QUESTIONS

1.
How would you explain the following problems with the help of production
possibilities frontier?
a)
b)
c)
d)

The choice between the production of basic consumer goods and luxuries.
The problem of unemployment
The problem of economic growth
The production inefficiency bellow

2. Suppose the market demand for pizza is given by Qd= 300-20p and the market
supply for pizza is given by Qs= 20p-100, where P= Price (per pizza).
a) Graph the supply and demand curve for pizza using $5 through $15 as the value
of p.
b) In equilibrium, how many pizza would be sold and at what price?
c) What would happen if suppliers set the price of pizza at $15? Explain the market
adjustment process.
d) Suppose the price of hamburgers, a substitute for pizza, doubles. This leads the
doubling of the demand for pizza ( at each price consumers demand twice as
much pizza as before) write equation for the new market demand for pizza
e) Find the new equilibrium price and quantity of pizza from the equations.
3. Draw hypothetical supply and demand curves for tea. Show how the equilibrium price
and quantity will be affected by each of the following occurrences.
a)
b)
c)
d)

Bad weather wreaks havoc with the tea crop.

A medical report implying tea is bad for your health is published.
A technological innovation lowers the cost of producing tea.
Consumers income falls. (Assume tea is a normal good.)

4. What are the determinants of demand and supply? What is the effect of each of the
following events on the equilibrium price and quantity of hamburgers? Explain with the
demand-supply diagram model.
a) The Price of Pizza Increases.
b) The price of Bread increases.
c) The government requires that all the ingredients of hamburger be absolutely
fresh (that is, nothing can be frozen)
d) More firms enter the hamburger business.

5. Consider the following policies, each of which is aimed at reducing diseases by

reducing the consumption of cigarettes. Illustrate each of these proposed policies in a
supply and demand diagram of the cigarette market.
a)
b)
c)
d)

A tax on cigarette buyers

A tax on cigarette sellers
A price floor on cigarette
A tax on tobacco

6. Suppose that your demand schedule for Movie DVDs is as follows:

Price

Quantity Demanded

Quantity Demanded

(Income =Tk.12,000)

(Income =Tk.16,000)

Tk 80

50

60

100

42

55

120

34

40

140

26

32

18

22

a) Is Music DVD a normal good or inferior good? Explain your answer.

b) Calculate the price elasticity of demand as the price of DVDs increase from
Tk.100 to Tk.120 if (i) your income is Tk.12,000, and (ii) your income is
Tk.16,000.
c) Calculate the income elasticity of demand as your income increases from
Tk.12,000 to Tk.16,000 if (i) the price is Tk.100, and (ii) the price is Tk.140.
7. a. Define the price elasticity of demand, income elasticity of demand, cross price
elasticity of demand, supply elasticity of demand. Explain the relationship between total
revenue and the price elasticity of demand.
7. b. Determinants of price elasticity of demand.
7. c. Calculation of elasticity by using formulae.

7. d. How would the following changes in price affect total revenue? That is, would total
revenue increase, decrease, or remain unchanged?
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i. Price falls and demand is inelastic.

ii. Price rises and demand is elastic.
iii. Price rises and demand is inelastic.
iv. Price falls and demand is elastic.
v. Price falls and demand is of unit elasticity.

8. a. Distinguish between the short run and the long run in the context of production.
8. b. Sketch typical total product curve and marginal product curves with labor as the
variable input. Explain the law of diminishing marginal returns.
8. c. Define Increasing, decreasing and constant returns to scale

9. The government has observed that the free market price of potato is too low.

a) Suppose the government imposes a binding price floor in the potato market.
Draw a
Supply-and- Demand diagram to show the effect of this policy on the
price of potato and the quantity of potato sold. Is there a shortage or surplus of
potato?
b) Farmers complain that the price floor has reduced their total revenue. Is this
possible? Explain.
c) In response to farmers complaints, the government agrees to purchase all the
surplus potato at the price floor. Compared to the basic price floor, who benefits
from this new policy? Who loses?
10. The BD government administers two programs that affect the market for cigarettes.
Media campaigns and labeling requirements are aimed at making the public aware of
the dangers of cigarette smoking. At the same time, the Department of Agriculture
maintains a price-support program for tobacco farmers, which raises the price of
tobacco above the equilibrium price.

a) How do these two programs affect cigarette consumption? Use a graph of the
cigarette market in your answer.
b) What is the combined effect of these two programs on the price of cigarettes?
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c) Cigarettes are also heavily taxed. What effect does this tax have on cigarette
consumption?
11. Nimbus, Inc. makes brooms and then sells them door-to-door. Here is the
relationship between the number of workers and Nimbuss output in a given day:

Average

Workers

Output

Marginal

Total

Total

Product

Cost

Cost

20

20

50

90

120

140

150

155

Marginal
Cost

a) Fill in the column of marginal products. What pattern do you see? How might you
explain it?
b) A worker costs $100 a day, and the firm has fixed costs of $200. Use this
information to fill in the column for total cost.
c) Fill in the column for average total cost. What pattern do you see?
d) Now fill in the column for marginal cost. What pattern do you see?
e) Compare the column for marginal product and the column for marginal cost.
Explain the relationship.
12. a. Consider a typical firm under perfectly competitive market. For a given price,
explain how the firm chooses the level of output that maximizes profit. At that level of
output, show on your graph the firms total revenue and total costs.
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12. b. Instead of being price taker a monopoly firm is price maker. Does it mean that it
has unlimited market power of setting prices whatever it likes to maximize profits?
Comment.

13. Write short notes on the following:

a)
b)
c)
d)

Price discrimination
Cardinal utility and ordinal utility
Collusion and cartel
Consumer surplus and producer surplus

14. A commercial fisherman notices the following relationship between hours spent
fishing and the quantity of fish caught:

Hours
0 hours
1
2
3
4
5

Quantity of fishes ( in pounds)

0lb
10
18
24
28
30

a) What is the marginal product of each hour spent fishing?

b) Use these data to graph the fishermans production function. Explain its shape.
c) The fisherman has a fixed cost of $10 (his pole). The opportunity cost of his time
is $5 per hour. Graph the fishermans total-cost curve. Explain its shape.
15. a. What is meant by perfectly competitive market? When does a profit-maximizing
competitive firm decide to shut down?
15. b. Why does monopoly arise? Compare the production and pricing decision of
monopoly and perfect competition

16. Ball Bearings, Inc. faces costs of production as follows:

Total

Total
5

Fixed

Variable

Quantity

Costs

Costs

$100

$0

100

50

100

70

100

90

100

140

100

200

100

360

a) Calculate the companys average fixed costs, average variable costs, average
total costs, and marginal costs at each level of production.
b) The price of a case of ball bearings is $50. Seeing that she cant make a profit,
the Chief Executive Officer (CEO) decides to shut down operations. What are the
firms profits/ losses? Was this a wise decision? Explain.
c) Vaguely remembering his introductory economics course, the Chief Financial
Officer tells the CEO it is better to produce 1 case of ball bearings, because
marginal revenue equals marginal cost at that quantity. What are the firms
profits/losses at that level of production? Was this the best decision? Explain.
17. a. Graphically explain that a profit maximizing (or a loss minimizing) firm should
produce the output at which marginal revenue equals marginal cost.
17. b. A competitive firm should not produce at all if the average variable cost of
producing the output exceeds the price at which it can be sold- Why?

18. a. Definitions and features of all 4 types of markets with examples.

18. b. What is price discrimination? Give three real life examples of price discrimination.

19.
Q
1
2
3
4
5
6

Fixed cost
2
2
2
2
2
2

TVC
10
18
24
31
40
54

MC

AVC

a) Fill out the marginal cost and average variable cost columns.
b) If the market price is $6 how many units would the firm produce? Calculate its
profits/loss.
c) If the market price is $9 how many units would the firm produce? Calculate its
profits/loss.