ECONONE

Problem Set No. 1 Winfred M. Villamil

Name: _______________________ Section: _________

1. The following table provides information about the production possibilities frontier of a
country producing only coconuts and bananas.

Coconuts Bananas
0 420
100 400
200 360
300 300
400 200
500 0

a. If the country produces 100 coconuts and 400 bananas, what is the opportunity cost
of an additional 100 coconuts? ________________

b. If the country produces 300 coconuts and 300 bananas, what is the opportunity cost
of an additional 100 coconuts? _________________

c. Suppose the country is producing 200 coconuts and 200 bananas, how many
additional coconuts could they produce without giving up any bananas. __________

d. Encircle the letter preceding the correct answer: The PPF will shift outwards when
A. Government prints more money.
B. There is a decrease in labor productivity.
C. There is an increase in investment.
D. People migrate to another country and do not remit their income.

2. Suppose a worker in Germany can produce 15 computers or 5 tons of grain per month.
Suppose a worker in Poland can produce 4 computers or 4 tons of grain per month. For
simplicity, assume that each country has only one worker. This gives us the following table:

computers grain

Germany 15 5

Poland 4 4

a. The opportunity cost of a computer in Germany is _____________________ and the

opportunity cost of a ton of grain in Germany is ____________________.
b. The opportunity cost of a computer in Poland is _______________________ and the
opportunity cost of a ton of grain in Poland is ____________________.
c. Which country has the absolute advantage in producing computers? ______________
Grain? ________________
d. Which country has the comparative advantage in producing computers? __________
Grain? _______________
 e. Germany will specialize in the production of ___________ while Poland will
specialize in the production of __________________.

3. The supply and demand schedules below show hypothetical prices and quantities in tons in
the market for corn.

Price QD Qs

P6.00 220 400

5.50 240 360
5.00 260 320
4.50 280 280
4.00 300 240
3.50 320 200
3.00 340 160

a. The equilibrium price of corn is ___________ and the equilibrium quantity is

_________.
b. At a price of P3.00 per ton there would be a (shortage, surplus) ___________ of ____
tons and the price would tend to (fall, rise) ___________.
c. At a price of P5.00 per ton there would be a (shortage, surplus) ___________ of ____
tons and the price would tend to (fall, rise) ___________.
d. If the government imposed a price floor of P6.00 per ton, there would be a (shortage,
surplus) _____________ of _______ tons.
e. If the government imposed a price ceiling of P3.50 per ton, there would be a
(shortage, surplus) __________ of ______ tons.
f. If a new technology which lowers the cost of producing corn is adopted by farmers,
the (demand, supply) _____________ curve will shift to the (left, right) _________
and at the new equilibrium, prices are (higher, lower) _________ and quantities
(higher, lower) _____________.
g. If the price of fertilizers used in producing corn rises, the (demand, supply)
_____________ curve of corn will shift to the (left, right) _________ and at the new
equilibrium, prices are (higher, lower) ___________ and quantities (higher, lower)
_____________.
h. If people cannot eat corn without butter and there is a rise in the price of butter, the
(demand, supply) _____________ curve of corn will shift to the (left, right)
_________ and at the new equilibrium, prices are (higher, lower) _____________
and quantities (higher, lower) _____________.
i. If there is an increase in the price of rice, which is a substitute for corn, the (demand,
supply) _____________ curve of corn will shift to the (left, right) _________ and at
the new equilibrium, prices are (higher, lower)____________________ and
quantities (higher, lower) _____________.

4. The City Zoo is spending P3000 per day for maintenance but earns only P2400 in revenues
from admissions. The City Council is unwilling to contribute any tax money to support the
zoo asserting that the Mayor should simply raise prices to defray the cost. The price of
admission is currently P4.00 per person with average daily attendance of 600 people. The
City Council argued that if the admission price were raised to P5.00 per person, the zoo could
break even. You were then hired by the Mayor to recommend a pricing policy. You did a
survey and estimated the following demand schedule:

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Price QD of Tickets Total % Change % Change Elasticity
per Day Revenue in Price in Quantity

P0.00 1200 _______ ________ _________ ________

1.00 1050 _______ _________ __________ _________

2.00 900 _______ _________ __________ _________

3.00 750 _______ _________ __________ _________

4.00 600 _______ _________ __________ _________

5.00 450 _______ _________ __________ _________

6.00 300 _______ _________ __________ _________

7.00 150 _______ _________ __________ _________

8.00 0

a. Fill in the blanks in the preceding table. Use the midpoint method in calculating
percentage changes and calculate elasticities (ignore the negative sign) starting with a
price of P8.00 and falling.
b. Encircle the letter corresponding to the correct answer:
A.To increase revenues, the zoo should raise admissions prices.
B. To increase revenues, the zoo should lower admission prices.
C. Admission prices should not change and the zoo can, instead, increase the demand
for tickets and increase revenues by putting in more attractions.
c. Write the word true or false (whichever is applicable) to the statement below:
Elasticity is constant along a straight-line demand curve. ______________
5.Last year, Sheila bought 6 pairs of shoes when her income was P400,000. This year, her income
is P550,000 and she purchased 7 pairs of shoes. Holding other factors constant and using
the midpoint method, it follows that Sheilas income elasticity of demand for shoes is about
_________ and she regards shoes as a/an (normal, inferior) ___________ good.
6. Last year, Mang Juan bought 20 kilos of dried fish when the households income was P40,000.
This year, the household income was only P30,000 and he bought 60 kilos of dried fish. All
else constant, Mang Juans income elasticity of demand for dried fish is (positive, negative)
___________ and Mang Juan considers it to be a/an (normal, inferior) _________ good.
7. Suppose the cross-price elasticity of demand between hot dogs and catsup is -2.00. This
implies that a 20 percent increase in the price of hot dogs will cause the quantity of catsup
purchased to (rise, fall) _______ by ______ percent and that hotdogs and catsup are
(substitutes, complements) _________________.
8.If, for two goods, the cross-price elasticity of demand is 1.25, then the two goods are
(substitutes, complements) _____________.
9. When the price is P4.00 quantity supplied is 200 and when the price is P4.50 quantity supplied
is 250. Using the midpoint method the price elasticity of supply is _____________.

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10. Use the table to answer the following questions regarding the market for good X. Note that
QD is the initial quantity demanded and Qs is the initial quantity supplied:

Price QD Qs QS1 QD2

P1.00 10 0 0 8
1.50 9 1 0 7
2.00 8 2 0 6
2.50 7 3 1 5
3.00 6 4 2 4
3.50 5 5 3 3
4.00 4 6 4 2
4.50 3 7 5 1
5.00 2 8 6 0

a. The initial equilibrium price is ______ and the initial equilibrium quantity is _____.
b. Suppose the government imposes a P1.00/unit tax on the sellers of X. The new
equilibrium price is ________ and new equilibrium quantity is _________. The price
paid by the consumer is ________ while the price received by the seller is ________.
Of the P1.00 tax ________ is borne by the seller and ________ is borne by the
buyer.

Suppose a new piece of legislation was introduced which switched the tax from the seller
to the buyer. Supply will shift back from QS1 to Qs and demand will shift form QD to QD1.

c. The new equilibrium price is _____ and equilibrium quantity is _________. The
price paid by the buyer is now ________ while the price received by the seller is
_______. Of the P1.00 tax _________ will be borne by buyers and __________ by
sellers.
d. If the price elasticity of demand for good X is inelastic while the price elasticity of
supply is elastic, the burden of the tax imposed on producers of good X would fall
primarily on the (producers, consumers) _________________________of good X.
e. If the price elasticity of demand for good X is elastic while the price elasticity of
supply is inelastic, the burden of the tax imposed on consumers of good X would fall
primarily on the (producers, consumers) _________________________of good X.

11. Suppose the demand curve for pizza can be represented by the equation Q D = 20 2P where
QD is the quantity demanded and P is the price. The supply curve for pizza is given by the
equation QS = P 1. What is the equilibrium price? ___ What is the equilibrium quantity? ___

Suppose the government imposes a $3.00 tax on each pizza sold. What is the price that buyers
will pay? _____ What is the price that sellers will receive? _____. What is the share of the buyer
in the tax? _______. The share of the seller? ______ the tax revenue paid by the buyer? ____ The
tax revenue paid by the seller? ______ (Hint: If P is the price received by the seller, then P+3 is
the price paid by the buyer)