birr 10 per unit there is a demand of 100 units
of a product. If the per unit price of that commodity is double the demand will be 80 units.
A. Derive the individual demand function from the above statement.
B. If there are 100 identical buyers, what will be the market demand function?
3. Suppose U(x, y) = x2y2; Calculate ∂U/∂x and ∂U/∂y if x =2 and y = 1.
4. Suppose you have two commodities (X and Y). The price of X is 5, and the price of Y is 10.
Your income is also given 50. Draw the budget line.
5. Based on question number 4 find the utility maximizing level of X and Y if U(x,y) = XY
6. The individual consumer demand and individual producer supply is given as follows:

Thousands of kg
Price per kg Thousands of kg supplied Surplus or shortage
demanded
(birr)
85 3.40 72 - 13
80 3.70 73 -7
75 4.00 75 0
70 4.30 77 +7
65 4.60 79 + 14
60 4.90 81 + 21
 A. Find the demand and supply function.
B. Find the equilibrium quantity and price
7. The market for lemon has 10 potential consumers, each having an individual
demand curve P = 101 - 10Qi, where P is price in dollars per cup and Qi is the
number of cups demanded per week by the ith consumer.
A. Find the market demand curve.
B. Draw an individual demand curve and the market demand curve.
C. What is the quantity demanded by each consumer and in the market as a
whole when lemon is priced at P = $1/cup?
8. The demand for tickets to an Ethiopian Camparada film is given by D(p)= 1000-
100p, where p is the price of tickets. If the price of tickets is 3 birr, calculate
price elasticity of demand for tickets and draw the demand curve, and interpret
the result.
9. Based on the following table which indicates expenditure of the household on a
commodity, answer the questions that follow ( The price of the good is Br.10 )
Income ( Br. / month) Quantity Demanded( units / month )
10,000 50
20,000 60
30,000 70
40,000 80
50,000 90

A. Calculate income elasticity of demand, if income increases from Br.10, 000 to

Br. 20,000 and if income increases from Br.40, 000 to Br. 50,000.
B. Is this a normal or an inferior or a luxury good? Justify.
C. Does the proportion of household income spent on this good increase or
decrease as income increases? .Why?
10. When price of tea in local café rises from Br. 10 to 15 per cup, demand for
coffee rises from 3000 cups to 5000 cups a day despite no change in coffee
prices.
A. Determine cross price elasticity.
B. Based on the result, what kind of relation exists between the two goods?

Case study
 1. A farmer sells 200 kg potato per week at a price of birr 15 per kg. In this the farmer has
sold only 150 kg potato. What economic situation is the farmer facing and what will have
to happen to price in order for equilibrium to be attained?

2. Assume that over the last two years, tuition fees at Sebastopol Collage have increased by
5%. At the same time, the number of students enrolled has increased from 800 to over
3,000. Does this example demonstrate that the Law of Demand is false? Explain why or
why not. Use graphs.

3. Draw the demand curve for the following case.

A. I would never buy cigarette! You couldn’t even give me one for nothing.
B. I generally buy a bit more coffee as the price falls. But once the price falls to birr 2
per kg, I’ll buy out the entire stock of the supermarket.
C. I spend more on mango juice even as the price rises. (Does this mean that I must be
violating the law of demand?).
D. Due to a tuition rise, most students at a college find themselves with less disposable
income. Almost all of them eat more frequently at the school cafeteria and less often
at restaurants, even though prices at the cafeteria have risen, too. (This one requires
that you draw both the demand and the supply curves for school cafeteria meals.)
CHAPTER 3,4 & 5

1. Suppose U(x, y) = 4x2 + 3y2.

a) Calculate ∂U/∂x, ∂U/∂y
b) Evaluate these partial derivatives at x = 1, y = 2.
c) Write the total differential for U.
d) Calculate dy/dx for dU = 0; that is, what is the implied trade-off between x and y holding
U constant?
e) Show U = 16 when x = 1, y = 2.
f) In what ratio must x and y change to hold U constant at 16 for movements away from x
= 1, y = 2?
2. Suppose you have two commodities (X and Y). The price of X is 15, and the price of Y is 10.
Your income is also given as 30. Draw the budget line , and show the price effect on the
graph (assume the price of commodity X rise to 20).
3. Based on question number 2 find the utility maximizing level of X and Y if U(x,y) = X2Y2
4. Suppose a firm’s total revenues depend on the amount produced (q) according to the function
R = 70q - q2: Total costs also depend on q: C = q2 + 30q +100:
a) What level of output should the firm produce in order to maximize profits (R - C)?
What will profits be?
b) Show that the second-order conditions for a maximum are satisfied at the output level
found in part (a).
c) Does the solution calculated here obey the “marginal revenue equals marginal cost”
rule? Explain.
5. Suppose that the short-run production function of certain cut-flower firm is
given by: Q = 4KL -0.6K2 -0.1L2 where Q is quantity of cut-flower produced, L
is labor input and K is fixed capital input (K=5).
a) Determine the average product of labor (APL) function.
b) At what level of labor does the total output of cut-flower reach the
maximum?
c) What will be the maximum achievable amount of cut-flower
production?
6. Suppose the short run cost function of a firm is given by: TC=2Q3 –2Q2 + Q +10.
a) Find the expression of TFC & TVC
b) Derive the expressions of AFC, AVC, AC and MC
c) Find the levels of output that minimize MC and AVC and then find
the minimum values of MC and AVC
7. Suppose the production function is given by Q(L,K) = L3/4K1/4. Assume capital is
fixed, find APL and MPL.
8. Consider the following short run production function: Q = 6L2 - 0.4L3
a) Find the value of L that maximizes output
b) Find the value of L that maximizes marginal product
c) Find the value of L that maximizes average product
9. Given a short run cost function as T C = Q 3 - 2Q 2 + 60Q + 100, find the
minimum value of AVC and MC.
10. A firm operates in a perfectly competitive market. The market price of its product is
 4 birr and the total cost function is given by TC= Q 3 - 5Q 2 + 20Q + 50, where TC
is the total cost and Q is the level of output.
a) What level of output should the firm produce to maximize its profit?
b) Determine the level of profit at equilibrium.
c) What minimum price is required by the firm to stay in the market?
11. Suppose that the demand function is given by Q=50-0.5P and the Total Cost function is
specified as C=50+40Q.
A. Find the output level that maximizes profit
B. Obtain the price charged at the profit maximizing output
C. Determine the profit