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 1 (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. 3 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. 5