Nanyang Technological University
HE5091 Principles of Economics
January Semester 2022
Tutorial 1 (Tutor Version)
Question 1
You are taking two courses this semester: Economics and Mathematics. You
have two examinations coming up in both classes. The table below shows your
grade on each examination for different numbers of hours spent studying for
each:
Hours of Study
0
1
2
3
Economics
70
77
82
85
Mathematics
60
68
74
78
Your goal is to maximize your average grade on the two quizzes. Use the idea
of optimization in differences to decide how much time you would spend
studying for each quiz if you had three hours in total to prepare for the two
exams. Note: you can only choose to study in increments of one hour.
Suggested Answers:
If you had just one hour, you should study Mathematics since you would raise
your Mathematics grade by 68 – 60 = 8 points; if instead you studied Economics
you would raise your Economics grade by just 77 – 70 = 7. If you had a second
hour, you should study Economics since you would raise your Economics grade
by 77 – 70 = 7; if instead you studied Mathematics for a second hour you would
raise your Economics grade by just 74 – 68 = 6. If you had a third hour, you
should study Mathematics since you would raise your Mathematics grade by 74
– 68 = 6; if instead you studied Economics you would raise your Economics
grade by just 82 – 77 = 5. So you should spend 2 hours in Mathematics and
one hour in Economics.
Question 2
Explain how shifts in demand and/or supply curves could explain the
equilibrium price of houses increases but the equilibrium quantity remains
unchanged. You should consider three different situations and support your
answers with three suitable diagrams.
Suggested Answers:
The three situations are:
(i) Demand increases with perfectly inelastic supply curve
(ii) Supply decreases with perfectly inelastic demand curve and
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(iii) Simultaneous shift of demand increases and supply decreases of equal
magnitude.
The three diagrams are as follows:
P
S
P
P
D
P2
P2
P1
P1
D2
S2
S2
S1
P2
S1
P1
D2
D1
Qe
D1
Q
Qe
Q
Qe
Q
Question 3
The farm-breed fish industry in Singapore has been affected by two incidents.
One incident is an increasing preference of consuming farm-breed fish by
Singapore consumers. The other is the pollution in the Singapore sea which
results in many farm-breed fishes died before harvesting. Analyze the effects
of these two incidents on the farm-breed fish market in Singapore and support
your analysis with suitable farm-breed fish market diagrams.
Answer:
Refer to the 3 diagrams below:
Price
S2
E2
S1
P2
P1
E1
D2
D1
Q1
2
Q2
Quantity
Price
S2
E2
S1
P2
P1
E1
D2
D1
Q2
Q1
Quantity
Price
S2
E2
S1
P2
P1
D2
E1
D1
Q1 = Q2
Quantity
The stronger preference for fish will result in an increase in the demand for fish
in the fish market. This will cause the demand curve to shift to the right. The
pollution resulting in fish died before harvesting will reduce the supply of fish
in the fish market. This will cause the supply curve to shift to the left. Students
should draw 3 diagrams, showing (i) demand shifts more than supply and hence
price and quantity increase, (ii) supply shifts more than demand and hence price
rises but quantity falls, and (iii) supply and demand shifts by the same
magnitude and hence price rises but quantity remains unchanged.
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Question 4
The market for rice in a small country has the following demand and supply
functions:
Demand function:
P = 6 – 0.5QD
Supply function:
P = 2 + 0.5QS
Where QD is the quantity demanded, QS is the quantity supplied and P is the unit
price of rice.
(a)
Determine the equilibrium price and quantity in the rice market. Support
your answers with a suitable market diagram.
(b)
Since rice is the staple good in the country, the government decides to
impose a price ceiling of rice at $2.50 per unit to help consumers. At this price,
determine the quantity of rice consumed and produced. What is the maximum
price that consumers are willing to pay in this situation?
(c)
To increase the income of rice farmers, the government implement a
price floor policy (legal minimum price) of rice at $5.50 per unit. Determine
the quantity of rice consumed and produced. Will this policy increase the
earning of the famers?
Suggested Answers:
(a)
At equilibrium, QS = QD. Solving the two simultaneous equations, we
have P = 4 and Q = 4. Refer to the diagram which shows the demand and
supply curves, the equilibrium price and quantity,
Price
6
Supply curve
5.50
4
2.50
2
Demand curve
1
4
4
7
Quantity
(b)
At $2.50 which is the legal maximum price, there is a shortage.
Although the quantity demanded is 7 units, the quantity supplied is 1 unit.
Hence the effective quantity traded in the market is also 1 unit. From the
demand curve, if only 1 unit of rice is available, consumers are willing to pay
$5.50 for the rice.
(c)
At $5.50 which is the lowest minimum price, there is a surplus in the
rice market. Although the quantity supplied is 7 units, the quantity demanded is
1 only unit. Hence the effective quantity traded in the market is also 1 unit. The
rice farmers actually earn a lower revenue unless the government absorbs the
rice from the farmers.
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