Topic 1: PPF:
Q: Explain how unemployment rise affects country’s PPF?
Answer
The unemployment rate affects the PPF, as production processes require labor to
produce output. Suppose the unemployment rate in the economy rises. In that
case, the PPF will shift inward because the labor (one of the factors of production)
will decline and lead to a reduced amount of output.
Topic 2: Demand & Supply:
Question 1: Essay Questions:
1- Explain how each of the following events affects demand curve.
a- A product becomes more fashionable.
b- Income of consumers increase and the good is an inferior good.
2- Explain how each of the following events affects supply curve
a- A technological advance in a production method
b- The expectation that the equilibrium price will be lower in future.
3- Explain using graph how each of the following events affects equilibrium
price and quantity
a- Supply decreases and demand are constant.
b- Demand increases and supply are constant.
Question 2: Problems:
Given the below table answer the following questions:
a- Fill in the empty column.
b- What is the equilibrium price?
c- Graph the demand and supply curves showing equilibrium price and quantity.
Quantity Price $ Quantity Surplus (+) or
demanded supplied Shortage (-)
95 4 82
90 4.3 83
85 4.6 85
80 5 87
75 5.3 89
70 5.6 91
1 | Micro-economics
Topic 2: Elasticity of demand & Supply:
Question 1: MCQ:
1- Cross elasticity of demand is positive when the goods are
a. complementary
b. substitute
c. inferior
d. necessary
2- Cross elasticity of demand is negative when the goods are
a. complementary
b. substitute
c. inferior
d. necessary
Question 2: Essay Questions:
1- How would this affect total revenue: price rises and its luxury good?
2- How would this affect total revenue: Price rises and its necessity good with
no substitutes?
2 | Micro-economics
Topic 3: Utility:
Q1: Supposing that you can consume bundles from 2 goods O and P. If your
income is 13 EGP, the price of a good O is 1 EGP and the price of good P is 3
EGP. What is the best bundle of consuming the 2 goods for you that maximize
your satisfaction subject to your budget constraint?
Q TUO TUP
1 18 57
2 34 105
3 47 132
4 56 150
5 61 159
6 62 162
Answer
First get the Marginal utility from the available total utility in the above table, then
achieve the two conditions.
After solving it you will find that the best bundle of consumption for you is 4 units
of O and 3 units of P.
3 | Micro-economics
Q2: Given the following marginal utility curve of Mr. John for consumption
of juice, explain the shape of this curve and show how many should he drink
to maximize his utility.
Answer
First: Utility maximization
As long as MU is greater than zero,
drinking additional one will increase
his total utility, therefore he will drink
seven cups of juice by the time he has
finished his seventh juice the MU of
juice to him is zero as shown by
intersection of the utility curve with x-
axis after seven juices the MU of juice
is negative so drinking more juice will
decrease his utility.
Second: Explanation of the figure 6
5
Firstly, the marginal utility curve is 4
increasing after the first unit till the Marginal 3
2
third one, the curve stops increasing at utility
1
the fourth unit it gives the same utility
as the third one gives then it starts to
slope downward as each additional unit
is less satisfying, finally the seventh
unit get zero utility then starts to give
negative utility at the eighth unit of the 0 1 2 3 4 5 6 7 8
juice.
Quantity of juice
4 | Micro-economics
Topic 4: Consumer Prefrences:
Question 1:
Answer
Remember the rule
(4)*1.5+ (6)*1 = 12
So the combination bundle that would maximize his utility is 4 units of good A
& 6 units of good B
5 | Micro-economics
Q2: Suppose the prices remain constant at 3$ for the food and 2$ for cloth and
the budget rises to $18, how will AB shift?
Cloth
6
A
B
Food
4
Answer
When income rises he will be able to buy more of both products therefore his
budget line will shift up to the right as shown in the figure.
Units of food he is able to buy will rise to 18/3= 6
Units of cloth he can buy 18/2=9
Cloth
9 A
6
A
B
B
4 6 Food
6 | Micro-economics
