1. What does the expression "choosing at the margin" mean? How does the expression relate to opportunity cost?
2. In one hour, Liz can make 30 smoothies or 30 salads. In this same hour, Joe can make 6 smoothies or 6 salads. Demonstrate that neither Liz nor Joe can gain from trade.Joe can now make 6 smoothies or 12 salads in an hour, while there is no change in the productivity of Liz. Demonstrate how and why Liz can be made better off.
3. (a) Using diagrams, differentiate between productive efficiency and allocative efficiency.(b) What are the key differences between a linear PPF and a concave PPF?
(c) Which PPF is better representation of economic reality and why?
4. Using the supply and demand model, show and explain what would happen to the
equilibrium price and quantity of mobile phones if the following events were to occur:
(a) Mobile phones become a trendy fashion accessory.
(b) Scientists confirm that mobile phones cause brain cancer.
(c) There is an increase in the cost of microchips that are used in the manufacture of mobile phones.
(d) There is dramatic drop in the wages of workers in mobile phone factories.
(e) Both events in a) and c) occur at the same time.
(f) Both events in a) and d) occur at the same time.
5. (a) Suppose the demand curve is represented by the equation: P = 1000 - 50Qd. show theintercept and the slope. Re-write the equation in terms of quantity demanded.
(b) Suppose that the supply curve is represented by the equation: P = 200 + 50Qs. Show the intercept and the slope. Re-write the equation in terms of quantity supplied.
(c) Find the equilibrium price and the equilibrium quantity.
6. A university student complains that he can no longer visit his university pub five times a week. Since the price of his favourite beer went up to $2 a glass from $1.60, he has been dropping in only four times a week. Assuming this student consumed the same amount of beer per visit before and after the price change, calculate the elasticity of his demand for pub dispensed beer.
7. Are the following statements true or false? And why? [Hint: Analyse similar statements as a group].
"Elasticity is another term for sensitivity".
"Elasticity is another term for responsiveness".
"Elasticity is another term for the law of demand".
"Price elasticity depends only on the price of a product".
"Price elasticity depends only on the quantity of a product".
"Price elasticity depends only on the slope of the demand curve".
"A linear demand curve has the same slope throughout".
"A linear demand curve has the same price elasticity throughout".
"Price elasticity depends on the price, the quantity and the slope of the demand curve".
8. Write the point formula and the mid-point formula for calculating price elasticity of demand. Explain the two formulas. Why do we need two formulas?
9. Suppose the demand curve and supply curves are the same as Q5 (above). Calculate and show on a diagram:
(a) Qd and Qs if a price ceiling is set at $300. If this price ceiling is enforced, how many units will be traded on the market? What is the numerical difference between Qd and Qs, and what is this known as?
(b) Qd and Qs if a price floor is set at $900. If this price floor is enforced, how many units will be traded on the market? What is the numerical difference between Qd and Qs, and what is this known as?
11. (a) Define "total surplus". What is the relationship between "total surplus" and allocative efficiency?
(b) Differentiate between the terms "deadweight loss" and "potential loss from search cost".
(c) Using the market in Q10 (above), calculate the size of the deadweight loss that is generated by both the price ceiling and price floor.
12. (a) If there are no externalities, explain how a specific per-unit tax can result in an economically inefficient outcome.
(b) If there are no externalities, explain how a specific per-unit subsidy can result in an economically inefficient outcome.