Assignment 1
1. Define the law of demand. Explain why the demand curve slopes downward.
2. Distinguish between a shift in the demand curve and a movement along the
demand curve. Provide examples of each.
3. Define the law of supply. Why does the supply curve typically slope upward?
4. What is market equilibrium? Explain how the equilibrium price and quantity are
determined in a competitive market.
5. The following table shows the market demand and supply schedule for a
product:
a. Determine the equilibrium price and quantity.
b. If the market price is $20, calculate the surplus or shortage in the
market.
c. Suppose a price ceiling is imposed at $20 in the market. Illustrate
the price ceiling in the graph and show the resulting shortage.
d. If the government provides a subsidy to producers, causing the
quantity supplied to increase by 5 units at each price, adjust the
supply schedule. Calculate the new equilibrium price and quantity.
6. Define price elasticity of demand (PED). How is it calculated? What does a PED of
-2 mean?
7. Classify the following scenarios as elastic, inelastic, or unit elastic:
a. A 10% increase in price causes a 20% decrease in quantity demanded.
b. A 5% decrease in price causes a 3% increase in quantity demanded.
c. A 15% increase in price causes a 15% decrease in quantity demanded.
8. The price of a product rises from $10 to $12, and as a result, the quantity
demanded falls from 50 units to 40 units.
a) Calculate the price elasticity of demand using the midpoint method.
b) Interpret the result.
9. A firm is selling a product at $20 per unit, with a quantity demanded of 100 units.
The price elasticity of demand is estimated to be -1.5.
a) If the firm increases the price by 10%, calculate the percentage change in
quantity demanded.
b) Will total revenue increase or decrease? Explain.
10. The price of coffee increases by 5%, and as a result, the quantity demanded of
tea increases by 10%.
a) Calculate the cross-price elasticity of demand.
b) Are coffee and tea substitutes or complements? Explain.
11. A consumer’s income rises by 20%, and as a result, the quantity demanded for a
luxury car increases by 40%.
a) Calculate the income elasticity of demand.
b) Is the luxury car a normal or inferior good?
12. A farmer sells wheat at $5 per kg. When the price rises to $6, the quantity
supplied increases from 1,000 kg to 1,200 kg.
a) Calculate the price elasticity of supply using the midpoint method.
b) Is the supply elastic, inelastic, or unit elastic?
13. A government imposes a $2 per unit tax on a product whose demand elasticity is
-0.8 and supply elasticity is 1.2.
a) Calculate the percentage change in equilibrium quantity.
b) Determine who bears the greater burden of the tax—consumers or
producers—and explain why.
14. Define price ceilings and price floors. Provide examples of each and explain their
impact on market equilibrium.
15. Under what conditions is a price ceiling binding? What are the likely market
outcomes when a binding price ceiling is imposed?
16. Explain how the imposition of a tax affects the equilibrium price and quantity in a
market. Distinguish between the burden of tax borne by buyers and sellers.
17.
