GENERAL ELECTIVE: Principles of MICROECONOMICS I

Problem Set 1: Topic I

Dr. Apoorva Gupta, Hansraj College

1. Consider a market for Onions with the following demand and supply equations: P = 500 + 5 Q
s

P = 700 - Q
d

(a) Find the equilibrium price and quantity in this market. Find consumer surplus and producer surplus.
Showtheequilibrium, consumer surplus and producer surplus using a graph. Suppose government imposes a taxof Rs10per
kg of onion sold in the market on the buyers. Find the new quantity being traded in the market andthepricefor onions.
2. What is a price ceiling? What effect does a ceiling on rents have on the market for rental accommodation?3. If the
minimum wage is above the equilibrium wage in a competitive labour market, what effect will thishave on
employment? Show using a diagram.
4. A consumer spends his entire income on milk and cookies. Can both be inferior goods? Explain. 5. If the price of
a commodity falls from Rs 8 per unit to Rs 5 per unit, the consumer’s demandincreasesfrom 10 units to 16 units.
What is the price elasticity of demand for this commodity usingmid-pointmethod and by expenditure method?
6. Outline the main determinants of quantity demanded and quantity supplied 7. How is equilibrium
price determined in a free market?
8. The rise in the price of a good results in the total spending on the good remaining unchanged. What isthevalue of
elasticity of demand?
9. How does scarcity give rise to the central problems in an economy? How are these problems solvedinafree market
economy?
10. “Scarcity is the mother of all problems.” Discuss the central problems of an economy. 11. (a) The government
is considering two alternate policies to curb the use of tobacco: (i) increasethetaxontobacco products, (ii)
increasing awareness of the health effects of smoking. What will happentotheequilibrium price and quantity of
tobacco under each policy? (b) Examine briefly the factors that determinehow the taxes are divided between
buyers and sellers.
12. Consider the following demand and supply equations:
PD = 100 - 5Q P = Price of chocolate
PS = 10 + Q Q = Quantity of chocolate
Find the price elasticity of demand at the equilibrium point.
13. Consider a market in which the supply and demand functions are given by the following equations: P = 100 -
0.2 Q (demand)
P = 40 + 0.1 Q (supply)
(i) Determine the equilibrium quantity and price and compute the price elasticity of supplyattheequilibrium
point.
(ii) Determine the effect of a Rs. 50 price ceiling on the price and the quantity traded. 14. A software engineer is
thinking of quitting her Rs. 180,000 job and opening a bookshop. Sheestimatesthat it would cost Rs. 500,000 per year
to rent the location and buy the books to stock. What istheengineer’s opportunity cost of running a bookshop for a
year? If the engineer thought she couldsell Rs.650,000 worth of books in a year, should she open the store? Explain.
15. Suppose the demand for bread rises. What happens to producer surplus in the market for
bread?Whathappens to producer surplus in the market for flour (an ingredient for making bread)?
Usediagramstoexplain.
16. Write a short note on:
(a) Income elasticity of demand
(b) Price Controls
(c) Consumer Surplus and Producer Surplus
(d) Price elasticity of supply
(e) Opportunity Cost and PPC
(f) Cross Price Elasticity of Demand
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17. State whether the following statements are true or false. Give reasons.
 (a) If consumers always spend 4 percent of their income on flowers, then the incomeelasticityofdemand
for flowers is unity.
(b) The price elasticity of demand for new cars is –2. If a car dealer wishes to increase its salesby15percent,
what should it do?
(c) Technological progress in the manufacture of televisions will result in a decreaseintheequilibrium price
and an increase in the equilibrium quantity in the market for televisions. (d) If the price elasticity of supply
for electric heaters is 1.5, an increase in the priceof electricheaters would increase the quantity supplied of
electric heaters by 17 percent. (e) When a tax is levied on a good, there is an increase in the price buyers
pay, a decreaseintheprice sellers receive, and the quantity sold increases.
(f) An increase in the demand for pencils raises the quantity of pencils demandedbut notthequantity
supplied
18. If markets are usually a good way to organize economic activity, why do we sometimes needgovernment?19. What
would be the effect of a price ceiling of (i) Rs. 150 and (ii) Rs. 80, in a market withthefollowingdemand and supply
curves: Qd= 1000 - 5P (Qd is the quantity demanded and P is the priceof thecommodity) and Qs= 5P (Qs is the quantity
supplied)
20. Calculate the price elasticity of demand using the mid-point method from the following information:
Price 20 30 40

Quantity 90 60 45

Would your result be different if instead you considered the total revenue approach to
calculatethepriceelasticity of demand?
21. It is observed that at the existing equilibrium demand is highly inelastic while the supply is highlyelastic. Ifthe
buyers have to pay a tax of Rs. T for each unit they buy, who will, bear the higher burdenof tax, buyeror seller?
Explain.
22. Explain why we expect housing shortage to be more in the long-run than in the short-run if governmentimposes a
binding rent control.
23. Why is trade-off unavoidable? Does it have any relationship with scarcity? 24. A good harvest may generally lower
the income of farmers. Do you agree? Why or why not? 25. Explain why the PPC is bowed outwards? What would be
the shape of PPC if the OC of CommodityYinterms of X is constant?
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