# ECON101 Price Elasticity of Supply and Demand Final Assignment all questions should be answered, the graphs should be clear and titled, calculations must b

ECON101 Price Elasticity of Supply and Demand Final Assignment all questions should be answered, the graphs should be clear and titled, calculations must be shown and the formula used. Question 1 (16 marks)
Suppose the demand equation for a certain product is given by P = 180  2Q, and the supply
equation is given by P = 4Q. (Price is in \$ and Quantity is in kg)
a) If the government imposes a maximum price (price ceiling) of \$130 per kg of this
product, it would lead to a black-market price. Do you agree? Explain. (4 marks)
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b) Without calculating, what can we say about the price elasticity of demand for this
good if the price is more than 90 but less than 180? (4 marks)
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c) Without calculating, what can you say about the price elasticity of supply of this good?
(4 marks)
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d) Suppose the current market price of the good was \$95. If the seller wanted to increase
his total revenue, should he increase the price or decrease the price? (4 marks)
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Question 2 (10 marks)
Consider the market above, with the original demand and supply curves labelled D and S.
Now assume a tax on each unit of output is imposed on these producers. The new supply
curve is labelled as S + t.
Answer the following questions based on above graph.
a) What is the tax rate? \$ _____________ (2 marks)
b) How much of the tax is actually paid by the consumers? \$____________ (2 marks)
c) Based on how much consumers pay, what can you say about the price elasticity of
demand? (2 marks)
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d) Shade the loss of the consumer surplus due to the tax policy. (2 marks)
e) Calculate the government tax revenue. \$ ____________________ (2 marks)
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Question 3 (6 marks)
a) What do we call a good which has a negative income elasticity of demand? (2 marks)
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b) What kind of good has a very high income elasticity of demand? (2 marks)
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c) What is the relationship between two goods if their cross price elasticity is negative?
(2 marks)
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Question 4 (6 marks)
The following table provides some data on GDP (based on purchasing power parity) and
growth rate of GDP for India and the USA in 2018. Assuming a constant annual growth
rate, when do you expect India to surpass the USA in terms of GDP (purchasing power
parity)?
Country
USA
India
Nominal GDP ( \$ trillion)
19.9
10
Growth Rate
3.5
7
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Question 5 (13 marks)
Use the following information of a competitive firm to answer (a) through (f)
Quantity
0
1
2
3
4
5
6
Total cost (£)
100
134
154
177
216
266
366
Average cost (£)
?
134
77
59
54
53.2
61
34
20
23
39
50
100
130
120
110
100
90
80
130
110
90
70
50
30
130
240
330
400
450
480
Marginal cost (£)
Price (£)
140
Marginal revenue (£)
Total revenue (£)
0
a) Is this firm operating in the short or the long run? Explain. (2 marks)
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b) Is this firm operating under perfect competition or monopolistic competition?
Explain. (2 marks) ______________________________________________________
c) What level of output will this firm produce in the short run? ________________
Explain. (2 marks)
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d) Calculate the total profit of the firm at the profit maximizing level of output. [2
marks]
\$ __________________________
e) Should this firm stay open, or shut down in the Short Run? Explain. (2 marks)
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f) What will happen in the long run if this firm represents a typical firm in the industry?
(3 marks)
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Question 6 (10 marks)
a) Suppose that there are 10 million people living in a certain country and its
unemployment rate is known to be 10%. From these statistics, we can conclude that
1 million people of this country are unemployed. Do you agree? Explain. (3 marks)
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b) List the three main types of unemployment. (3 marks)
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c) What type of unemployment might older workers be more prone to experience than
younger workers? Explain. (2 marks)
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d) Using the following data calculate the labor force participation rate. (2 marks)
Working-age population = 220 million
Labor force = 180 million
Number employed = 160 million
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Question 7 (9 marks)
What are the defining differences among the three main schools of thought in Economics,
Classical, Keynesian and Monetarist with regard to full employment?
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Question 8 (8 marks)
Use the following production and price information of an imaginary economy to answer
the questions below, using 2016 as the base year.
Year
2016
2017
2018
Hats
1,200
1,400
1,500
Price (\$)
\$4.00
\$5.00
\$5.50
Cups of Tea
2,900
2,800
3,000
Price (\$)
\$2.00
\$2.50
\$3.00
a) Calculate the nominal GDP for year 2017. ___________ (2 marks)
b) Calculate the real GDP for year 2018. ___________ (2 marks)
c) Now consider that in this economy, the CPI basket contains 3 hats and 7 cups of tea.
Use this and the price information above to calculate the CPI for year 2017.
Use 2016 as the base year.
______________________ (2 marks)
d) What was the inflation rate from year 2016 to 2017?
______________________ % (2 marks)
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Question 9 (12 marks)
a) Explain in a short paragraph (5-7 sentences), and with the support of a diagram, how
the market will move an economy with inflationary gap towards the full employment
equilibrium. (8 marks)
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b) Why do we adjust for purchasing power parity when comparing real GDP per capita
data between countries? (4 marks)
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Question 10 (10 marks)
Economists expect the Federal Reserve Bank of USA to increase its interest rate next month
by 1 percentage point and the Bank of Japan to lower its interest rate by a similar amount.
Using demand and supply curves explain the effect of the two announcements on the US
dollar-yen exchange rate.
Label all the graphs and axis appropriately.
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