EMBF – 10

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Batch Group (2)

Economics
EMBF 10th Batch
Group (2) Assignment

Group 2 - Members
 EMBFI (2) - Ma Aye Thida Thein
 EMBFI (7) - Ma Htet Htet Win
 EMBFI (8) - Ma Kay Thwe Khaing
 EMBFI (11) - Ma Khin Aye Mar (Group Leader)
 EMBFI (12) - Ma Khin Moth Moth Kyaw
 EMBFI (13) - Ma Khin Mya Marlar Tun (VP)
 EMBFI (15) - Ma Khin Thidar Aung (2nd Group Leader)
 EMBFI (19) - Ma Lai Yee Oo
 EMBFI (25) - Ma May Thinzar Win
 EMBFI (52) - Mg Yan Kyaw Aung (Accountant)
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Q1-Ch(4) : Consider the markets for DVD movies, TV screens, and tickets at movie theaters.
a. For each pair, identify whether they are complements or substitutes:
• DVDs and TV screens
• DVDs and movie tickets
• TV screens and movie tickets
b. Suppose a technological advance reduces the cost of manufacturing TV screens. Draw
a diagram to show what happens in the market for TV screens.
c. Draw two more diagrams to show how the change in the market for TV screens affects
the markets for DVDs and movie tickets.

Answer (a)
 DVDs and TV screens are complements.
 DVDs and movies tickets are substitutes.
 TV screens and movie tickets are substitutes.

Answer (b)
The technological improvement would reduce the cost of producing a TV screen, shifting the
supply curve to the right. Price will fall and quantity rise as shown in below figure.

Price of
S1
TV screen
S2

P1

P2

D
Quantity of TV
Q1 Q2 screen
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Answer (c)
The reduction in the price of TV screen would lead to an increase in the demand for DVD
because TV screen and DVD are complements. Increases in both price and quantity as shown
in below figure.

Price of
DVDs
S
P2
P1

D2
D1 2

Quantity of DVDs
Q1 Q2

The reduction in the price of TV screen would cause a decline in the demand for movie tickets
because TV screen and movie tickets are substitutes thus demand curve shifting to left.
Decreases in both price and quantity as shown in below figure.

Price of Movie
Tickets
S
P1

P2

D1
D2

Quantity of Movie
Q2 Q1 Tickets
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Q2 – Ch (4): Using supply and demand diagrams, show the effect of the following events on the
market for sweatshirts.
a. A hurricane in South Carolina damages the cotton crop
b. The price of leather jackets falls.
c. All colleges require morning calisthenics in appropriate attire.
d. New knitting machines are invented.

Answer (a)
If cotton crops are damaged by hurricane, falls the supply of sweatshirts thus the supply curve
shifting to left. Price will rise and quantity fall as shown in below figure.

Price of
S2
Sweatshirts
S1

P2

P1

D
Quantity of
Q2 Q1 Sweatshirts

Answer (b)
If the price of leather jackets falls, the demand for sweatshirts will fall and shift to left because
leather jackets and sweatshirts are substitutes. Both the price and quality of sweatshirts will fall
as shown in below figure.

Price of
Sweatshirts
S
P1

P2

D1
D2

Quantity of
Q2 Q1 Sweatshirts
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Answer (c)
Sweatshirts are not attire for colleges thus the demand for sweatshirts will fall and shift to left
while all colleges require morning calisthenics in appropriate attire Both the price and quality of
sweatshirts will fall as shown in below figure.

Price of
Sweatshirts
S
P1

P2

D1
D2

Quantity of
Q2 Q1 Sweatshirts

Answer (d)
If new knitting machines are invented, then the cost of supplying sweatshirts will fall and
thus the supply curve will shift right. Price will fall and quantity rise as shown in below
figure.

Price of
S1
Sweatshirts
S2

P1

P2

Quantity of
Q1 Q2 Sweatshirts
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Q3 – Ch (4): Ketchup is a complement for hot dogs. If the price of hot dogs rises, what happens
to the market for ketchup? For tomatoes? For tomato juice? For orange juice?

Answer
Ketchup is a complement for hot dogs. If the price of hot dogs rises, the demand for Ketchup will
fall and demand curve shift to left. Both price and quantity are falling as as shown in below
figure.

Price of
Ketchup

S
P1

P2

D1
D2

Quantity of Ketchup
Q2 Q1

The quantity of ketchup falls, the demand for tomatoes by ketchup producers falls and demand
curve shifts to left. Both price and quantity are falling as shown in below figure.

Price of
Tomatoes

S
P1

P2

D1
D2

Quantity of Tomatoes
Q2 Q1
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When the price of tomatoes falls, producers of tomato juice face lower input prices, so the supply
curve for tomato juice shifts to the right. Price will fall and quantity rise as shown in below
figure.

Price of
S1
Tomato
juice S2

P1

P2

Quantity of Tomato
Q1 Q2 juice

The fall in the price of tomato juice causes people to substitute tomato juice for orange juice, so
the demand for orange juice decreases and the demand curve shifts to left. Both price and
quantity are falling as shown in the figure below.

Price of
Orange
juice
S
P1

P2

D1
D2

Quantity of Orange
Q2 Q1 juice
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Q4 – Ch (5): Cups of coffee and donuts are complements. Both have inelastic demand. A
hurricane destroys half the coffee bean crop. Use appropriately labelled diagrams to answer the
following questions.
a. What happens to the price of coffee beans?
b. What happens to the price of a cup of coffee? What happens to total expenditure on
cups of coffee?
c. What happens to the price of donuts? What happens to total expenditure on donuts?

Answer (a)
When a hurricane destroys half of the crop, the supply of coffee beans decreases, and the supply
curve of coffee beans shifts to the left. Price will rise and quantity fall as shown in below figure.

Price of
S2
Coffee
beans S1

P2

P1

Quantity of Coffee
Q2 Q1 beans

Answer (b)
The price of a cup of coffee will increase due to the decreased supply of coffee. When the price
of coffee beans increases, the quantity supply of cups of coffee decreases. The quantity of a cup
of coffee will fall as shown in below figure.

Price of A Supply of Coffee

Cup of bean
coffee Supply of
Coffee bean

Quantity of A Cup
40 50 of coffee
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The total expenditure of coffee will rise. This is because for goods with inelastic demand,
increase in price of a good raises the total expenditure on that good.
Price of Elasticity Demand = Change in % of Qd = {(50 – 40)/45} x 100%
Change in % P { (3-4)/3.5}x 100%
= 22.22% = 0.77 < 1 (inelastic)
28.57%
Answer (c)
The price of donuts decreases. When the price of coffee increases and the quantity demanded of
coffee decreases, consumers demand fewer donuts because coffee and donuts are complements.
The demand for donuts will decrease and shift to left and lowering the donuts price as shown in
below figure.
Price of
Donuts

S
4

D1
D2

Quantity of Donuts
40 50

The total expenditure of donuts will decrease. Donuts is an inelastic good and decrease in price
will result to decreased expenditure on donuts.
Price of Elasticity Demand = Change in % of Qd = [(50 – 40)/45] x 100%
Change in % P [(3-4)/3.5]x 100%
= 22.22% = 0.77 < 1 (inelastic)
28.57%
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Q5 – Ch (5): Suppose that your demand schedule for DVDs is follows:

Price Quality of Demand Quality of Demand

(Income = $10,000) (Income = $12,000)
8 40 DVDs 50 DVDs
10 32 45
12 24 30
14 16 20
16 8 12

a. Use the midpoint method to calculate your price elasticity of demand as the price of
DVDs increases from $8 to $10 if (i) your ncome is $10,000 and (ii) your income is
$12,000.
b. Calculate your income elasticity of demand as your income increases from $10,000 to
$12,000 if (i) the price is $12 and (ii) the price is $16
Answer (a)
 (i) Price elasticity of demand is -1
 (ii) Price elasticity of demand is - 0.48

Sloution

Price elasticity of demand = % Change in Qd

%Change in P
Pr
Q2- Q1 ic P2-P1
Using midpoint method = e ÷
(Q2+Q1)/2 (P2+P1)/2
el
as
ti (i) W
ci
h
ty
of e
de n
m i
an n
d c
ome is 10,000
P1 = 8 Q1 = 40
P2 = 10 Q2 = 32

32- 40 10- 8
Price elasticity of demand = ÷
(32+40)/2 (10+8)/2
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Price elasticity = -8 ÷ 2
of demand 36 9
Price elasticity of demand = - 0.22 / 0.22 = -1 (Unit elastic)

(ii) When income is 12,000

P1 = 8 Q1 = 50
P2 = 10 Q2 = 45

45 - 50 10- 8
Price elasticity of demand = ÷
(45+50)/2 (10+8)/2

Price elasticity of demand = -5 ÷

2
47.5 9

Price elasticity of demand = - 0.11 / 0.22 = - 0.48 (inelastic)

Answer (b)
 (i) Income elasticity of demand is 1.22
 (ii) Income elasticity of demand is 2.22
Solution

% Change in Qd
Income elasticity of demand =
Pri% Change in Income
ce
Q2- Q1ela I2-I1
Using midpoint method = stic ÷
(Q2+Q1)/2 (I2+I1)/2
ity
of
(i) When Price is 12 de
P1 = 10,000 Q1 = 24 ma
P2 = 12,000 Q2 = 30 nd
30- 24 12000-10000
Income elasticity of demand = ÷
(30+24)/2 (12000+10000)/2
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Income elasticity of 6 2000

= ÷
demand
27 11000

Income elasticity of demand = 0.22 / 0.18 = 1.22 > 1 ( elastic)

(ii) When Price is 16

P1 = 10,000 Q1 = 8
P2 = 12,000 Q2 = 12

Income elasticity of demand = 12- 8 ÷ 12000-10000

(12+8)/2 (12000+10000)/2

Income elasticity of demand = 0.4 / 0.18 =2.22 > 1 (elastic)

Q6 – Ch (5): Maria has decided always to spend one third of her income on clothing.

a. What is her income elasticity of clothing demand?

b. What is her price elasticity of clothing demand?
c. It Maria s tastes change, and she decides to spend only one fourth of her income on
clothing, how does her demand curve change? What is her income elasticity and price
elasticity now?

Answer (a)
If Maria always spends one-third of her income on clothing, then her income elasticity of
demand is one, because maintaining her clothing expenditures as a constant fraction of her
income means the percentage change in her quantity of clothing must equal her percentage
change in income.
For example
Situation Income Spending on Clothing Qty if P= 10 Qty if P= 20
(1) 300 300*1/3 = 100 100/10 =10 unit 100/20 =5unit
(2) 600 600*1/3 = 200 200/10 =20 unit 200/20 =10 unit

Income elasticity of demand = % change in Qd / % Change in I

Income elasticity of demand = (Q2−Q1)/[(Q2+Q1)/2]
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((I2−I1)/[(I2+I1)/2])
= (5−10) / [(5+10)/2]
(600−300)/[(600+300)/2]
= -66.67 / 66.67
= -1 = Unit elastic
Answer (b)
Maria's price elasticity of clothing demand is also one, because every percentage point
increase in the price of clothing would lead her to reduce her quantity purchased by the same
percentage.

Price elasticity of demand = % change in Qd / % Change in I

Income elasticity of demand = (Q2−Q1)/[(Q2+Q1)/2]

((P2−P1)/[(P2+P1)/2])
= (5−10) / [(5+10)/2]
(20−10) / [(20+10)/2]
= -66.67 / 66.67
= -1 = Unit elastic

Answer (c)
Because Maria spends a smaller proportion of her income on clothing, then for any given price,
her quantity demanded will be lower. "Thus, her demand curve has shifted to the left. Because
she will again spend a constant fraction of her income on clothing, her income and price
elasticities of demand remain one.

Situtation Income Spending on Qty if P= 10 Qty if P= 20

Clothing
(1) 300 300*1/4 = 100 75/10 =7.5 unit 75 /20 =3.75unit
(2) 600 600*1/4 = 200 150/10 =15 unit 150/20 =7.5 unit

Income elasticity of demand = % change in Qd / % Change in I

Income elasticity of demand = (Q2−Q1)/[(Q2+Q1)/2]
((I2−I1)/[(I2+I1)/2])
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= (3.75−7.5) / [(3.75+7.5)/2]
(600−300)/[(600+300)/2]
= -66.67 / 66.67
= -1 = Unit elastic

Price elasticity of demand = % change in Qd / % Change in I

Income elasticity of demand = (Q2−Q1)/[(Q2+Q1)/2]

((P2−P1)/[(P2+P1)/2])
= ((3.75−7.5) / [(3.75+7.5)/2]
(20−10) / [(20+10)/2]
= -66.67 / 66.67
= -1 = Unit elastic

Price

20

10
D

Quantity
37 7.
.5 5

Q7 – Ch (5): The price of coffee rose sharply last month, while the quantity sold remained the
same. Five people suggest various explanations:
Tom: Demand increased, but supply was perfectly inelastic.
Dick: Demand Increased, but it was perfectly inelastic.
Harry: Demand increased, but supply decreased at the same time.
Larry: Supply decreased, but demand was unit elastic
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Marry: Supply decreased, but demand was perfectly inelastic.

Who could possibly be right?

a. Tom, Dick, and Harry
b. Tom, Dick and Marry
c. Tom, Harry, and Larry
d. Dick, Harry, and Larry
e. Dick, Harry, and Marry

Answer is C.

Solution
According to Tom’s suggestion demand increases while supply is perfectly inelastic. This
suggestion can be depicted in the graph below.

Price S

P2

P1

D2
D1 2

Quantity
Q1= Q2

According to Dick’s suggestion demand increases but demand is perfectly inelastic. This
suggestion can be depicted in the graph below.

D1 D2 S
Price 2

P2

P1
 Q1 Q2

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According to Harry’s suggestion demand increases while supply decreases at the same time. An
increase in the demand leads to an upward shift in the demand curve from D1 to D2 while a
decrease in supply leads to a leftward shift in the supply curve from S 1to S2.

S1
Price 2

S
1

P2

P1

D2

D1

Q2 = Q1 Quantity

Larry’s suggestion can be depicted in the graph below. The graph represents two curves where D
is the unit elastic supply curve while S represents the supply curve. A decrease in the supply
leads to a leftward shift of the supply curve from S1 to S2. The new equilibrium E2is attained
when S2 intersects D. At point E2, equilibrium quantity Q2 decreases from Q 1 while
equilibrium price rises from P1 to P2.

Price
S2
S1

P2
 P1

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Quantity
Q2 Q1

Marry’s suggestion is depicted in the graph below. With the perfectly inelastic demand curve (D),
a decrease in supply will lead to a leftward shift in the supply curve from S1 to S2. A new
equilibrium point E2 where the new supply curve and old demand curve intersect, the
equilibrium quantity Q2is equal to Q 1while equilibrium price P2 is higher than the initial price
level P.

D S2 S1
Price 2

P2

P1

Quantity
Q1 = Q2

Q8 – Ch (5): Suppose that business travelers and vacationers have the following demand for
airline tickets from New York to Boston:

Price Quantity Demanded Quantity Demanded

(business travelers) (vacationers)
$150 2,100 tickets 1,000 tickets
200 2,000 800
250 1,900 600
300 1,800 400
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a. As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i)
business travelers and (ii) vacationers? (Use the midpoint method in your calculations.)
b. Why might vacationers have a different elasticity from business travelers?
Answer (a)
 business travelers: -.231
 vacationers: -1.286
Solution:
% Change in Qd
Price elasticity of demand =
Pri % Change in Income
ce
P1= 200 P2 = 250 ela
stic
Q1= 2000 Q2 = 1900 ity
(i) For business travelers of
de
ma
Q2- Q1 P2-P1
Using midpoint method nd
= ÷
(Q2+Q1)/2 (P2+P1)/2

1900 - 2000 250 - 200

Price elasticity of demand = ÷
(1900 + 2000)/2 (250 +200)/2

Price elasticity of demand = -100 ÷

50

1950 225

Price elasticity of demand = - 5.12% / 22.22 % = - 0.231 < 1

(ii) For vacationers

P1= 200 Q1 = 800
P2 = 250 Q2= 600
600 - 800 250 - 200
Price elasticity of demand = ÷
(600 + 800)/2 (250 +200)/2

Price elasticity of demand = -200 ÷

50

700 225

Price elasticity of demand = - 28.57% / 22.22 % = - 1.286 < 1

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Answer (b)
Vacationers would have a different elasticity since they are more price sensitive to taking
vacations. Business travelers do not care as much for a price change, and they are not as affected
as much by a price change as vacationers.

Q9 – Ch (5): You are the curator of a museum. The museum is running short of funds, so you
decide to increase revenue. Should you increase or decrease the price of admission? Explain.
Answer:
We should decrease the price of museum admission in order to increase total revenue.
Going to a museum is a luxury and not a necessity, so the demand for museum tickets will be
elastic, as people enjoy going to museums but do not depend on museum visits as a basic human
need (say, like visits to the doctor). Therefore, we should decrease the price of admission, as a
decrease in price will cause an increase in quantity demanded that is greater in magnitude.
Therefore, knowing that total revenue is calculated as P×Q, we know that a decrease in price and
an increase in quantity demanded that is greater in magnitude will increase total revenue
mathematically.

Q10 – Ch (6): Suppose the federal government requires beer drinkers to pay a $2 tax on each
case of beer purchased. (In fact, both the federal and state governments impose beer taxes of
some sort.)

a. Draw a supply-and-demand diagram of the market for beer without the tax. Show
the price paid by consumers, the price received by producers, and the quantity of beer
sold. What is the difference between the price paid by consumers and the price received
by producers?
b. Now draw a supply-and-demand diagram for beer market with tax. Show the proce
paid by consumer, the price received by producers, and the quantity of beer sold. What is
the difference between the price paid by consumers and the price received by producers?
Has the quantity of beer sold increased or decreased?

Answer (a)
Shows the market for beer without the tax. The equilibrium price is P1 and the equilibrium
quantity is Q1. The price paid by consumers is the same as the price received by producers.
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Price of
Beer
S

P1

Q1 Quantity of Beer
Answer (b)
When the tax is imposed, it drives a wedge of $2 between supply and demand, as shown in the
Figure below. The price paid by consumers is P2, while the price received by producers is P2 –
$2. The quantity of beer sold declines to Q2.

Price of
Beer
S

P2

P1

P2- $2

Q2 Q1 Quantity of Beer

Q11 – Ch (6): If the government places a $500 tax on luxury cars, will the price paid by
consumers rise by more than $500, less than $500, or exactly $500? Explain.

Answer
If the government imposes a $500 tax on luxury cars, the price paid by consumers will rise less
than $500, in general. The burden of any tax is shared by both producers and consumers ⎯ the
price paid by consumers rises and the price received by producers falls, with the difference
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between the two equals to the amount of the tax. The only exceptions would be if the supply
curve were perfectly elastic or the demand curve were perfectly inelastic, in which case
consumers would bear the full burden of the tax and the price paid by consumers would rise by
exactly $500.

Q12 – Ch (6): Congress and the president decide that the United States should reduce air
pollution by reducing its use of gasoline. They impose a $0.50 tax on each gallon of gasoline
sold.
a. Should they impose this tax on producers or consumers? Explain carefully using a
supply-and-demand diagram.
b. If the demand for gasoline were more elastic, would this tax be more effective or less
effective in reducing the quantity of gasoline consumed? Explain with both words and a
diagram.
c. Are consumers of gasoline helped or hurt by this tax? Why?
d. Are workers in the oil industry helped or hurt by this tax Why?

Answer (a)
It doesn’t matter whether the tax is imposed on producers or consumers ⎯ the effect will be the
same. With no tax, as shown in below Figure, the demand curve is D1 and the supply curve is
S1. If the tax is imposed on producers, the supply curve shifts up by the amount of the tax (50
cents) to S2. Then the equilibrium quantity is Q2, the price paid by consumers is P2, and the
price received (after taxes are paid) by producers is P2 – 50 cents. If the tax is instead imposed
on consumers, the demand curve shifts down by the amount of the tax (50 cents) to D2. The
downward shift in the demand curve (when the tax is imposed on consumers) is exactly the same
magnitude as the upward shift in the supply curve when the tax is imposed on producers. So
again, the equilibrium quantity is Q2, the price paid by consumers is P2 (including the tax paid to
the government), and the price received by producers is P2 – 50 cents.

Price of S2
Gasoline

S1

P2

P1
 P2 - $50

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D2

Q2 Q1 Quantity of Gasoline

Answer (b)
The more elastic is the demand curve, the more effective this tax will be in reducing the quantity
of gasoline consumed. Greater elasticity of demand means that quantity falls more in response to
the rise in the price of gasoline. Figure 7 (b) illustrates this result. Demand curve D1 represents
an elastic demand curve, while demand curve D2 is more inelastic. To get the same tax wedge
between demand and supply requires a greater reduction in quantity with demand curve D1 than
for demand curve D2.

Answer ( C)
The consumers of gasoline are hurt by the tax because they get less gasoline at a higher price.

Answer (d)
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Workers in the oil industry are hurt by the tax as well. With a lower quantity of gasoline being
produced, some workers may lose their jobs. With a lower price received by producers, wages of
workers might decline.