Problem 1
A computer products retailer purchases laser printers from a manufacturer at a price of Rs.
25,000 per printer. During the year, the retailer will try to sell the printers at a price greater
than Rs. 25,000, but may not be able to sell all the printers. At the end of the year, the
manufacturer will buy back any unsold inventory at 40 percent of the original price. No one
other than the manufacturer would be willing to buy these unsold printers at the end of the
year.
a. At the beginning of the year, before the retailer has purchased any printers, what
is the opportunity cost of a laser printer?
b. After the retailer has purchased the laser printers, what is the opportunity cost
associated with selling a laser printer to a customer? (Assume that if this customer
does not buy the printer, it will be unsold at the end of the year.)
c. On December 1, the retailer still has a large inventory of unsold printers. The
retailer has set a retail price of Rs. 30,000 per printer. The manager of the store
proposes that they should cut the price by half and sell the printers at Rs.
15,000 each. The owner of the store disagrees, pointing out that at Rs. 15,000
each, they would lose Rs. 10,000 on each printer sold. Is the owner’s argument
correct?
Answer 1
a) At the beginning of the year, before the retailer has purchased any printers, the
opportunity cost of a laser printer is Rs. 0, as the retailer has not invested in the
choice of purchasing a printer yet, hence, there is no cost attached to an
alternate choice.
b) The opportunity cost of selling a laser printer will be the value received at the
end of the year from not selling the printer i.e. 40% of Rs. 25,000 = Rs. 10,000
c) No, the owner is making a wrong decision. Since the printers were bought at Rs.
25,000, selling them at Rs. 15,000 would result in a per unit loss of Rs. 10,000.
However, if they do not sell the products the manufacturer will buy back the
laser printers at Rs. 10,000, resulting in a per unit loss of Rs. 25,000 – Rs. 10,000
= Rs. 15,000. In an effort to minimize the per unit loss it would be in their best
interest to liquidate their inventory at a cost of Rs. 15,000.
Problem 2
Consider the market for biryani in Hyderabad. In this market, the supply curve is given by Qs
= 10PB − 5PR and the demand curve is given by QD = 100 − 15PB + 10PK, where B denotes
biryani, R denotes rice, and K denotes kebabs. Assume that PR is fixed at 1 and PK = 5.
Calculate the equilibrium price and quantity in the biryani market. What is the producer and
consumer surplus generated by the biryani market at these prices?
a. Suppose that a poor harvest season raises the price of rice to PR = 2. The price of
kebabs remains the same as in part a. Find the new equilibrium price and quantity
of biryani. Draw a graph to illustrate your answer.
b. Suppose PR = 1 but the price of kebabs drops to PK = 3. Find the new equilibrium
price and quantity of biryani.
c. Suppose PR = 1, PK = 5, and the local government mandates that since a lot of
tourists like to eat biryani when they visit Hyderabad, in the interest of promoting
tourism, the price of biryani cannot exceed 5. How much is the shortage of biryani
as a result?
Answer 1
PR =1; PK = 5
Qs = Qd
10PB – 5PR = 100 – 15PB + 10PK
25PB = 100 + (5x1) + (10x5)
PB = (100 + 5 + 50)/25
PB = 6.2
Qs = (10x6.2) – 5
Qs = 57
Qd = 100 – (15x6.2) + (10x5)
Qd = 100 – 93 + 50
Qd = 57
a) PR = 2; PK = 5
Qs = Qd
10PB – 5PR = 100 – 15PB + 10PK
25PB = 100 + (5x2) + (10x5)
PB = (100 + 10 + 50)/25
PB = 6.4
Qs = (10x6.4) – 5
Qs = 59
Qd = 100 – (15x6.4) + (10x5)
Qd = 100 – 96 + 50
Qd = 54
The producer surplus generated in this scenario is of Qs-Qd = 5 i.e. At this price
of rice suppliers will producer 5 units extra of biryani
b) PR = 1; PK = 3
Qs = Qd
10PB – 5PR = 100 – 15PB + 10PK
25PB = 100 + (5x1) + (10x3)
PB = (100 + 5 + 30)/25
PB = 5.4
Qs = (10x5.4) – 5
Qs = 49
Qd = 100 – (15x5.4) + (10x3)
Qd = 100 – 81 + 30
Qd = 49
The new equilibrium price will be Rs. 5.4
