UNIVERSITY OF BOTSWANA

DEPARTMENT OF ECONOMICS

ECO-111 BASIC MICROECONOMICS

Tutorial questions

Topic- 1 and Topic-2

1. What is economics?

2. Write short notes on the following perspectives

a) Scarcity and choice
b) Rational behaviour and rational self-interest
c) Generalisations
d) Ceteris Paribus

3. Distinguish between the following concepts

a) Microeconomics and macroeconomics

b) Normative economics and positive economics
c) Economic principle and economic policy
d) Independent variable and dependent variable
e) Direct relationship and indirect relationship between any two
variables

4. Explain the reasons why every economy is faced with the basic
economic problem to answer fundamental questions such as what to
produce, how to produce, for whom to produce?

5. Differentiate between the following concepts

a) Consumer goods and capital goods
b) Public goods and private goods

6. The alternative production possibilities faced by the economy of

Botswana in the production of cloth and bread are indicated in the
following Production Possibilities Table (PPT).

Production Bread Cloth

possibilities (000’ loaves) (000’ metres)
Combination
A 0 10
B 1 9
C 2 7
D 3 4
E 4 0

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 a) With cloth on vertical axis (Y) and bread on the horizontal axis (X),
graph the above data using an appropriate scale to derive
Production Possibilities Curve (PPC)
b) If the economy wants to move from combination B to the
combination C, what is the opportunity cost of producing one
million more loaves of bread?
c) Explain how the law of increasing opportunity cost is reflected in
the shape of the production possibilities curve.

7. What is meant by demand and demand schedule?

8. What is law of demand?

9. Why is that demand curve downward sloping?

10. Distinguish between change in demand and change in the quantity

demanded.

11. Explain the non-price determinants of demand and their effect on

demand.

12. What will each of the following have on the demand for shoes? Show
these effects graphically.

a) Bata shoes become fashionable.

b) Government workers have a higher income due to a generous
salary increment (assuming Bata shoes are normal goods).
c) The price of a substitute to Bata shoes, ‘Nike shoes’ falls.
d) The consumers expect the price of Bata shoes to fall in the near
future (assuming they will still fashionable)
e) An increase in interest rates (assuming consumers are net borrowers)
f) A reduction in income tax

13. Distinguish between the following:

a) Normal and inferior goods.
b) Substitutes and complements goods.

14. How will the demand for normal a good change when income rises?
How will the demand for a normal good change when income falls?
How do your answers change if the good is an inferior good? Explain
with the help of diagrams

15. How will the demand for a good change when the price of its substitute
decreases? How will the demand for a good change when the price of
its complementary good falls? Explain with the help of diagrams.

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16. Define supply schedule and the law of supply. What is the relationship
between price and quantity supplied? Why is the supply curve upward
sloping?

17. Distinguish between a change in supply and a change in quantity

supplied.

18. Discuss the non-price determinants of supply that shift the supply curve
and show graphically the effect of the following.
a) Increase in wages and the prices of raw material that influences cost
of production
b) Technological progress
c) Negative expectations of suppliers
d) Increase in the number of suppliers

19. Explain, with diagrams, the following

a) Market equilibrium
b) Market equilibrium price and equilibrium quantity
c) Market surplus and market shortage

20. With the help of diagrams, explain the effect of the following on
equilibrium price and equilibrium quantity
a) Supply increase and demand decrease
b) Supply increase and demand increases
c) Supply increases and demand increases
d) Supply decrease and demand decrease
e) Supply remains constant and demand increases
f) Supply increases and demand remains constant

21. What is price elasticity of demand? How is it measured?

22. Explain the following graphically

a) Elastic demand
b) Unit elastic
c) Inelastic demand
d) Perfectly elastic
e) Perfectly inelastic

23. Distinguish between arc/midpoint elasticity and point elasticity

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24. Suppose the demand schedule for CDs is as follows

Price per CD (Pula) Quantity demanded

8 1
7 2
6 3
5 4
4 5
3 6
2 7
1 8

a) Calculate the elasticity coefficient for each price change and

quantity change. At what price(s) or price range is the demand
elastic, unit elastic and inelastic?
b) By using the above figures, draw the demand curve.
c) What price would bring in the highest revenue to the
seller?
d) How would the price changes affect total revenue?

25. When price of milk is reduced from P10 to P7 per litre in Gaborone city,
milk purchased by Mrs. Doreen per week for her family has increased
from 12 to 14 litres. Calculate price elasticity of demand for milk by using
point elasticity and arc elasticity methods. Indicate whether the
demand is elastic or inelastic.

26. How do businesses and government use the concept of elasticity while
fixing the price of a product or service and imposing taxes on people?

27. Discuss the factors that determine price elasticity of demand.

28. Define elasticity of supply and explain how it is measured?

29. Explain the following and give examples of products that are relevant
for each:
Immediate market
Short run market
Long run market

30. What are the determinants of Price elasticity of supply?

31. Explain cross-price elasticity of demand? How is it measured?

32. Analyse cross-price elasticity of demand for the following

Substitute goods
Complementary goods
Independent goods

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 33. Define income elasticity of demand

34 Explain income elasticity of demand for the following

Normal goods
Inferior goods

35. What are regulated prices? Distinguish between price ceiling and price
floor

36. Explain, with the help of diagrams, the implications of price ceiling and price
floor for equilibrium quantity

Questions on Topic 3 and 4

1. Distinguish between the following

a) Accounting costs and economic costs
b) Explicit costs and implicit costs
c) Short-run and long-run period
d) Fixed costs and variable costs
e) Short run costs and long run costs

2. John runs a bakery firm. He hires one helper at P20, 000 per year, pays
annual rent of P5000 for his bakery, and spends P50, 000 for materials. He
has P75, 000 of his own funds invested in equipment (baking machine,
ovens etc.) that could earn him P7500 per year if alternatively invested. He
has been offered P35, 000 per annum to work as a baker for a competitor.
He estimates his entrepreneurial talents are worth P25, 000. Total annual
revenue from bread sales is P190, 000. Calculate the accounting profit and
economic profit for John’s bakery firm.

3. Make out the distinction between normal profit and economic profit

4. Define the following concepts:

a) Marginal Product (MP), Average Product (AP) and
Total Product (TP)
b) Marginal revenue, Average Revenue and Total Revenue

5. What is the law of diminishing returns? How is it relevant to the short run?

6. How does the change in the size of the variable factor (labour) in the short run
influence the shape of the TP, MP and AP curves?

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7. Complete the table below:

Variable factor (labour) T.P AP MP

0 0
1 15
2 34
3 51
4 65
5 74
6 80
7 83
8 82

a) Present the above data graphically

b) Show the three stages of production as per the law of diminishing
returns

8. Explain the relationship between the following in the three stages of

production:
i. The TP and the MP
ii. The AP and the MP
iii. The AP and the TP

9. Define the following:

a) Total Cost; b) Average Total cost; c) Fixed cost;

d) Average fixed cost; e) Total variable cost; f) Average
variable cost g) Marginal cost

10. By using the figures given for an industry in the short run, complete the table
below. Draw the curves of AFC, AVC, ATC and MC by using the figures and
explain their relationship.

Output (units) TFC TVC TC AFC AVC ATC MC

1 P50 150 - - P100 - -
2 - 160 - - - 105 -
3 - 180 - - - - 20
4 - - - - - 67.5 -
5 - - - 54 - -

11. Why is the law of diminishing returns not applicable to a firm in the long run?

12. What is meant by the economies of scale? Indicate the important factors that
explain its existence

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13. What are the diseconomies of scale? What are the factors that bring
diseconomies of scale?

14. Why is the long run ATC Curve of a firm generally U shaped?
Use your knowledge of economies/diseconomies of scale to explain the
shape of the long-run average cost curve.

15. Why is the equality of Marginal Revenue and Marginal Cost essential for profit
maximisation in all market structures?
16. Explain the basic characteristics of a pure/perfect competitive market.
17. Under pure competition the demand curve of the individual firm is perfectly
elastic, why?

18. Why does the following situation arise under perfect competitive market?
Average Revenue (AR)= Marginal Revenue (MR) =Price (P)

19. Explain why price can be substituted for marginal revenue in the MR = MC rule
when an industry is purely competitive.

20. Under perfect competition, at what stage can a firm:

a. Continue to operate even though it does not realise an economic
profit?
b. Close or shut down?

21. Explain how a competitive firm will:

(a) Attain equilibrium
(b) Attain economic profit
(c) incur losses

22. What are the characteristics of pure monopoly? Compare them with the
characteristics of pure competition

23. Explain the factors that prevent the entry of other firms under monopoly.

24. How do the entry barriers help the monopoly firm to derive economies of
scale?
25. Explain why the monopolist’s demand curve is downward slopping, causing
the MR curve to lie below it?
26. Why does demand curve of monopoly firm differ from that of pure
competitive firm?
27. The pure monopolist has no supply curve why?

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28. Discuss how a monopolist firm adjusts the price on the elastic and inelastic
segments of its demand curve in order to increase/maximise its total
revenue
29. Explain why a profit maximising monopolist is unlikely to operate on the
inelastic part of the demand curve facing him.

30. The following data present the cost and revenue of a pure monopolist.

Quantity Total Total AR MR ATC MC Profit/Loss

Revenue Cost
1 P162 P190
2 304 270
3 426 340
4 528 400
5 610 470
6 672 550
7 714 640
8 736 750
9 738 880
10 720 1030

(a) Calculate AR, MR, ATC and Profit/Loss.

(b) Plot the AR, MR, ATC and MC schedules on the same graph and estimate
the profit-maximising price and quantity.

31. What is price discrimination?

32. How will the monopolist be able to charge different prices to different
consumers of similar goods and services in different markets? How does the
monopolist separate the markets?
33. Discuss the welfare effects of monopoly