SCHOOL OF ECONOMIC, FINANCE AND BANKING

SEMESTER 1 2013/2014
BEEB1013 PRINCIPLES OF ECONOMICS
Exercise 1
1.

Here is a production possibilities table for: automobiles (A) and cocoa (K).
Types of Production
A
0
30

Automobiles (A)
Cocoa (K)

Production Alternatives
B
C
D
E
2
4
6
8
27
21
12
0

a) Draw the production possibilities frontier curve. Upon what specific

assumptions is this production possibilities frontier curve based?
b) If the economy is at point C, what is the cost of one more automobile? One
more cocoa? Explain how this curve reflects increasing opportunity costs.
c) What must the economy do to operate at some point on the production
possibilities frontier?
2.

Brazil produces ethanol from sugar, and the land used to grow sugar can be
used to grow food crops. Suppose that Brazils production possibilities for
ethanol and food crops are given in the table.
Ethanol
(barrels per day)

Food crops
(tons per day)

70
64
54
40
22
0

0
1
2
3
4
5

a) Draw a graph of Brazils production possibilities frontier (PPF) and explain

how your graph illustrates scarcity.
b) If Brazil produces 40 barrels of ethanol a day, how much food must it
produce if it achieves production efficiency?
c) Why does Brazil face a tradeoff on its PPF?
d) If Brazil increases its production of ethanol from 40 barrels per day to 54
barrels per day, what is the opportunity cost of the additional ethanol?
e) If Brazil increases its production of food crops from 2 tons per day to 3 tons
per day, what is the opportunity cost of the additional food?
f) What is the relationship between your answers to d and e?
g) Does Brazil face an increasing opportunity cost of ethanol? What feature of
the PPF that youve drawn illustrates increasing opportunity cost?

3. A farm grows wheat and produces beef. The marginal cost of producing each of
these products increases as more of it is produced.

a) Make a graph that illustrates the farms PPF.

b) The farm adopts a new technology that allows it to use fewer resources to
fatten cows. Use your graph to illustrate the impact of the new technology
on the farms PPF.
c) With the farm using the new technology described in b), has the opportunity
cost of producing a ton of wheat increased, decreased, or remained the
same? Explain and illustrate your answer.
d) Is the farm more efficient with the new technology than it was with the old
one? Why?
4. Suppose that Yucatans production possibilities are given in the table below.
Food
(pounds per month)

Sunscreen
(gallons per month)

300
200
100
0

0
50
100
150

a) Draw a graph of Yucatans PPF and explain how your graph illustrates a
tradeoff.
b) If Yucatan produces 150 pounds of food per month, how much sunscreen
must it produce if it achieves production efficiency?
c) What is Yucatans opportunity cost of producing 1 pound of food?
d) What is Yucatans opportunity cost of producing 1 gallon of sunscreen?
e) Does Yucatan face an increasing opportunity cost of food? What feature of a
PPF illustrates increasing opportunity cost and why does the PPF that you
have drawn not have this feature?
5. a) Explain how competitive market system and mixed economy solve all
three basic economic problems.
b) Explain two advantages and disadvantages of the competitive market
system and the centralized economic system.
6.

In January 2009, the price of petrol per liter is RM1.70. In May 2010, the price
increases to RM2.10 per liter. Assume there is no change in income, population,
or any other factors on consumption decision. What is the effect of the price
increase on
a) demand for petrol? Explain your answer.
b) quantity of petrol demanded? Explain your answer.

7.

What is the effect on supply and the supply curve for each of the followings?
a) an increase in production technology of computers.
b) a decline in the price of good A, a good whose production requires
substantially the same technique as does the production of good B
c) a decline in the number of firms.

8.

a) Explain how market equilibrium prevail?

b) What happens to price level when there is a shortage or surplus?

9.

The table below shows the demand and supply of crackers in a week:

a)

Price
(cent per
packet)
40
50
60
70
80
90
100
110

Qd
(000 packets)

Qs
(000
packets)
90
100
110
120
130
140
150
160

What is the
equilibrium
price
and
quantity for
crackers?
Plot
the
equilibrium
point.
b)
If
the price of
crackers is 60 cent per packet, show what happens in the market.
c) Let assume a new type of junk food comes into the market and as such
demand for crackers decline by 40 thousand packets per week. What
happens to the market equlibrium price and quantity of crackers?
170
160
150
140
130
120
110
100

10. In 2008, the continuation of a 6-year drought in Australia reduced the amount
of water available to irrigate wheat crop. Farmers responded by reducing the
amount of land devoted to wheat. The drought was a major factor in the
change of wheat price.
Based on the above;
a) Explain the effect of the severe drought on the supply of wheat crop and its
supply curve?
b) What is the effect of the farmers action on the equilibrium price and
quantity of wheat?
c) If Australian farmers grow different wheat varieties and growing techniques
that require less water, explain what will happen to the equilibrium price
and quantity of wheat crop?
11. Oil soars to new record over $135
The price of oil hit a record high above $135 a barrel on Thursdaymore than
twice what it cost a year ago ... OPEC has so far blamed price rises on
speculators and says there is no shortage of oil.
BBC News, 22
May, 2008
a) Explain how the price of oil can rise even though there is no shortage of oil.
b) If a shortage of oil does occur, what does that imply about price
adjustments and the role of price as a regulator in the market for oil?
c) If OPEC is correct, what factors might have changed demand and/or supply
and shifted the demand curve and/or the supply curve to cause the price to
rise?
12.

The following events occur one at a time:

(i)
The price of crude oil rises.

(ii) The price of a car rises.

(iii) All speed limits on highways are abolished.
(iv) Robots cut car production costs.
Which of these events will increase or decrease (state which occurs)
a)
b)
c)
d)

the
the
the
the

demand for gasoline?

supply of gasoline?
quantity of gasoline demanded?
quantity of gasoline supplied?

13. The demand and supply schedules for gum are given in the table.
Price
(cents per
pack)

Quantity demanded
(millions of pack
per week)

Quantity supplied
(millions of pack
per week)

20
40
60
80
100

180
140
100
60
20

60
100
140
180
220

a) Draw a graph of the gum market, label the axes and the curves, and mark
in the equilibrium price and quantity.
b) Suppose that the price of gum is 70 cent a pack. Describe the situation in
the gum market and explain how the price adjusts.
c) Suppose that the price of gum is 30 cent a pack. Describe the situation in
the gum market and explain how the price adjusts.
d) A fire destroys some factories that produce gum and the quantity of gum
supplied decreases by 40 million packs a week at each price. Explain what
happens in the market for gum and illustrate the changes on your graph.
e) If at the time the fire occurs in d), there is an increase in the teenage
population, which increases the quantity of gum demanded by 40 million
packs a week at each price. What are the new equilibrium price and
quantity of gum? Illustrate these changes in your graph.
14. The table sets out the demand and supply schedules for potato chips.
Price
(cents per
bag)

Quantity demanded
(millions of bags
per week)

Quantity supplied
(millions of bags
per week)

50
60
70
80
90
100

160
150
140
130
120
110

130
140
150
160
170
180

a) Draw a graph of the potato chip market and mark in the equilibrium price
and quantity.

b) Describe the situation in the market for chips and explain how the price
adjusts if chips are 60 cent a bag.
c) If a new dip increases the quantity of potato chips that people want to buy
by 30 million bags per week at each price, how does the demand and/or
supply of chips change?
d) If a new dip has the effect described in c), how does the price and quantity
of chips change?
e) If a virus destroys potato crops and the quantity of potato chips produced
decreases by 40 million bags a week at each price, how does the supply of
chips change?
15. a) Rain spoils the strawberry crop. As a result, the price rises from $4 to $6 a
box and the quantity demanded decreases from 1,000 to 600 boxes a week.
Over this price range, what is the price elasticity of demand? Describe the
demand for strawberries.
b) If the quantity of dental services demanded increases by 10 percent when
the price of dental services falls by 10 percent, is the demand for dental
services inelastic, elastic, or unit elastic?
c) In 2003, when music downloading first took off, Universal Music slashed the
prices of a CD from an average of $21 to an average of $15. The company
said that it expected the price cut to boost the quantity of CDs sold by 30
percent, other things remaining the same.
i) What was Universal Musics estimate of the price elasticity of demand
for CDs?
ii) Given your answer in i), if you were making the pricing decision at
Universal Music, would
you cut the price, raise the price, or not
change the price? Explain your decision.
16. a) The demand schedule for hotel rooms is given in the table.
Price
(dollars per night)

Quantity demanded
(number of rooms per
night)

300
200
100
0

0
50
100
150

i) What happens to total revenue if the price falls from $400 to $250 a
night?
ii) What happens to total revenue if the price falls from $250 to $200 a
night?
iii) At what price is total revenue at a maximum? Explain and interpret your
answer.
iv) Is the demand for hotel rooms elastic, unit elastic, or inelastic?
b) The table gives the supply schedule of long distance phone calls.

Price
(cents per minute)

Quantity supplied
(millions of minutes per
day)

10
20
30
40

200
400
600
800

Calculate the elasticity of supply when

i) The price falls from 40 cents to 30 cents a minute.
ii) The average price is 20 cents a minute.

INSTRUCTIONS:
1.
2.

Distributions of groups and questions are given in the table below.

All answers must be submitted by 20 October 2013.
Question No.

Groups

1, 14
2, 15
3, 16
4, 13
5, 11, 12
6, 7, 16
5, 7, 12
6, 8, 15
9, 10
10, 11
1, 11
2, 12
3, 13
4, 14
8, 9, 15

1, 18, 28, 43
5, 22, 32, 39
9, 26, 35, 40
13, 31, 34, 44
17, 27, 38
21, 23, 30
19, 25, 36, 42
15, 29, 46
47
4, 11, 37
12, 41, 48
2, 8, 45
6, 16, 33
3, 20, 10
7, 14, 24