UKMM1043 Basic Economics, Accounting and Management

Tutorial 1 (Part A)
1. For each of the following, list whether the topic is under microeconomics or
macroeconomics in nature:
(a.)
The price of milk. Microeconomics
(b.)
The national inflation rate. Macroeconomics
(c.)
The quantity of new cars sold each year. Microeconomics
(d.)
The wage rate paid to manufacturing workers. Microeconomics
(e.)
The amount of national output in an economy. Macroeconomics
2. For each of the following, note whether the statement is an example of positive
economic analysis or an example of normative economic analysis:
(a.)
An increase in the minimum wage will lead to a higher rate of teenage
unemployment. Positive
(b.)
If the government reduces the tax on tobacco, more individuals will start
smoking. Positive
(c.)
The government should lower taxes because tax rates are too high for the
average U.S. family. Normative
(d.)
Wealthy senior citizens can afford to buy their own health insurance and
therefore should not be given Medicare coverage. Normative
(e.)
If the price of tea increases, people will consume more coffee. Positive
3. Draw a production possibility frontier. Find a point that represents a combination
of outputs that is not currently feasible. Label it point A. Find a point that
represents efficient production. Label it point B. Find a point that represents
inefficient production. Label it point C.
There are many possible answers here, but point A should be drawn outside of the
production possibility frontier, point B should be on the production possibility
frontier, and point C should be inside the production possibility frontier.

Good Y
B

Good X
4. The table below represents five points on the production possibility frontier for
the country of Aruba, which produces only paper (measured in thousands) and
wheat (measured in thousands of bushels):
A

Paper

50

45

35

20

Wheat

10

20

30

40

If the economy is currently at point A, what is the opportunity cost of producing

an additional 10,000 bushels of wheat? If the economy is currently at point B,
what is the opportunity cost of producing an additional 10,000 bushels of wheat?
What if the economy is currently at point D?
Draw a production possibility frontier (show point A, B, C, D and E).

Papers (thousands)

50
40
30

B
C

20
10
0

Wheat (thousands of bushels)

10 20 30 40

Point A: Opportunity Cost

= (45 50) / (10 0)

= -0.5 paper ( 0.5 unit of paper / 5000 units of

paper)
Point B: Opportunity Cost =
=
Point D: Opportunity Cost =
=

(35 45) / (20 10)

-1 paper ( 1 unit of paper / 10000 units of paper )
(0 20) / (40 30)
-2 paper ( 2 unit of paper / 20000 units of paper )

5. Using an appropriate diagram, show how economic growth affects the production
possibility frontier.
When an economic growth occurs, the economy can produce more goods and
services. Therefore, the production possibility curve shifts outward.

6. Suppose a country produces two goods: corn and cars. New technology is
developed that increases the amount of corn that can be produced. Use a diagram
to show the effect on the countrys production possibility frontier. Explain what
occurs in the diagram.
The production possibility frontier shifts outward. The y-intercept is unaffected,
however. At the y-intercept, the country would be producing all cars and no corn
because the new technology would have no effect on cars.

Tutorial 1 (Part B)
1.

Using appropriate diagrams, explain the difference between a change in demand and
a change in quantity demanded.
Solution:
A change in DD involves a shift in DD curve. It is caused by changes in factors other
than the P of the goods itself such as income. A change in Qd refers to a movement along
a DD curve. It is caused by a change in the price of the goods itself.
Price

Price

P1=P2

P1

D2

P2

D
Q1

2.

Q2

D1
Quantity

Q1

Q2

Quantity

The following are some changes that may take place in the market for textbooks.
For each of the following, explain what will happen to the DD and/or the SS of
textbooks.
a) An increase in student enrollment at universities across the country.
b) A decrease in the price of ink used to print textbooks.
c) A drop in income
d) An improvement in the technology used to print textbooks.
e) An increase in college tuition fees.

Solution:
a) The demand curve will shift to the right.
b) Cost of production drop the supply curve to shift to the right.
c) Textbooks are a normal good. Thus, the demand curve will shift to the left.
d) The supply curve will shift to the right.
e) Less students study in universities the demand curve to shift to the left.
3. Explain how price adjusts to eliminate excess demand.
Solution:
When there is excess demand, Qd is greater than Qs. Therefore, P will rise. As the P
rises, Qd falls and Qs rises. P will continue to rise until Qd equals Qs.

4.

The table below shows the supply and demand for eraser:
Price (RM)
0.6
0.5
0.4
0.3
Qd
100
120
140
160
Qs
150
120
90
60
a) What is the equilibrium price and quantity?
b) Suppose the current price is RM0.30. Describe the present situation.
remain at RM0.30? Explain.

0.2
180
30
Will the price

a) The equilibrium P is RM0.50 and the equilibrium Q is 120 erasers.

b) At a P of RM0.30, Qd (160) is greater than Qs (60). Therefore, there is a shortage of 100
erasers. This will put upward pressure on the P (eventually pushing P to RM0.50).
5.

Answer the following questions based on the supply and demand equations as Qs =
-500 + 300P and Qd = 2000 - 100P.
a) In a free market, what would be the equilibrium price and quantity?
b) At the price of $3, what would happen? (Discuss in terms of adjustment to
equilibrium).
c) At the price of $7, what would happen? (Discuss in terms of adjustment to
equilibrium).
a) At equilibrium: Qd = Qs. Thus, 2000 - 100P = -500 + 300P 2500 = 400P P =
$6.25.
Substitute P = 6.25 into Qd, Qd = 2000 100(6.25) = 1375 or
Substitute P = 6.25 into Qs, Qs = -500 + 300(6.25) = 1375
b) At a P of $3, Qd (1700) would exceed Qs (400). There would be a shortage and
suppliers would raise the price to eliminate the shortage. The P would rise until Qs
equals Qd at $6.25.
c) At a P of $7, Qs (1600) would exceed Qd (1300). There would be a surplus and
supplier would lower their prices to eliminate the surplus. The price would decline
until until Qs equals Qd at $6.25.
6.

The figure below shows the market for cotton fabric.

Will there be market equilibrium at the price of $8, $5 and $3 respectively?

At the P of $8, the market will have a surplus of 600 yards of fabric (Qs-Od = 1200-600).
At the P of $5, the market will be at equilibrium with equilibrium Q of 900 yards of
fabric.
At the P of $3, the market will have a shortage of 400 yards of fabric (Qd-Qs = 1100700).

Tutorial 1 (Part C)
1. Name three determinants of elasticity. Explain how each one affects the
responsiveness of demand.
i)
Availability of substitutes. Where fewer substitutes, DD will tend to be more
inelastic.
ii) The proportion of income spent on the good. If an item represents a smaller portion
of a total budget, DD will tend to be more inelastic.
iii) The time dimension. The greater the time available to adjust behaviour, the more
elastic DD tends to be.
2. Based on the table, answer the questions.
Types of fruits Price elasticity of Income elasticity of Cross-price elasticity
DD
DD
with apple
Strawberry
-0.6
1.5
1.8
Papaya
-3.0
-2.1
-1.5
Kiwi
-1.0
3.5
2.5
i) Is papaya an inferior product or normal product for Peter? Explain your answer.
ii) What is the relationship between papaya and apple for Peter? Explain your answer.
iii) If Peters income increased by 20%, how much is the changes of her demand for kiwi?
i) Inferior product (Negative relationship with income/Negative Income Elasticity)
ii) Complement product (Negative cross-price elasticity)
iii) %Qd/% Y = 3.5 %Qd = 20% x 3.5 = 70%
3. The cross-price elasticity between X and Y is positive. Illustrate on two graphs, one
for good X and one for good Y, what will happen if the supply of X decreases.
Solution:

If the supply of X decreases, the price of X will increase, the demand curve for good Y
will shift to the right, and the amount of Y purchased will increase.

4. Suppose the equilibrium rent for a two-room apartment in Kampar is RM350 per
month. The city council decides to place a price ceiling on apartments rental and
will not allow landlords to charge more than RM200 per month for each room. Draw
this situation using a graph. What will happen in this market? Is it a good policy?
Explain.
Solution:
There will be a shortage of apartments because Qd is greater than Qs.
RMt

Supply

350
Price ceiling

200

Demand

Quantity of apartments

QS
QD
This policy has good intention but will cause landlord to be reluctant to rent out and
there will be stronger demand for apartment room (some who has no intention
initially to rent may now want to rent as a result of low rental). At the end, students
may suffer.
In addition, price ceiling distort markets and reduce market welfare.
Tutor can ask the students: "How large are the gains to the winners and how
large are the losses to the losers?
We can use the graph to illustrate the gain/loss of consumer surplus and producer
surplus.

RMt

Supply
D

350
B

200

Price ceiling

Demand
QS

QD

Quantity of apartments
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As a result of P ceiling, Consumer surplus reduces from A+D to A+B (as what you
actually paid = what you are willing to pay), Producer surplus reduces from B+C+E
to C. The deadweight loss is D+E.
5. Suppose the market for sugar is at equilibrium with price of $3 per kg and quantity of
2 million per month. Illustrate using an appropriate diagram of what will happen in
the market when the government imposes a price floor of $4.50.
Solution:
-

Price

4.50

3.00

above the equilibrium P.

Price floor
Quantity

Qd

The P floor is binding as it is set

At the P floor of $4.50, the Qs >

Qd. A surplus exist in the market
(size of surplus = Qs - Qd)

Qs

6. Explain with graph how each of the following events would affect the price and
quantity of bread bought and sold.
a) An increase in the price of flour
b) An increase in consumer income
c) Medical report showing that bread is rich in fiber
Solution:
a) If the price of flour increases, the cost of producing bread increases. As a result,
the supply curve will shift to the left from S1 to S2. This increases the equilibrium
P from P1 to P2 and lowers equilibrium Q from Q1 to Q2.
Price of bread
S2
S1
P2
P1
D1
Q2

Q1

Quantity of bread

10

b) If consumer income rises, this will increase the DD for bread. As a result, the DD
curve will shift rightward from D1 to D2. This increases the equilibrium P from P1
to P2 and increases the equilibrium Q from q1 to q2.
c) If the medical report showing that bread is rich in fiber, the DD for bread will
increase. As a result, the DD curve will shift rightward from D 1 to D2. This
increases the equilibrium P from P1 to P2 and increases equilibrium Q from q1 to q2.
Price of bread
S
P2
P1
D1
q1 q2

D2
Quantity of bread

7. Using demand and supply analysis to illustrate how each of the following events
would affect the price and quantity of butter bought and sold.
a) An increase in the price of margarine
b) An increase in the price of milk
c) A decrease in the average income level
Solution:
a) Margarine is a substitute to butter. As the
price of margarine increases, it becomes
more expensive. This causes people to
substitute margarine to butter, thereby
shifting the DD curve for butter to the right
from D to D. This shift in DD will cause the
equilibrium P to rise from P0 to P1 and the
equilibrium Q to increase from Q0 to Q1.

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b) Milk is the main ingredient in butter. An

increase in the price of milk will increase the
cost of producing butter. Thus, the supply
curve for butter will shift to the left from S to
S. This increases the equilibrium price from
P0 to P1 and lowers the equilibrium quantity
from Q0 to Q1.

c) Assume that butter is a normal good. A

decrease in the average income level will
cause the demand curve for butter to shift the
left from D to D. This shift in demand will
cause the equilibrium price to fall from P0 to
P1 and the equilibrium quantity to decrease
from Q0 to Q1.

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