Lecture 1

s.09.1

Lien and Laura both have bakeries. Laura can bake 1 cake or 1 brownie in 1 hour and Laura only works 5 hours
every day. Lien can bake 4 brownies in one day or two cakes in one day and like Laura, Lien only works 5 hours
per day.

What is the opportunity cost of 1 cake for Laura and Lien, in terms of the number of brownies? What about the
opportunity cost of 1 brownie in terms of the number of cakes for Laura and Lien?

Lecture 2, 3, 4 & 5
f.08.2

Exercise 1

For the following scenarios assume the market is in equilibrium.

When both S and D shift, there are 2 cases (D shifts in larger volume than S, D shifts in smaller volume
than S) and an extreme case (D and S shift with the same volume)

a. Coca and Pepsi are substitute goods. How would an increase in the price of Coca affect the equilibrium
price and the equilibrium quantity of Pepsi?

b. Suppose there is an increase in the price of lemons and sugar, which are an input in the production of
lemonade. What will happen to the equilibrium price and equilibrium quantity of Lemonade?

c. At the Ut Ut craft beer restaurant, beer and potato chips are complements. Suppose that there is an
increase in the price of beer and an increase in the price of potato, an input in the production of potato chips. How
would these changes affect the equilibrium quantity and equilibrium price in the market for potato chips?

d. What would happen to the equilibrium quantity and the equilibrium price of public bus, an inferior
good, if at the same time income increases and the price of petrol decreases? Assume for this question that petrol
is an input in the supply of public bus.

e. What happens to the equilibrium price and equilibrium quantity in the market for baby food if there are
technological advances in the production of baby food and at the same time a baby boom happens? Assume that a
baby boom means that a greater than normal number of babies are born during a period of time?

Exercise 2

Consider the market for electricity in Robinson Island. The price (P) is given in dollars per kilowatt hour (kWh)
and the quantity (Q) is measured in kilowatt hours (kWh). Demand and Supply equations for the electricity are as
follows:
Market Demand: P = 10 – Qd
Market Supply: P = 2 + Qs

a.
Find the equilibrium price and equilibrium quantity in the market for electricity. Plot a graph to describe the
equilibrium. Be sure your graph is completely and clearly labeled (label all intercepts, label the axis, label the
equilibrium price and the equilibrium quantity, label any curves that your draw).

b.
What is the value of consumer surplus and producer surplus at the equilibrium? Use a graph to illustrate
your work and find the numerical values for both the consumer and the producer surplus.

c.
Assume that during the past summer, because of the record-breaking heat, the government set a price
ceiling in the market for electricity at 7 dollars per kWh. Is there a shortage or a surplus in the market once the
price ceiling is set? Calculate the value of consumer surplus, producer surplus, and deadweight loss due to the
implementation of this price ceiling.

d.
Assume that the government sets a price ceiling at 5 dollars per kWh. With this new price ceiling is there a
shortage or a surplus in the market once the price ceiling is implemented? Calculate the value of consumer surplus,
producer surplus, and deadweight loss due to the implementation of this price ceiling.

Exercise 2
f.08.3

Assume that in the market for LCD TV, demand and supply are described by the following equations where Q is
the quantity of LCD TV and P is the price per screen:
Demand: 𝑄𝑑=300−10𝑃
Supply: 𝑠=10𝑃−200

a. Now assume the government imposes an excise tax of $5 per LCD screen sold. This excise tax is
imposed on the producers of the LCD screens. What will be the equation that describes the new supply curve,
written in x-intercept form, after the implementation of this excise tax?

b. Given the excise tax described in (b), calculate the new equilibrium quantity, the price consumers pay
with the tax, and the post-tax price producers receive once the excise tax is implemented.

c. Find the consumer surplus, producer surplus, and the government’s tax revenue given this excise tax.
Illustrate these areas on a clearly labelled graph.
Lecture 6 & 7 (with answers)
f.08.4

Exercise 1
A poor graduate student survives on two types of food items, pizza (P) and mushroom soup (S). He spends all of
his monthly income of $80 on food. One slice of pizza and one cup of soup both cost $1. You are also provided
the following information about the graduate student’s utility function:
U = P*S
MUP = S
MUS = P

a. Graph the budget line (BL1), with pizza on the x-axis and soup on the y-axis. Under current price levels, how
many slices of pizza and how many cups of soup does the student consume? Show how you found this optimal
bundle and then label this optimal bundle as Bundle A in your graph. What is his total utility at this optimal
bundle?

Budget line equation: P + S = 80 (1)

Indifference curve: Utility function: U = P*S
Optimal choice : IC tangents U, then MUP / MUS = PP / PS = 1 because PP = PS = 1.
Hence MUP / MUS = S / P = PP / PS = 1 (2)

Replace (2) into (1) : S = P = 40  U = 40x40 = 1600

b. To encourage healthy living, the mayor imposes an excise tax of $3 on each slice of pizza (it causes a rise in the
price of pizza). How does this tax affect the graduate student’s budget line? Provide an equation for this new
budget line, BL2. What is his optimal consumption bundle, Bundle B, now? Show how you found this optimal
consumption bundle. When this student maximizes his utility now, how much utility will he have? Show how you
found this answer. How much tax revenue is collected from this student? Illustrate in your graph BL2 and Bundle
B. Make sure your graph identifies all intercepts as well as the coordinates of any known points. Also in your
graphs include the indifference curves that represent the level of utility this student has at Bundle A and at Bundle
B. Label these indifference curves IC1 and IC2, respectively.

Budget line equation: (1+3)P + S = 80 (1)

(New BL is the BL rotated inward)
Indifference curve: Utility function: U = P*S
Optimal choice: MUP / MUS = PP / PS = 4.
Hence MUP / MUS = S / P = PP / PS = 4  PP = 4Ps (2)

Replace (2) into (1) : P = 10, S = 40 U = 10 x 40 = 400

Lecture 8-12

If you are provided information for TC or TR, you are expected to calculate MC or MR after finishing
lecture 9.

These following exercises are for lecture 10-12, but you can also read it for reference of the midterm test

Exercise 1

Suppose there is a perfectly competitive rice market with a market demand curve:    P = 100 – (1/10)Q  
where P is the market price and Q is the market quantity.  
Furthermore, suppose that all the farmers in this market are identical and that a representative  farmer’s 
total cost is:  TC = 100 + 5q + q2   where q is the quantity produced by this representative  farmer. 
The representative farmer’s marginal cost is:  MC = 5 + 2q.    (Unit of Q : MT, unit of P : USD 1000) 

Questions:
a. What is the average total cost for the representative farmer?   
b. In the long run, how many units will this farmer produce and what price will it sell each unit for in  this market?
c. What is the total market quantity produced in this market in the long run?   
d. How many farmers are in the industry in the long run?   
e. How do long‐run profits change for each farmer if demand decreases?  Increases?  

f.08.5

Exercise 2

Suppose you are given the following information about a monopolist:

Market Demand Curve: P = 200 – 2Q

Total Cost for the monopolist: TC = 20Q + Q + 100  MC(Q) = TC’(Q)

2

Use this information to answer this set of questions.

1) What is the profit maximizing price and quantity for this monopolist given the above information? Show how
you found your answer and what your reasoning was. Calculate the monopolist’s profit.

2) Calculate the monopolist’s consumer surplus (CS), producer surplus (PS), and deadweight loss (DWL). In a
well-labeled graph illustrate this monopolist: be sure to include the areas that represent CS, PS, and DWL in your
graph.

3) Suppose demand increases by 90 units at every price. Find the equation for the monopolist’s new demand
curve. Then, calculate the new profit maximizing price and quantity for this monopolist given the new demand
curve. Calculate the new level of monopoly profits.

4) Calculate the value of consumer surplus (CS’), producer surplus (PS’), and deadweight loss (DWL’) for this
monopolist given the information in (3). In a well-labeled graph illustrate this monopolist: be sure to include the
areas that represent CS’, PS’, and DWL’ in your graph.