CHAPTER 1: BASIC CONCEPTS

1. The PPF of an economy is given as below

80 A

60
•B
40
•F •C •H
20
•D
•E X
O 200 300 350 380

a. Which point is inefficient in the graph? Why?

b. Which are the efficient points in the graph?
c. Make assumption that the economy is operating from A to E. Compute the
opportunity cost for producing from C to D.
C (300X, 40Y)
D (350X, 20Y)
𝛥𝑌 2
The opportunity cost for producing from C to D is = 𝛥𝑋 =5

d. If there is no factor of production in making Y goods, how many X goods are

produced?
If there is no factor of production in making Y goods, there is no Y goods are produced.
That means the X goods are maximum at the level X = 380 units
f. Which point on the PPF is considered as the maximum opportunity cost?
we have to compute the opportunity cost from:
60−80
A- B: the opportunity cost is = 200−0 = 1/10
40−60
B-C: the opportunity cost is = 300−200 = 1/5

C-D: done = 2/5

0−20
D-E: the opportunity cost is = 380−350 = 2/3

Remember: The opportunity cost is the slope of the PPF, so the moving from D to E has
the highest slope
g. Which is the impossible point in the graph? Why?
2. A farm is possible to produce 2 goods: coffee beans and cashew nuts. The possibilities of
production is given as this table

Production Possibility Coffee beans (tons) Cashew nuts (ton)

A 25 0
B 20 2
C 15 4
D 10 6
E 5 8
F 0 10
a. Draw the PPF of this farm
b. What is the opportunity cost of producing coffee beans and cashew nuts at this farm?

CHAPTER 2: SUPPLY AND DEMAND

1. The watch market is given as below:

- P : Prices per watch
- QD : Quantity demanded of watch(es)
- QS : Quantity supplied of watch(es)

P 120 100 80 60 40 20
(USD)
QD 0 100 200 300 400 500
(units)

QS 750 600 450 300 150 0

(units)

a. Define the demand and supply equations of this watch market. Compute the
equilibrium price and quantity of this product
- The demand equation of this watch market is formed as: Qd = f(P) = a1 + a2.P
𝜟𝑸𝒅
a2 = = -5; a1 = 600
𝜟𝑷
So, the demand equation of this watch market is: Qd = 600 – 5P
- The supply equation of this watch market is formed as: Qs = f(P) = a1 + a2.P
𝜟𝑸𝒔
a2 = 𝜟𝑷 = 7,5; a1 = -150
So, the supply equation of this watch market is: Qs = -150 + 7,5P
- According to the demand&supply schedule, we have the equilibrium price is 60$ and
the equilibrium quantity is 300 units
Or: The market is in equilibrium when: Qs = Qd and Pd = Ps
-150 + 7,5P = 600 -5P  P = 60, then we replace the P = 60$ into the demand
equation Qd = 600 – 5.60 = 300 (units) = Q
 b. Compute the demand and supply elasticity of this product at P = 80 và P = 60 (by
midpoint method)
At P1 = 80, we have Qd1 = 200, Qs1 = 450
At P2 = 60, we have Qd2= 300, Qs2 = 300
%𝛥𝑄𝑑
- The demand elasticity is Ep = %𝛥𝑃
𝛥𝑄𝑑
𝑄𝑑1 + 𝑄𝑑2 300 − 200
%𝛥𝑄𝑑 = =( ) 𝑥100 = 40%
2 250

𝛥𝑃
60 − 80
%𝛥𝑃 = 𝑃1 + 𝑃2 = ( ) 𝑥100 = −28,57%
2 70
40%
Ep = −28,57% = -1,4 => /Ep/ = 1,4 > 1: elastic

%𝛥𝑄𝑑 𝛥𝑄𝑑/𝑄𝑑 𝛥𝑄𝑑 𝑃 𝛥𝑄𝑑 𝑃 𝑃

Ep = = = x = x 𝑄𝑑 = a2 x 𝑄𝑑
%𝛥𝑃 𝛥𝑃/𝑃 𝑄𝑑 𝛥𝑃 𝛥𝑃
70
= - 5x 250 = -1,4=> /Ep/ = 1,4

%𝛥𝑄𝑠 𝛥𝑄𝑠/𝑄𝑠 𝛥𝑄𝑠 𝑃 𝛥𝑄𝑠 𝑃 70

Es = = = = x = x = 7,5 x 375 = 1,4
%𝛥𝑃 𝛥𝑃/𝑃 𝑄𝑠 𝛥𝑃 𝛥𝑃 𝑄𝑠

2. The market supply and demand equations of a product (X) is given as below:
1 1
PS = Q5 PD = - Q  20
50 100
a. Calculate the equilibrium price and quantity of this market.
The market is in equilibrium when  Ps = Pd and Qs = Qd
1 1
 Q5= - Q  20  Q = 500
50 100
We replace the Q = 500 into the demand equation, we have:
P = -1/100.500 +20 = 15
So, the equilibrium price is 15 and the equilibrium quantity is 500 (units)
b. If the government sets the price floor at P = 17,5; how many X products are there in
shortage or surplus?
The price floor leads the market to surplus. At Pf = 17,5, we have:
1
Ps = Q  5 = 17,5 => Qs = 625 (units)
50
1
PD = - Q  20 =17,5 => Qd = 250 (units)
100
ΔQ = Qs – Qd = 625 – 250 = 375 (units)
So, there are 375 units of X products in surplus at the price floor Pf
= 17,5
 c. Make assumption that the government put a tax 2USD on each X product . Compute
the the equilibrium price and quantity after tax? How much does a buyer pay and a
seller receive after tax? Does the buyer or seller has a heavier tax burden?
 The supply equation after tax is:
1 𝟏
Ps’ = Ps + t = Q  5 + 2 = 𝟓𝟎Q + 7
50
After tax, the X market would be in equilibrium when  Ps’ = Pd
𝟏 1
 𝟓𝟎Q + 7 = - Q  20  Q = 433,33 (units)
100
P = 15,67
After tax, the equilibrium price is 15,67$ and the equilibrium quantity is 433,33
(units)
 After tax, a buyer pays 15,67$ for an X product
 After tax, a seller receives: Ps = Pb – t = 15,67 -2 = 13,67 $ for an X product
 The tax burden a buyer has: Pb – Pe = 15,67 – 15 = 0,67$ => so, the tax burden
the seller has t – 0,67 = 2 – 0,67 = 1,33$
 The tax burden a seller has: Pe – Ps = 15 – 13,67 = 1,33$
The seller has the heavier tax burden than the buyer (1,33>0,67)

3: The equilibrium price and quantity of the Y product is P = 15 và Q = 20. At this equilibrium,
the demand elasticity is Ep = -0,5 and the supply elasticity is ES = 0,5. The demand and supply
curve are linear lines
a. Define the demand and supply equations of this Y market.
 The demand equation is formed as Qd = f(P) = a1 + a2.P
𝛥𝑄𝑑 𝑃 𝛥𝑄𝑑 𝐸𝑝 𝑥 𝑄𝑒 −0,5 𝑥 20
Ep = x => a2 = = = = -2/3
𝛥𝑃 𝑄𝑑 𝛥𝑃 𝑃𝑒 15
 a1 = Qd – a2.P = Qe – (-2/3).Pe = 20 +2/3.15 = 30
So, the demand equation is: Qd = 30 – 2/3P
 The supply equation is formed as Qs = f(P) = a1+a2.P
𝛥𝑄𝑠 𝑃 𝛥𝑄𝑠 𝐸𝑠 𝑥 𝑄𝑒 0,5 𝑥 20
Es = x => a2 = = = = 2/3
𝛥𝑃 𝑄𝑠 𝛥𝑃 𝑃𝑒 15
 a1 = 10
So, the supply equation is: Qs = 10 + 2/3P

b. Make assumption that the supply decreases 50% after the government put tax on this
product. What are the changes of the equilibrium price and quantity?
 The new supply equation is: Qs’ = 50% Qs = 0,5 (10+2/3P) = 5 + 1/3P
 After tax, the market would be in equilibrium when: Qs’ = Qd
 5 + 1/3P = 30 – 2/3P
 P = 25 and Q = 40/3
 After the tax, the price is rising (1525) and the quantity is falling (20 40/3)
c. After tax, the government continues set the price ceiling P = 15. How the market
supply and demand would be like?
Pc = 15 < Pe’ = 25 => The market would be in shortage
At the price ceiling, we have:
Qs = 5 + 1/3.15= 10
Qd = 30 – 2/3.15 = 20
ΔQ = 20-10 = 10 (units)
So, the market would be in shortage with 10 units at the price ceiling