Anna Blajer-Gołę biewska M. Sc. Microeconomics 1. WHAT IS ECONOMIC THINKING?

Exercise 1.

Fill the gaps with appropriate words.

a)

Economics is the study of the use of scarce .............................. to satisfy unlimited human ..............................

b)

The things produced are called ..................................

c)

.................................commodities are called................................. ( for example: education).

d)

.................................commodities are called................................. (for example: books, cars) e)

..................................is a theoretical simplified construct that represents economic processes by a set of variables and a set of logical and quantitative relationships between them.

f)

................................. is a Latin phrase for "all else being equal."

g)

............................................................. is the branch of economics that does not provide any instruction.

h)

............................................................. is the branch of economics that incorporates value judgments (that is, normative judgements) about what the economy ought to be like or what particular policy actions ought to be recommended to achieve a desirable goal.

Exercise 2.

Match phrase from column A with appropriate phrase from column B.

COLUMN A

COLUMN B

the second best

c.p.

ceteris paribus

production possibilities frontier

product transformation curve (PTC)

concave or convex PTC

nonlinear PTC

-∆B/∆A

linear PTC

the marginal opportunity cost is constant

MRT

opportunity cost

Exercise 3.

Which of the following are normative economic statements?

• In 1973 OPEC jacked up prices for crude oil almost five times, from $US2.50 a barrel to $US12 a barrel.

• Government should tax carbon emissions.

• The rate of unemployment is too high.

• The minimum wage in the world's richest country has just been raised by almost 12 percent.

• Jane’s income is too low.

• Increased consumer spending on new cars will lead to a rise in traffic congestion

• Euro zone inflation jumped to another record high of 4.1 percent in July 2008.

• The cost of fruit and vegetables should be subsidized by the government to encourage healthy eating.

• Petrol price in Poland has gone up significantly in the past 2 years.

• Firms should be politically active.

• If growth is higher, inflation is lower.

• The national minimum wage rate should be increased to £5 per hour for all workers.

• Nurses working the national health service should be on a maximum working week of 50 hours per week.

• Most firms seek to maximise their market share.

• All taxes are bad, but some public services are good.

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Anna Blajer-Gołę biewska M. Sc. Microeconomics

Exercise 4.

Which of the following are microeconomic statements?

• The rate of unemployment is 10%.

• Coal production in Poland will decrease and coal will no longer be the cheap source of energy.

• The World Bank estimated France's GDP in 2006 to be US$1959745 million.

• Current petrol price in Poland is about 4.60 zloty per litre

• China's automobile industry experienced a 65.79 percent profit rise in the first half of 2007.

Exercise 5.

The opportunity cost of attending university includes:

• the cost of food (?)

• the cost of books and other requisite items (?)

• the cost of tuition (?)

• the free time, that one had to resign from (?)

• the lost wages a student could have earned in the workforce (?)

Exercise 6.

What is the opportunity cost of watching a movie in cinema if the ticket cost is $8?

What is the total cost of watching this movie?

Exercise 7.

The opportunity cost to society of constructing a new motorway would be:

• The loss of farmland and natural habitat used in order to build the road (?)

• The other goods and services that would be produced if the motorway were not built (?)

• The financial cost of the road (?)

Exercise 8.

By taking an airplane Kate can travel from Gdańsk to Berlin in one hour. The same trip takes 5 hours by bus. Airfare is $100 and the bus fare is $35. Kate, when she is not travelling, can work and earn $30/hour.

Answer the following questions:

a) What is the opportunity cost for Kate of travelling by plane?

b) What is the opportunity cost for Kate of travelling by bus?

c) Which is the cheaper mode of travel for Kate?

d) How would the answers be different for another person Lisa (who can work and earn $10/hour when she is not travelling)?

Exercise 9.

Construct product transformation curve for a country producing two goods wine and beer.

Producing one bottle of wine requires 2 units of labour, while producing

one bottle of beer requires 1 units of labour. Labour supply L = 120.

MAX

a) Determine the maximum wine production.

b) Determine the maximum beer production.

FUNCTION

c) Construct the product transformation curve.

d) Find the opportunity cost of beer in terms of wine.

e) This product transformation curve is concave / convex / linear(?)

f) Find the function describing the product transformation curve?

g) Where does opportunity cost of beer in terms of wine appear

in the function describing the product transformation curve?

h) Determine MRT.

BEER

i)

What is the opportunity cost of increasing output of beer

from 10 to 30 units?

j)

What is the opportunity cost of producing 40 bottles of beer?

WINE

k) What is the opportunity cost of increasing output of wine

from 30 to 60 units?

l)

What is the opportunity cost of producing 60 bottles of wine?

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Anna Blajer-Gołę biewska M. Sc. Microeconomics

Exercise 10.

The graph below shows a product transformation curve (PTC) for MP3 players and DVD players produced by the same company.

DVD

(Thousand

per Year)

12

F

A

10

B

C

E

D

1

0 1 11 20

MP3

(Thousand per Year)

a) Determine the maximum MP3 production.

b) Determine the maximum DVD production.

c) This product transformation curve is concave / convex / linear (?).

As a result the marginal opportunity cost remains the same / is increasing / is falling (?).

d) What is the opportunity cost of producing 10 thousand DVD players?

e) What is the opportunity cost of producing 4 thousand DVD players?

f) What is the opportunity cost of producing 8 thousand MP3 players?

g) What is the opportunity cost of producing 20 thousand MP3 players per?

h) What is the opportunity cost of increasing the output of DVD players from 4 to 8 units (a movement from D to C)?

i)

What is the opportunity cost of increasing the output of DVD players from 10 to 12 units?

j)

What is the opportunity cost of increasing the output of MP3 players from 0 to 15 units?

k) What is the opportunity cost of increasing the output of MP3 players from 0 to 20 units?

l)

Which of the combinations of the output (of DVD players and MP3 players) on the graph are feasible (attainable) (A, B, C, D, E or F)?

m) Which combination of output of DVD players and MP3 players is the best for the company A, B, C or D?

n) Periods of high unemployment in an economy correspond to points that lie outside / on / within the production possibility curve (for example: point …..)

o) Combinations of goods and services that lie outside the production possibility curve are efficient / inefficient /

unattainable (for example: point …..).

Combinations of goods and services that lie on the production possibility curve show an efficient / inefficient /

unattainable allocation of scare resources (for example: point …..).

Combinations of goods and services that lie within the production possibility curve show an efficient / inefficient /

unattainable allocation of scare resources (for example: point …..).

p) What is happening to the marginal opportunity cost of producing extra MP3 players as a company reallocates Y

∆

resources from combination A to B and then to C and to D? Determine MRT ( MRT

= −

).

YX

X

∆

q) A fall in the size of available labour supply, other factors remaining constant, will cause an outward / inward shift of the product transformation curve.

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Anna Blajer-Gołę biewska M. Sc. Microeconomics

Exercise 11.

An economy has a given stock of factor inputs of labour, land and capital. The production possibilities for two products, steel and chocolate are shown in the table below.

Output of Steel

Output of Chocolate

a) What is the opportunity cost of increasing output of steel from

200 to 250 units?

Tonnes of steel

Thousands of bars

b) What is the opportunity cost of increasing output of chocolate

per year

per year

from 450 to 1450 units?

c) What is the opportunity cost of producing 300 units of steel?

0

1500

d) What is the opportunity cost of producing 1480 units of

chocolate?

50

1480

e) What is the opportunity cost of increasing output of chocolate

from 0 to 1500 units?

100

1450

f) What is the opportunity cost of producing 500 units of steel?

150

1400

g) What is the opportunity cost of producing 100 units of

chocolate?

200

1300

h) Determine MRT while increasing output of chocolate

from 1000 to 1400 units.

250

1175

i) Using figures in the table graph a product transformation curve

(PTC). Should it be concave, convex or linear?

300

1000

350

750

400

450

450

100

500

0

Exercise 12.

The diagram below shows a product transformation curve (PTC) for health services. The outward shift of the PTC from PTC1 to PTC2 might have been caused by:

a) A fall in new capital investment in the health service.

b) Improvements in medical technology available to provide a full range of health services.

c) An increase in the number of heart surgeons employed by the NHS.

d) An increase in the efficiency of labour and capital providing heart operations only.

All Other

Operations

PTC1 PTC2

Output of Heart Operations

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Anna Blajer-Gołę biewska M. Sc. Microeconomics

Exercise 13. An economy can choose to allocate scarce resources between consumer goods and services or capital goods.

The product transformation curve (PTC A) is shown in the diagram below.

The shift of the PTC from PTC A to PTC B might have been caused by …………………………………

The shift from PTC A to PTC C might have been caused by …………………………………

The shift from PTC A to PTC D might have been caused by …………………………………

The shift from PTC A to PTC E might have been caused by …………………………………

Ca pital

Go ods

PTC B

PTC C

PTC D

PTC E

PTC A

Consumer Goods and Services

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Anna Blajer-Gołę biewska M. Sc. Microeconomics 2. SUPPLY AND DEMAND ANALYSIS

Exercise 1.

Price

The graph shows supply curve S.

Choose the appropriate answers.

1

I.

4

An expansion of supply due to a higher price is number ……

A contraction of supply due to a lower price is number ……

2

Decrease in supply is number……..

Increase in supply is number……..

3

II.

S1

An outward shift in supply might have been caused by:

a) changes in production costs (wages, energy,

S

raw materials, components),

S2

b) an increasing number of producers in the market,

c) a rise in the real incomes of consumers,

d) new, improved technologies,

Quantity

e) a fall in the price of complementary good.

Exercise 2.

Price

The graph shows demand curve D.

Choose the appropriate answers.

4

I.

A contraction of demand due to a higher price is number ……

1

An expansion of demand due to a lower price is number ……

Decrease in demand is number……..

Increase in demand is number……..

3

II.

2

An outward shift in demand might have been caused by:

a) changes in the costs of production,

D1

b) an increase in the price of complementary good,

D

c) a fall in the price of complementary good,

D2

d) a fall in the price of substitute good (i.e. a competing product),

e) an increase in the price of substitute good

Quantity

(i.e. a competing product),

f) an increase in the size of the total population,

g) changes in the number of producers in the market,

h) a changes in consumer preferences towards the good.

Exercise 3.

Suppose that the demand function for oranges in Poland

is Qd =-P+8 and the supply is Qs = P-2.

Draw a graph for the market of oranges in Poland.

Find the equilibrium price and quantity.

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Anna Blajer-Gołę biewska M. Sc. Microeconomics

Exercise 4.

Fill in the table with the results of shifts in demand and supply.

-

↑ D

D = const

↓ D

↑ S

S = const



↓ S

Exercise 5.

Which one of the following would be the most probable consequence of a fall in the supply of coffee, the supply curve of tea remaining unchanged?

a) An increase in the price of coffee and an increase in the price of tea.

b) An inward shift in the demand for coffee and an outward shift in the demand for tea.

c) A decrease in the price of coffee and an increase in the price of tea.

Exercise 6.

What is the definition of consumer surplus?

a) The difference between the consumer's willingness to pay and the firm's cost of the product.

b) The difference between the consumer's willingness to pay and the price actually paid for the product.

c) The total value placed on products by consumers.

Exercise 7.

According to the previous exercise define the producer’s surplus.

Complete the diagram, indicate the consumer’s and producer’s surpluses.

Producer’s surplus is ..............................................................

.................................................................................................

Exercise 8.

An increase in market demand for a normal good other things being equal will lead to:

a) a rise in both consumer and producer surplus.

b) a fall in consumer surplus and a rise in producer surplus.

c) a rise in consumer surplus and a fall in producer surplus.

Exercise 9.

Determine shifts in supply and demand in the video recorders’ market, when:

a) people can easily buy cheaper video cassettes,

b) the government taxed components used in video recorders’ production,

c) there was fall in the real incomes of consumers,

d) prices of energy went up,

e) some new firms producing video recorders were set up on the market,

f) some companies put DVD’s on the market.

Exercise 10.

Consumer surplus in a market will tend to be higher when demand is:

a) income inelastic(?)

b) price inelastic (?)

c) price elastic (?)

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Anna Blajer-Gołę biewska M. Sc. Microeconomics

Exercise 11.

a) When 15% fall in price leads to a 30% increase in quantity demanded, the price elasticity of demand Edp =..................

b) Following a 5% rise in the price of fresh bread from a bakery c.p., a decrease in the consumption of the fresh bread was 4%. As a result the demand for the fresh bread from a bakery is estimated to have an price elasticity Edp= .................., so the demand is............................…

c) If the price of red wine increases by 30% and as a the consumption of red wine falls by 3%, we can conclude from this information that price elasticity of demand for red wine is .................., so the demand is................. .........

d) The price of original perfume “BE” increases by 20% and as a result the quantity demanded of original perfumes “BE”

falls by 30%. We can conclude from this information that price elasticity of demand for original perfumes “BE” is

........................., so the demand is.............................

e) The price elasticity of demand for British built computers in foreign markets is estimated to be 2. A fall in the exchange rate lowers the foreign prices of these computers by 10%. Assuming the British computer industry has unemployed resources, the lower exchange rate will result in the number of computers exported rising by.................

f) Suppose that a 15% decrease in the price of good X results in an increase in the consumption of good X of 15%. What can you tell about the demand for X.

Exercise 12.

a) The price of a bottle of beer called “Gulp” increases from 2.5 to 3.5 and as the consumption of beer falls form 10

million bottles of beer monthly to 8 million, we can conclude from this information that price elasticity of demand for red wine is ………….., so the demand is…………………

b) Suppose that a decrease in the price of good from $100 to $70, results in an increase in the consumption of this good from 2000 to 1800 weekly. What can you tell about the demand for the good?

c) The price of the honey decreases by 25% and the bears increase their consumption form 300 to 450 tonnes monthly. We can conclude from this information that price elasticity of demand for the honey is ………….., so the demand is…………………

Exercise 13.

The demand function for carrot juice is as follows: X=-P+8.

a) The current price of X is 6. What is the price elasticity of demand? What can we say about the demand for carrot juice at this price-point?

b) The price decreases to 4. What is the price elasticity of demand?

Exercise 14.

The weekly demand function for butter is Qd = -2P+ 10, where Qd is quantity in kilograms purchased per week, P is price per kg in dollars. Supply function is Qs = P-1.

a) Calculate the price elasticity of demand for butter at the equilibrium.

b) What can we say about the demand for butter at this price-point?

c) What significance does this fact hold for suppliers of butter?

Exercise 15.

Fill in the table:

Edp

Demand

Edp = -1,2

 Edp= 6

Edp = 0

│

Edp│ = ∞

Edp = - 0,3

Exercise 16.

The local multiplex cinema discovered that when it charged £5 for the afternoon matinee, it took in £450 per showing, but when it lowered the price to £3, it took in £500 per showing. This implied that the elasticity of demand for afternoon matinee movies is unit elastic / price inelastic / price elastic / perfectly elastic.

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Anna Blajer-Gołę biewska M. Sc. Microeconomics

Exercise 17.

a) The market demand for heroin is elastic / inelastic. Because of the reduction in market supply total revenue of those selling this drug (other things equal) will rise / fall / remain unchanged.

b) We know that the demand for a good or service is inelastic if when price rises, total revenue falls / rises.

c) If the demand for your product is elastic, what should you do with the price?

d) If the demand is perfectly elastic, the elasticity of demand is infinite / zero and the demand curve is vertical / horizontal e) The demand for a product will tend to be elastic when:

• It is quickly consumed (?)

• It has few close substitutes (?)

• The purchase of the product takes up a high proportion of a consumers' budget (?)

Exercise 18.

Fill in the table.

Point

│Edp│ Demand

a

P

a

b

b

c

c

d

d

e

e

1

0

f

X

Exercise 19.

The demand function is: X=3-0,5P.

a) │Edp│= 1 when P=........... and TR = ..............

b) Edp=0 when X = .................

c) X=2 when Edp = ..............

d) Demand is inelastic for.............<x< .............

e) When consumption is rising from ............. do......................., total revenue (TR) is also rising.

Exercise 20.

a) A firm producing cheese estimates that its price elasticity of supply is 0.8. Its current level of output is 20,000 units of cheese per month. Following a price increase of 10%, we would expect total output to rise / fall to ……..

b) A washing powder is found to have a price elasticity of supply of 1.2 If its price falls from £3.00 to £2.0, its supply will increase / decrease by ………

c) If the price elasticity of supply of UK produced coal is 0.6, an increase in the price for £30 to £33 per tonne will increase the quantity produced each week from 400,000 tonnes to ………………….

d) The supply of a good to a market is likely to be more elastic when:

• The time period required for production is small (?)

• Producers are operating close to full capacity (?)

Exercise 21.

The demand and supply functions are: X= - 0,5P + 7 and X= 3 P.

a) Determine the price and quantity equilibrium.

b) Calculate the price elasticity of demand at the equilibrium.

c) Calculate the price elasticity of supply at the equilibrium.

9

Anna Blajer-Gołę biewska M. Sc. Microeconomics

Exercise 22.

a) The demand for fresh bread from a bakery is estimated to have an income elasticity of + 0.3. Following a 15% rise in consumers real incomes (other factors held constant) we predict that demand for fresh bread will rise by…….. %

b) Calculate the income elasticity of demand when a consumer's income changes from $30,000 to $50,000. Quantity demanded when income is $30,000 is 90 and when the price is $50,000 is 140.

Exercise 23.

Tom’s income changed from $1000 to $1500 monthly. As a result his demand for a good X has fallen from 20 to 10 units monthly and his demand for a good Y has risen from 4 to 5 units monthly.

a) Calculate the income elasticity of demand.

b) X can be………………………….., Y can be……………………………….

c) Which graph is for X, which is for Y?

A B C

Q

Q

I

I

I

Q

Exercise 24.

Tom graduates from university with a degree in Economics and his income increases by £10,000 a year. Other things remaining the same, he decreases the quantity of donuts he buys. For Tom, donuts are an inferior good / a normal good.

Exercise 25.

Suppose that an 4% increase in the price of good Y results in an increase in the consumption of good X of 10%. This is an example of substitute / complementary good. Cross elasticity of demand Edc = ……………

Exercise 26.

Evidence suggests that the cross elasticity of demand between private and public transport, whilst positive, is very low.

Therefore it follows that:

a) a rise in the price of private transport would cause a small rise in the demand for public transport.

b) a fall in the demand for private transport would cause a small rise in the demand for public transport.

c) a rise in the price of private transport would cause a slight fall in the demand for public transport.

Exercise 27.

Increase in the price of tea from 10 do 14 per unit results in a decrease of demand for sugar from 4 to 2 tonnes and an increase in the consumption of coffee from 6 to 10 tonnes monthly.

a) Calculate the cross elasticity of demand for tea and sugar.

b) Calculate the cross elasticity of demand for tea and coffee.

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Anna Blajer-Gołę biewska M. Sc. Microeconomics

Exercise 28.

Compare various price elasticities of demand*.

TABLE 1. TABLE 2.

Product

ε

Product

ε

Gasoline, short-run

0.2

Airline travel, short-run

0.1

Automobiles, long-run

0.2

Taxi, short-run

0.6

Airline travel, long-run

2.4

Automobiles, short-run

1.2-1.5

Foreign travel, long-run

4.0

Chevrolet automobiles

4.0

TABLE 3. TABLE 4.

Product

ε

Product

ε

Airline travel, short-run

0.1

Movies

0.9

Airline travel, long-run

2.4

Radio and television receivers

1.2

Automobiles, long-run

0.2

Restaurant meals

2.3

Automobiles, short-run

1.2-1.5

Foreign travel, long-run

4.0

TABLE 5. TABLE 6.

Product

ε

Product

ε

Salt

0.1

Toothpicks

0.1

Matches

0.1

Coffee

0.25

Coffee

0.25

Tobacco products, short-run

0.45

Fresh tomatoes

4.6

Private education

1.1

TABLE 7.

Product

ε

Gasoline, short-run

0.2

Gasoline, long-run

0.7

Tires, short-run

0.9

Tires, long-run

1.2

* Data from http://www.mackinac.org/archives/1997/s1997-04.pdf

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