MEE1014 – IEM Digital Assignment -1

1. Suppose there is a small, closed economy that produces bananas. The domestic demand and domestic supply
curves for bananas in this small, closed economy are given as:
Domestic demand: P = 20 – (1/2)Q
Domestic supply: P = 2 + (1/10)Q
a. What is the equilibrium price and quantity of bananas in this small, closed economy?
b. Suppose that the world price of bananas is Rs.8 per unit of bananas and this economy opens to trade. Provide a
numerical measure of this country’s imports or exports of bananas once the market is open to trade.
c. If this closed economy opens its banana market to trade with the world price of bananas equal to Rs.8 per unit
of bananas, what will be the change in consumer surplus due to this decision?
d. Suppose that the world price of bananas is Rs.2.50 per unit of bananas. If this market opens to trade, what will
be the level of imports or exports of bananas?

2. The demand and supply curves of salt are given by

Qd = 1000 - p
Qs = 700 + 2p
(a) Find the equilibrium price and quantity?
(b) Suppose the price of an input to produce salt has increased, so that the new supply curve is
QS = 400 + 2p
How does the equilibrium price and quantity change? Does the change confirm to your expectation?
(c) Suppose the government has imposed a tax of Rs. 3 per unit on sale of salt. How does it affect the equilibrium
price and quantity?

3. (a) A 5% fall in price of a good leads to 10% rise in its demand. A consumer buys 40 units of a good at a price of
10 per unit. How many units will he buy at a price of 12 per unit?
(b) Consider the demand curve Q = 10 – 3p. What is the elasticity at price 5/3?

4. Katherine advertises to sell cookies for $4 a dozen. She sells 50 dozen, and decides that she can charge more.
She raises the price to $6 a dozen and sells 40 dozen. What is the elasticity of demand? Assuming that the elasticity
of demand is constant, how many would she sell if the price were $10 a box?

5. A local super market lowers the price of its vennila ice cream from Rs.3.50 per half gallon to Rs.3.0. Vennila ice
cream (unit) sales increase by 20 percent. The store manager notice that the (unit) sales of chocolate syrup increase
by 10 percent.
(a) What is the price elasticity coefficient if vennila ice cream?
(b) Why have the sales of chocolate syrup increased, and how would you measure the effect?
(c) Overall, do you think that the new pricing was beneficial for the supermarket?