Question 1

Production possibility of Ireland to produce sheep and map

20000
Sheep

10000

Maps

The production possibility curve for Ireland is shown above the country can either produce

20000 units of sheep or 10000 units of maps at the existing technology and capacity

Production possibility curve for Norway to produce sheep and map

13000
Sheep

9000

Maps
The production possibility curve for Norway is shown above the country can either produce

13000 units of sheep or 9000 units of maps the present technology and capacity.

Absolute advantage

The country with an absolute advantage in the production of sheep is Irene because the country

will produce 20000 units of sheep will it counterpart Norway will produce 13000 sheep. On the

other hand, Iceland will be have an absolute advantage over Norway in the production of maps.

It is because the country will produce 10000 units of sheep will Norway will produce 9000 units

of maps.

Comparative Advantage

The country with a higher comparative advantage in the production of sheep is Ireland. It is

because it will have to forego produce 10000 units of maps to produce sheep while Norway will

have to forego 9000 units. In the production of maps the country with a higher comparative

advantage is Ireland it because it will forego a higher number of units of sheep than Norway

Relative Price

If the two countries were to trade the relative price of sheet and maps will be

Relative price of sheep=Units produced by Iceland/Units produced by Norway

Relative price of sheep=20000/13000

Relative price of sheep=1.54

Relative price of map=Units produced by Iceland/Units produced by Norway

Relative price of map=10000/9000

Relative price of map=1.11

Question 2

Market for paper in the Northeast region of the United States

S2

S1
F
E
P1 p2
Price

e
e
E
D

q2 q1

Quantity

The initial equilibrium is represented by point E where the price of goods is p1 and the quantity

demand is q1. When Dunder Mifflin went under the market was force with a storage in supply

and excess demand. The subsequent this is a shift in the supply curve from S1 and S2. The shift

caused the equilibrium point to move from E to F and the price to increase to p2 and quantity to

reduce to q2.
Market for tickets

F
P3 p2 P1

E G

e
Price

e
E

q1 q1 q2

Quantity

As the event gets closer the demand of tickets will be expected to increase that will lead to an

upward shift in the demand curve of tickets. That will cause the equilibrium shift from E to G.

the quantity supplied will increase from q1 to q2 and the price will rise from p1 to p2. It is

expected that the event organizers will react by increasing supply of tickets downward the supply

curve upward. The consequence of the shift is a change in the equilibrium from G to F. The

quantity supplied will increase to q 3 and the price will reduce to p3.
Market for chocolate
S2

S1
P3 p2 P2

E G

e
Price

e
E

Q2 q1 q3

Quantity

The study by the American Heart Association will cause the demand curve chocolate to shift

outwards that will lead to an increase in the quantity supplied to q2 and price to increase to q2. If

the producer of chocolate reacts by increase quantity it will cause the supply curve to shift

downwards. The price will reduce to p3 and the quantity will increase to q3.
Market for peanut, Jelly and Jam

Peanut butter
S2

S1
G
P2 p1

E
Price

e
e
E
D

q2 q1

Quantity

If the price of Jelly was to skyrocket it demand and that complimentarily goods will reduce. It

will lead to shift in the demand curve downward as producer supply less in the market. It will

make the price of peanut butter to reduce from p1 to p2 while the demand will reduce from q1 to

q2.
Jam

S1
G
P1 p2

E
Price

e
e
E
D

Q1 q2

Quantity

Increase in the price of Jelly will make consumers to change their preference and consumer more

of prefer the substitute good. It will led to rise in the demand for Jam causing the demand curve

to shift upwards it will make the price to increase to p2 and quantity to q2.
Question 3

Area of Interest and Market intervention

Beer

E
S1
e G
e
P1 p2
Price

4000 5000

Quantity

If the government was to limit the number of suppliers the quantity will reduce from 5000 units

to 4000 units. It will shift the supply curve upwards. The consumer demand weight loss will be

represented by area CGE. If the producer can sell at $ 2 per cup and the consumers can buy at $5

then the quota rent amount is $ 3.

Dairy market

E
S1
e G
e
P1 p2
Price

Q1 q2
Quantity

If a price floor was set above the equilibrium price at p2 the consequence will be a rise in the

supply curve and make reduce demand that will cause the quantity supplied to reduce. The

consumer deadweight loss is represented by area CEG. The measure will make producers better-

off since their profit will increase.

Efficiencies of Market intervention

The main inefficiency of market interventions is reduction in the welfare of the consumers. In

addition the producers’ welfare is also reduced. The market interventions also prevent optimal

operations of the market. However, even with those inefficiencies the market interventions are

still needed because they help to prevent the consumer of bad goods at the same time is used to

promote some sectors of the economy.

Question 4
Increase in price from $ 75 to $ 95 reduces to a rise in the quantity from 130000 to 175000.

Therefore the demand obeys the law of demand thus, the data represents a supply curve.

Price elasticity= Percentage change in quantity*price/ percent change in price*quantity

Price elasticity=25%*75/47%*130000

Price elasticity=4.5*06

The price elasticity is for the supply of goods because it is positive value.

Since the value of price elasticity indicate that the good is almost inelastic.

Income elasticity of Demand

Income elasticity= (% change in demand/ initial demand)/ (% change in income/ initial income)

Income elasticity= (-37%*1500)/ (45%/100000) =-54.2

The income elasticity of the good is less than zero. It means that the demand of good decreases

as income rises thus, the good is inferior.

Cross-price elasticity of demand

Cross-price elasticity of demand= change in the quantity of good A/change in the price of good

B* Sum of the price of good A/Sum of the quantity of good B

Cross-price elasticity of demand=30/-15*(85+70)/ (40+70)

Cross-price elasticity of demand=-2.82

The two good are complementary because the cross elasticity is negative. As the price of good A

increases the demand for B reduces because it is required for it consumptions.

Question 5

Market for firewood

F
P1 p2

E
Price

e
e
E
D

q2 q1

Quantity

Since the demand elasticity of demand is greater than one then the demand of the good is elastic

while the supply is less than one then supply is inelastic. It means that increase in the tax will

lead to a rise in the price of the good. It will cause the demand of the good that will shift the

supply curve upwards. The deadweight loss due to the tax is represented by triangle EFC.

The consumer bears more of the tax incident because their price elasticity is elastic. Thus the

supplier are able to transfer the tax responsibility to them. While the supplier have an inelastic

price elasticity thus are not affect by the changes.

Tax revenue= tax per unit* unit sold

Tax per unit= $5

Unit sold=23000

Tax revenue=$5*23000

Tax revenue=$115000

Question 6

Crepes

Quantity of Crepes Total Utility Marginal Utility Marginal Utility per $

0 0 0 0

1 14 14-0=14 14/5=1.8

2 22 22-14=8 8/5=1.6

3 28 28-22=6 6/5=1.2

4 34 34-28=6 6/5=1.2

5 39 39-34=5 5/5=1

6 43 43-39=4 4/5=0.8

7 46 46-43=3 3/5=0.6

8 48 48-46=2 2/5=0.4

9 49 49-48=1 1/5=0.2

10 50 50-49=1 1/5=0.2
Film Tix

Quantity of Film Tix Total Utility Marginal Utility Marginal Utility per $

0 0 0 0/10=0

1 24 24-0=24 24/10=2.4

2 32 32-24=8 8/10=0.8

3 38 38-32=6 6/10=0.6

4 42 42-38=4 4/10=0.4

5 44 44-42=2 2/10=0.2

Budget line
5
4
3
2
Crepes

1 2 3 4 5 6 7 8 9 10

Movies

The optimal combination of the two goods is six unit of Creepes and two units of Movies. It is
because at this combination marginal utility per dollar for the two goods is the same.
The marginal utility curve is downward sloping due to the law of diminishing return at the
number of units increases the utility reduces