Information and Communications University

School of Business Studies

Department of Economics

Microeconomics 1 assignment
Instructions:
Answer all questions

1. a) Innocent, a first year Business student wonders why one should consider scarcity and
choice as basic problems in economics. Advise Innocent.
b) Scarcity leads to economic choices. Give an example of an economic decision you
made and what you gave up when you made your choice. Then think of a choice our
country has made and what we may have given up in making that choice.
2. a) Sambambi a politician of Lets Enjoy Ourselves Party promises to increase funding
for both the military program and education. Knowing about opportunity costs, what
question should you ask as a citizen? (Clue use the ppc).
b) Some economic systems work better with democracies and some work well with
authoritarian rule. Which political system best matches each economic system? Why?

3. a) Explain how are prices set in a market economy?

b) What happens to the demand for an item if the price goes down?
c) What happens to the quantity demanded for an item if the price of the item goes up?
d) Describe the difference between the real income effect and the substitution effect.
e) If the price of Coca-Cola suddenly rose, what would happen to the demand for Pepsi?
Why?

4. Suppose the supply and demand curves for Honda Accord sedans in Lusaka are
and

(a) Calculate the equilibrium price and quantity for Honda cars from the above demand and
supply equations.
(b) Plot the demand and supply curves in a figure and indicate the equilibrium point. Put
quantity along vertical and price along horizontal axis.
c) List the four determinants of demand and supply.
d) How does a shortage of tickets to a professional sports event such as a football match
determine the price of those tickets?
e) How are equilibrium prices determined?
f) In a free-market economy, how much and how often do you believe the government
should intervene by setting price floors and ceilings? Why?
5.

If goods are perfect complements, the effect of a price change consists solely of an
income effect. Discuss.

6. State the merits and demerits of economic growth

b) In Zambia, is the demand for fuel elastic or inelastic? Why? State an example to
support your answer.
c) Explain the advantages and disadvantages of i) sole proprietor, ii) partnership and
Incorporating.

7. The XYZ drug company is considering investing in research that would lead to a costsaving innovation in its production of a special rabies vaccine. Assuming the firm can
keep this innovation solely for its own use, will the increased profits from the lower
marginal costs be greater if the firm is in a competitive market or if it is a monopoly?
Explain your answer in a graph (ignore AC curves) and with words.

8. Mulenga and Kasanga are rival bakers. The table below show how many brownies and
toffee bars each can bake in 1 hour.

1.

Brownies

Toffee Bars

Mulenga

15

Kasanga

(A) If each baker works a typical 40 hour workweek, draw the production possibility
frontier for each baker. Put Brownies on the horizontal (x-axis) and Toffee bars
on the vertical (y-axis). Be sure to identify the intercept values on your graphs.
(B) Suppose each baker decides to split their workweek evenly between baking brownies
and baking toffee bars. That is each worker will spend 20 hours baking brownies and
20 hours baking toffee bars. Complete the table below to show each bakers output of
the two products and the total output between them.
(C) Suppose the two bakers decide to specialize (by spending every hour of the work
week baking either brownies or toffee bars). Who should bake only brownies and
who should bake only toffee bars? To receive credit, you must show your work
justifying your answer.

9. The market demand and supply curves for Tulenwa Beer are given by the following
equations:

(market demand curve)

(market supply curve)

(a) Graph the demand and supply curves together in one graph. In your graph be sure to
label the axes and the curves. Clearly indicate where the demand curve crosses the
axes (find the X and Y intercepts).
(b) Calculate the equilibrium price and quantity algebraically.

(c) Calculate the consumer surplus, producer surplus and total surplus for Tulenwa Beer.
(d) Suppose the equation for the supply curve changes to

. Does this new

supply curve indicate an increase or decrease in the supply curve? Suggest two
possible explanations for the indicated change in the supply curve.

10. One firm has the entire market for Halloween masks that look like Richard Nixon. It
produces at average and marginal costs of AC=MC=10. Originally, the firm faces a
market demand curve of Q= 60-P.
a) Calculate the profit-maximizing price and quantity combination for the firm. What are
the firms profits?
b) Assume that the market demand curve becomes steeper and is given by Q= 45 - 0.5P .
What is the firms profit-maximizing price and quantity now? What are the firms
profits?
c) Say the market demand curve becomes flatter and is given by Q =100-2P. What is the
firms profit-maximizing price-quantity now?
d) Graph the three different situations and explain why there is no supply curve for a
monopoly.

Good Luck!