Microeconomics Answers

“There is a high cross elasticity of demand between new and old cars”. Discuss the statement by explaining the features of cross elasticity of demand. Also compare and contrast cross elasticity with other types of elasticities of demand.

The competition commission of india had imposed a penalty of more than Rs 60 billion on cement firms in 2012.
Justify the same based on following point
a) how do you think the cartel would affect the price & quantity? Can prices diverge significantly from marginal cost in cement industry, and why?
b) How do you think the cartel formation helps producers?
c) how do you think the cartel impacts the consumers?
d) how does the cartel affect overall welfare of the society and why?

The state of Kansas, is increasing the cost of fungicide and insecticide used by growers of blueberries. The most impacted will be Shawne County growers, who produce about 80% of the nation’s crop.
Illustrate this situation with graphs for the blueberries market and the Shawne County grower. Start with the situation in long run equilibrium before the cost of fungicide and insecticide increase. Next, show and discuss the short run and long run effects of the fungicide and insecticide cost increase. Explain with words + graphs.

Price (Rupees per Ice-cream cup) Quantity demanded (Ice-cream cup per month) Quantity Supplied (Ice-cream cup per month)
140 500 1500
120 750 1200
100 1000 1000
80 1250 750
60 1500 600
40 1750 300

⦁ Plot the demand and supply curves and show the equilibrium price and quantity. Also, briefly explain if law of demand and supply holds true in this case. (2 Marks)
⦁ Is there surplus or shortage in the market at price Rs.40? At price Rs.120? (2 Marks)
⦁ Suppose if the price of frozen yogurt decreases, elucidate the change it might cause on the ice-cream market given the consumption behavior and also illustrates the same through using 2-dimensional space. In your opinion what type of elasticity best describes this situation? (3 marks)
⦁ Suppose the price of milk decreases from the equilibrium price. Explain what will happen to the supply curve and also indicate the same on the graph.

There are two goods, X and Y, and their marginal utiliy is as follow:
Units of X. MU of X. Units of Y. MU of Y
1. 10. 1. 8
2 8. 2. 7
3. 6. 3. 6
4 4. 4. 5
5. 3. 5. 4
6. 2. 6. 3
If the income is $9 and the prices of X and Y are $2 and $1, respectively, what quantities of each will you purchase in order to maximize utility? What total utility will be realized? Assume that, other things remaining unchamged, the price of X falls to $1. What quantities of X and Y will now be purchased? Using the two prices and quantites for X, derive a demand schedule for X.

A business firm sells goods at the price of Rs 450.The firm has decided to reduce the price of good to Rs 350.Consequently, the quantity demanded for the good rose from 25,000 units to 35,000 units. Calculate the price elasticity of demand.

A news website reported (Feb. 17, 2020) that ridership of Karachi Metro Bus declined after a fare increase: “There were nearly four million fewer riders in December 2019, the first full month after the price of a token increased Rs. 25 to Rs.150, than in the previous December, a 4.3 percent decline.”
i. Use these data to estimate the price elasticity of demand for Karachi Metro Bus. (2 Marks)
ii. According to your estimate, what happens to the Karachi Metro Bus’s revenue when the fare rises? (0.5 Marks)
iii. Why might your estimate of the elasticity be unreliable?

⦁ Plot the demand and supply curves and show the equilibrium price and quantity. Also, briefly explain if law of demand and supply holds true in this case. (2 Marks)
⦁ Is there surplus or shortage in the market at price Rs.40? At price Rs.120? (2 Marks)
⦁ Suppose if the price of frozen yogurt decreases, elucidate the change it might cause on the ice-cream market given the consumption behavior and also illustrates the same through using 2-dimensional space. In your opinion what type of elasticity best describes this situation? (3 marks)
⦁ Suppose the price of milk decreases from the equilibrium price. Explain what will happen to the supply curve and also indicate the same on the graph. (1mark)

Assume a country produces haircuts and shirts with inputs of labour. The country has 1000 hours of labour available. A haircut requires ½ hour of labour, while a shirt requires 5 hours of labour.
⦁ Construct country’s production- possibility frontier. (2 marks)
⦁ The country is faced with massive unemployment. How will the PPF be impacted? Explain and indicate on graph. ( 1 mark)
⦁ The country discovers new technology and moves towards automation. Justify how this will impact the PPF for the economy. Also, indicate the same through the graph. (1mark)