BECO100 001,002 Principles of Microeconomics

ASSIGNMENT 1

Deadline: 11th Nov, 2013 (Please submit before 17:00)

Submit to: Mr. Sun (Block 1-A303)

1. The table below shows the Production Possibility Curve for country A:
Points
Oil
Rice
1
0
500
2
100
450
3
200
350
4
300
200
5
400
0
a) Plot the PPC of this economy (show rice on the vertical axis). Explain the
meaning of the vertical intercept.
b) Calculate the opportunity costs between Point 1 and 2, and between Point 2 and
3. Explain how the production possibilities curve reflects the law of increasing
opportunity costs.
c) What is the meaning of a point that is inside the PPC?
2. Suppose the demand and supply curves for eggs in Macau are given by the
equations below:
Qd = 210 10P
Qs = 10 + 15P
where Qd = thousands of dozens of eggs Macau people would like to buy each year;
and Qs = thousands of dozens of eggs the suppliers would like to sell each year;
and P = price per dozen eggs (in MOP).
a) Use the equations to find the equilibrium price and equilibrium quantity.
b) Graph the demand and supply curves, and identify the equilibrium price and
equilibrium quantity.
c) Suppose the demand of eggs fall by 30 thousands of dozens at every price level.
Draw the new demand curve on the same diagram as in part b), calculate and
show the new equilibrium.
3.

The Sunny Tour Company offers flight tickets to customers who leave for
Australia. The ticketing manager finds that his customers normally fall into two
categories of the two groups of customers.
Price ($)
Quantity demanded Quantity demanded Quantity supplied
of emigrants
of tourists
6,000
200
300
300
7,000
190
250
340
8,000
185
200
385
9,000
180
100
450
10,000
170
50
600
i)
Calculate the price elasticity of demand for the two groups of customers
respectively when the price of the flight tickets is increased from $7,000 to
$8,000. Why the elasticity between the two groups of customers is different?
ii)
Calculate the demand of market for each price. Find the equilibrium market
price and quantity of flight tickets. Assume the City Council passes a price
ceiling ordinance setting the maximum price at $8,500 per ticket. Use supply
and demand analysis to determine the effects of the price control.
4. Suppose that a consumer spends recreation time and income on two leisure activities:
1

tennis and fishing. The consumer has the basic equipment to pursue both activities.
The costs associated with these activities are court fees for tennis and the expense of
boat rental for fishing. The marginal utility schedules for hours spent on these
activities are shown in the table below.
Hours per week
Marginal utility schedule
Fishing
Tennis
1
20
20
2
18
19
3
16
18
4
14
17
5
12
16
6
10
15
7
8
14
8
6
13
A. If the cost per hour for each activity is $1 and the consumer spends five hours
per week on recreation activity, how many hours would be spent on each
activity in order to maximize total utility? Explain in detail.
B. Suppose that the cost of tennis increased 19 percent. What change in the mix
of tennis and fishing would be required to maximize utility? Explain, using
marginal utility to price ratios, why this is the case.