Problem-Set

Problem Set-1
1. Consider the demand function of a good (X), 𝑄𝑑 = 60 − 10𝑃 + 2𝑌 and the supply function of
the good 𝑄 𝑠 = 10 + 20𝑃 − 2𝑃𝑚
Here, 𝑄𝑑 and 𝑄𝑠 denote quantity demanded and supplied respectively, P is the price of X good,
𝑃𝑚 is the price of materials and Y is the income of the demanders.
a) For the given demand and supply equation, find the endogenous variables and exogenous
variables.
b) Define the equilibrium point of the market.
c) What is the equilibrium price and quantity of the market?
d) What is the equilibrium price and quantity when 𝑃𝑚 is 1 and Y is 10.
e) Suppose 𝑃𝑚 goes up to 1 to 2 and income (Y) increases from 10 to 12, what happens to the
equilibrium price and quantity? Explain and graphically show it.
2. The quantity demand and supply curve for pizzas in Dhaka University are given by following
two equations 𝑄𝑑 = 8000 − 800𝑃 and 𝑄𝑠 = 2000 + 200𝑃, where 𝑄𝑑 represents quantity
demanded, 𝑄𝑠 represents quantity supplied and P represents price.
a) Find the equilibrium quantity and price.
b) Suppose the students suddenly have a greater taste for burger, which of the following
would be new demand equation, 𝑄𝑑 = 6500 − 800𝑃 or 𝑄𝑑 = 9500 − 800𝑃? Using the
correct equation, calculate the new equilibrium price and quantity. [explain the reasons]
c) Suppose one of the pizza sellers has shut-down the business, which of the following would
be the new supply equation? 𝑄𝑠 = 1200 + 200𝑃 or 𝑄𝑠 = 2800 + 200𝑃. ? Using the correct
equation, calculate the new equilibrium price and quantity. [explain the reasons]
d) Find the consumer surplus and producer surplus for the above three scenarios (a), (b) and
(c). [explain the reasons for changing CS and PS]
3. Consider the following supply and demand model of the tea market of Bangladesh per month.
Price per KG Quantity supplied (thousands Quantity demanded
kg) (thousands kg)
380 1500 525
370 1000 600
360 700 700
350 600 900
340 550 1200
a) Is there a shortage or surplus when the price is 380 per KG? How large is it?
b) Is there a shortage or surplus when the price is 340 per KG? How large is it?
c) What is the equilibrium quantity and equilibrium price?
d) Suppose there is a drought in Bangladesh that reduces the supply of tea by 400 KG at every
price but demand does not change. In a new table fill in the new supply schedule.
e) What is the new equilibrium price and quantity?
f) Draw the initial demand supply curve to show the equilibrium
g) Draw the new supply curve on your diagram and show the new equilibrium.
4. Consider the following demand and supply equations in the market for cricket balls 𝑄𝑑 = 90 −
2𝑃 − 2𝐵 and 𝑄𝑠 = −9 + 5𝑃 − 2.5𝑅, where B is the price of Bat, and R is the price of rubber (a
metal used to make balls).
a) If R = 2 and T = 11, calculate the equilibrium price and quantity for the market of cricket
balls.
b) At the equilibrium values, calculate the price elasticity of demand and the price elasticity of
supply.
c) At the equilibrium values, calculate the cross-price elasticity of demand for cricket balls with
respect to the price of Bat. What does the sign of this elasticity tell you?
5. The demand for Coca-Cola in Bangladesh is given by the following equation: 𝑄𝑑 = 700 − 2𝑃 −
𝑃𝑁 + 0.10𝐼 where P is the price of Coca-Cola, 𝑃𝑁 is the price of nuts, and I is average consumer
income.
a) What happens to the demand for Coca-Cola when the price of nuts goes up? Are Coca-Cola
and nuts demand substitutes or demand complements?
b) What happens to the demand for Coca-Cola when average consumer income rises?
c) Graph the demand curve for Coca-Cola when 𝑃𝑁 = 100 and 𝐼 = 10,000.
d) Suppose income decreases from 10000 to 9000. What is the value of income elasticity of
demand? Explain the sign.
6. Suppose the demand for Banana is given by the following equation 𝑄𝑑 = 4000 − 100𝑃 −
500𝑃𝑀 . where P is the price of Banana and 𝑃𝑀 is the price of mangoes.
a) What happens to the demand for Bananas when the price of mangoes goes up?
b) Are Bananas and mangoes substitutes or complements?
c) Graph the demand for Bananas when 𝑃𝑀 = 2
d) Now suppose that the quantity of Banana supply is given by the equation: 𝑄𝑠 = 1500𝑃 −
60𝑅 where R is the amount of excessive rainfall. Explain the supply equation and find the
equilibrium price and quantity for the Banana market when R=2.
e) Show the market equilibrium using the diagram.
f) At the equilibrium, calculate the price elasticity of demand and the price elasticity of
supply, and explain it.
g) At the equilibrium values, calculate the cross-price elasticity of demand for Banana with
respect to the price of mangoes. What does the sign of this elasticity tell you?
7. Suppose the demand and supply of a good are given by: 𝑄𝑑 = 100 − 14𝑃 and 𝑄𝑠 = 2 + 35𝑃
a) Find the equilibrium price and quantity and graphically show the equilibrium in market.
Also calculate the CS, PS and DWL.
b) Suppose the government impose a tax of $2 per unit on supply, find the new equilibrium
price and quantity in the market. Also calculate the CS, PS and DWL.
c) Who bears the burden of tax? Calculate.
8. The total cost function of a firm is given by 𝑇𝐶(𝑞) = (𝑞 + 3)2

a) Find the MC, AC, AVC, AFC
b) Draw the MC, AC, AVC, AFC in a diagram,
c) What is the minimum value of the AVC
d) Find the supply equation of the firm and draw it in a diagram.
9. The local beauty-parlor industry in your locality has the market structure of monopolistic
competition. Consider that the beauty-parlor owner is making a profit. Use a graph to explain
the current situation. Do you expect this to last? In a separate graph, draw what you expect to
happen in the long run. Explain your reasoning.
10. The demand function faced by the monopolist is given by 𝑃 = 100 − 2𝑄 and the total cost
function 𝑇𝐶(𝑄) = 400 + 20𝑄.
a) Find the profit maximizing level of price, quantity and profit of the monopolist
b) Graphically show the equilibrium of the monopolist.
c) Find the CS, PS, DWL of the monopolist.
11. Suppose Cooper’s company produces shoes in the perfectly competitive market of shoes. The
total cost function of the producer (assume both in short-run as well as long-run) is 𝑇𝐶(𝑞) =
64 + 𝑞 2 .
a) What are the AC, MC and AVC?
b) Assume the price of shoes per unit is 32, what is the copper’s level of production?
c) What is the level of production if price becomes 8 per unit? What is the amount of profit?
Should the firm shut-down?
d) At what price Copper’s will shut-down their production plant?
e) Currently, there are 19 other shoe producers in the market with the same cost function,
what is the total output in the industry at price equals 32?
f) Find the industry’s supply equation and draw in a diagram.
g) Suppose the demand for shoes in the market 𝑄 = 640 − 10𝑃, find the equilibrium price
and quantity in the industry of 20 firms.
h) Will the number of firms in the shoe industry stay at 20 in the long run at the equilibrium
price? Explain your reasoning.
12. Which of the following events will induce firms producing under perfectly competitive market
to enter/exit in the industry? Explain your answer assuming that currently the firm makes
economic profit. (You can also use diagram to explain it)
a) A technological advancement lowers the fixed cost of production for each of the firms.
b) Government imposing a nation-wise minimum wage which should be followed by.
c) A permanent change in the preferences causing people to increase consumption of the
good.
d) Price of inputs increased significantly due to shortage of input in the market.
13. Suppose a consumer’s utility function derived from consuming Apples is described by: 𝑈 =
10𝐵 + 3𝐵2 − 1/3𝐵3 where B is the number of Bananas.
a) Prepare a table of total and marginal utility for B, from 0 to 7 units.
b) Graphically show the total utility and derive the marginal utility from the total utility curve.
c) At what level of quantity the marginal utility is zero?
d) Suppose the price of per unit of banana is 3, what is the optimal level of consumption?
14. Suppose a consumer has an income of 5000 and faces the price of X commodity equals 20 and
price of Y commodity is 30.
a) Write the budget equation and draw it in a diagram,
b) What is the slope of the budget line?
c) Suppose the income of the consumer decreases to 4000, draw the new demand curve
comparing with the initial budget line.
d) Suppose the price of X commodity rises from 20 to 30. Draw the new budget line
comparing with the initial budget line.
e) Suppose the utility function of the consumer is given by 𝑈 = 𝑋 0.33 𝑌 0.67, what is the
implication of 0.33 and 0.67 used as the power of X and Y respectively?
f) Find the marginal rate of substitution (MRS)
g) Find the optimal consumption of X and Y considering the initial budget equation (a) and
show it graphically.
h) What is the optimal consumption for the scenario of (c)? graphically show it comparing
with the previous optimal consumption (g).
i) What is the optimal consumption for the scenario of (d)? graphically show it comparing
with the optimal consumption shown in the scenario (g).
j) Derive the Marshalian demand curve for X commodity using the diagram shown in the
scenario (i)
15. Suppose the total production function of a firm is given by 𝑇𝑃(𝐿) = √𝐿
a) What is marginal production function and average production function of labour for the
firm?
b) Graphically derive the marginal production function and average production function of
the labour.
c) Considering the new 𝑇𝑃(𝐿) = 2𝐿, find the marginal production and average production of
labour for the firm and graphically show it.
d) Considering the new 𝑇𝑃(𝐿) = 2𝐿1.5 , find the marginal production and average production
of labour for the firm and graphically show it.
16. Consider that a consumer consumes only two goods, x and y. It is possible for one of the goods
to be inferior, but they can’t both be inferior at the same time? Explain.
17. Suppose a consumer consumes only tomatoes and potatoes as a vegetable items. Potatoes are
a Giffen good for the consumer.
a) When the price of potatoes increases, what will be the total effect, substitution effect and
income effect? Show graphically with explanations
b) Can the Tomatoes be inferior good when potatoes are considered as the Giffen good?
Explain
c) Consider that both of the vegetable’s items are considered as the normal goods. What will
be the total effect, substitution effect and income effect for the increase of the potatoes
price? Show graphically with explanations
d) Consider that potatoes are inferior good, what will be the total effect, substitution effect
and income effect for the increase of the potatoes price? Show graphically with
explanations.
18. Define Iso-cost and Iso-quant of a firm. Using Iso-cost and Iso-quant, graphically show the
optimal choice of the factors of production of the firm. How would you derive factor demand
curve using Iso-cost and Iso-quant? Derive it.

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Problem Set-1

8. The total cost function of a firm is given by 𝑇𝐶(𝑞) = (𝑞 + 3)2

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