School of Economics
ECON5001 Microeconomics Theory
Problem Set 1 - Solution
1) Suppose the demand curve for a good is expressed as
sells for $3, then the price elasticity of demand is
a) -2*(3/44).
b) -3*(2/50).
c) -2*(50/3).
d) -3*(44/2).
Q  50  2 p . If the good currently
2) If the demand curve for a good is horizontal and the price is positive, then a leftward shift of
the supply curve results in
a) an increase in price.
b) a price of zero.
c) no change in price.
d) a decrease in price.
Figure 1
3) Figure 1 shows four different markets with changes in either the supply curve or the demand
curve. Which graph best illustrates the market for tea after severe weather destroys a large
portion of the coffee crop?
a) graph A.
b) graph B.
c) graph C.
d) Graph D.
4) The purpose of making assumptions in economic model building is to
A) express the relationship mathematically.
B) force the model to yield the correct answer.
C) simplify the model while keeping important details.
D) minimize the amount of work an economist must do.
5) Society faces trade-offs because of
A) government regulations.
B) scarcity.
C) faceless bureaucrats.
D) greedy corporations.
6) Figure above shows a graph of the market for pizzas in a large town. As a result of concern
over the affordability of pizza, the government restricts sellers from charging a price over $7. As
a result the quantity of pizzas consumed will
A) remain unchanged.
B) decrease.
C) increase.
D) be indeterminable.
7) If the demand curve for orange juice is expressed as Q = 2000 - 500p, where Q is measured
in gallons and p is measured in dollars, then at the price of $3, elasticity equals
A) -0.33.
B) -3.
C) -17.
D) -9.
8) When two goods are substitutes, a shock that raises the price of one good causes the price
of the other good to
A) change in an unpredictable manner.
B) remain unchanged.
C) increase.
D) decrease.
9) Which of the following will cause the price of beer to rise?
a. A shift to the right in the demand curve for beer.
b. A shift to the left in the supply curve of beer.
c. both (a) and (b).
d. none of the above.
10)
a.
b.
c.
d.
e.
The price of good A goes up. As a result the demand for good B shifts to the left. From this
we can infer that:
good A is used to produce good B.
good B is used to produce good A.
goods A and B are substitutes.
goods A and B are complements.
none of the above.
11) Total opportunity cost = $192,100 = $70,000 (explicit costs) + 2*60,000 + 0.03*70,000
(implicit costs), while accounting costs (=actual expenditure, or explicit costs) are only $70,000.
*12) Consider the following schedule that shows the marginal benefit received by Boris from
attending performances of Tchaikovsky:
Concert
0
1
2
3
4
5
6
Total benefit ($)
0
120
220
300
355
380
390
Assume that Boris is a price taker and the price of each concert is $65 and Boris maximizes his
utility how many concerts will he attend? Why?
3 concerts. Work out the marginal benefits and Boris will only attend the concert if the MB ≥ p.
*13. Assume that there are 10 identical consumers in the market for ice-creams and each
person (i=1, 2, …10) has a demand curve p = 40 – 2qi , where p=market price. Find the
market demand curve and draw it on a set of axis with price on the vertical axis and
quantity on the horizontal axis.
qi = 20 – (1/2)p
Q = 10x20 – 10x(1/2)p
Q = 200 – 5p
*14. The demand for oranges is given by the following:
P = 2I − Q,
where P is the price of oranges, I is the average income of consumers, and Q is the quantity
demanded of oranges. The supply of oranges is given by:
P = − 20 + Q.
(a) Assuming that income is 30 (i.e., I = 30), determine the market equilibrium price and
quantity of oranges.
P=60-Q=-20+Q, that means Q=40, p=60-40=20.
(b)
Suppose that income were to rise to 50 (i.e., I = 50), determine the new market
equilibrium price and quantity of oranges.
P=100-Q=-20+Q, that means Q= 60, p=100-60=40.
(c)
Draw a sketch showing the market equilibriums calculated in (a) and (b). Be sure to
label your axes and functions clearly.
(d)
Assuming that income remains at 50, suppose that a per unit tax of $20 per unit is
imposed on oranges. What price will consumers pay after the tax is imposed? How
much revenue will the tax raise?
P_d=P_s+20, where P_d=100-Q, P_s=-20+Q, that means Q=50, P_d=100-50=50, Revenue =
20*50=1000.