Lecture 1

s.09.1
Lien and Laura both have bakeries. Laura can bake 1 cake or 1 brownie in 1 hour and
Laura only works 5 hours every day. Lien can bake 4 brownies in one day or two cakes
in one day and like Laura, Lien only works 5 hours per day.
*What is the opportunity cost of 1 cake for Laura and Lien, in terms of the number of
brownies?
*What about the opportunity cost of 1 brownie in terms of the number of cakes for
Laura and Lien?

● The opportunity cost of 1 cake for Laura in terms of the number of brownies is 1
brownie.
● The opportunity cost of 1 cake for Lien in terms of the number of brownies is 2
brownies.
● The opportunity cost of 1 brownie in terms of the number of cakes for Laura is 1 cake.
● The opportunity cost of 1 brownie in terms of the number of cakes for Lien is 1/2
cake.

Lecture 2, 3, 4 & 5
f.08.2
Exercise 1
For the following scenarios assume the market is in equilibrium.
a. Coca and Pepsi are substitute goods. How would an increase in the price of Coca affect
the equilibrium price and the equilibrium quantity of Pepsi?
If there is an increase in the price of Coca, because Coca and Pepsi are substitutes goods, the
demand for Pepsi will increase. Therefore, the demand curve of Pepsi will shift to the right while
the supply curve remains unchanged, resulting in the higher equilibrium price and higher
equilibrium quantity of Pepsi.

b. Suppose there is an increase in the price of lemons and sugar, which are an input in the
production of lemonade. What will happen to the equilibrium price and equilibrium
quantity of Lemonade?
An increase in the price of lemons and sugar which are inputs in the production of lemonade
would cause the supply curve of lemonade to shift to the left while the demand curve remains
unchanged. Therefore, the new equilibrium price is higher and the new equilibrium quantity of
lemonade is smaller.

c. At the Ut Ut craft beer restaurant, beer and potato chips are complements. Suppose that
there is an increase in the price of beer and an increase in the price of potato, an input in
the production of potato chips. How would these changes affect the equilibrium quantity
and equilibrium price in the market for potato chips?
If there is an increase in the price of potato, an input in the production of potato chips, supply for
potato chips will decrease and the supply curve of potato will shift to the left. Moreover, as beer
and potato chips are complements, an increase in the price of beer will decrease the demand for
potato chips, and the demand curve of potato will shift to the left.
d. What would happen to the equilibrium quantity and the equilibrium price of public bus,
an inferior good, if at the same time income increases and the price of petrol decreases?
Assume for this question that petrol is an input in the supply of public bus.
3 cases.
If income increases, people will use less public bus, an inferior good, and demand for public bus
will decrease. Meanwhile, the price of petrol, an input in the supply of public bus, decreases,
means that supply for public bus will increase.

e. What happens to the equilibrium price and equilibrium quantity in the market for baby
food if there are technological advances in the production of baby food and at the same time
a baby boom happens? Assume a baby boom means that a greater than normal number of
babies are born during a period of time?
3 cases.
If there are technological advances in the production of baby food, supply for baby food will
increase and the supply curve will shift to the right. At the same time, a baby boom happens so
that the demand for baby food will increase.

Exercise 2
Consider the market for electricity in Robinson Island. The price (P) is given in dollars per
kilowatt hour (kWh) and the quantity (Q) is measured in kilowatt hours (kWh). Demand
and Supply equations for the electricity are as follows:
Market Demand: P = 10 – Qd
Market Supply: P = 2 + Qs
a. Find the equilibrium price and equilibrium quantity in the market for electricity. Plot a
graph to describe the equilibrium. Be sure your graph is completely and clearly labeled
(label all intercepts, label the axis, label the equilibrium price and the equilibrium quantity,
label any curves that your draw).
- Market Demand: P = 10 – Qd => Qd = 10 - P
- Market Supply: P = 2 + Qs => Qs = P – 2
- Equilibrium price: Qd = Qs => 10 – P* = P* – 2 => P* = 6
- Equilibrium quantity: Q* = 10 – P* = 4
b.​ ​What is the value of consumer surplus and producer surplus at the equilibrium? Use a
graph to illustrate your work and find the numerical values for both the consumer and the
producer surplus.
- Consumer surplus: ½ x 4 x 4 = 8 $
- Producer surplus: ½ x 4 x 4 = 8 $
c. Assume that during the past summer, because of the record-breaking heat, the
government set a price ceiling in the market for electricity at 7 dollars per kWh. Is there a
shortage or a surplus in the market once the price ceiling is set? Calculate the value of
consumer surplus, producer surplus, and deadweight loss due to the implementation of this
price ceiling.

- The price ceiling in the market for electricity is above the equilibrium price, so there is no effect
on the market. There is no shortage or surplus.
- The consumer surplus and producer surplus are still 8$ and there is no deadweight loss.

d. Assume that the government sets a price ceiling at 5 dollars per kWh. With this new price
ceiling is there a shortage or a surplus in the market once the price ceiling is implemented?
Calculate the value of consumer surplus, producer surplus, and deadweight loss due to the
implementation of this price ceiling.

With the new price ceiling at 5$ per kWh, there is a shortage in the market (Qs < Qd)
Due to the implementation of this price ceiling:
- Consumer surplus: ½ x (2+5) x 3 = 10.5 $
- Producer surplus: ½ x 3 x 3 = 4.5 $
- Deadweight loss: ½ x 1 x 2 = 1 $

Exercise 3
f.08.3
Assume that in the market for LCD TV, demand and supply are described by the following
equations where Q is the quantity of LCD TV and P is the price per screen:
Demand: ​𝑄𝑑​=300−10​𝑃
Supply: ​𝑄𝑠​=10P−200
a​. Now assume the government imposes an excise tax of $5 per LCD screen sold. This excise
tax is imposed on the producers of the LCD screens. What will be the equation that
describes the new supply curve, written in x-intercept form, after the implementation of this
excise tax?
- Equilibrium price: Qd = Qs => 300 – 10P = 10P – 200 => P* = 25$ per screen
- Equilibrium quantity: Q* = 10P* - 200 = 50 LCD screens
- When excise tax is imposed on the producers of the LCD screens, the supply curve will shift to
the left by 5$ per screen. It means that the new supply curve function is:
Qs = 10 (P – 5) – 200 = 10P – 250
Therefore, the new supply curve written in x-intercept form is: Qs’ = 10P – 250
b. Given the excise tax described in (b), calculate the new equilibrium quantity, the price
consumers pay with the tax, and the post-tax price producers receive once the excise tax is
implemented.
- The price consumers pay with the tax equals the new equilibrium price: Qs’ = Qd => 10P – 250
= 300 – 10P => P*’ = 27.5$ per screen
- The new equilibrium quantity: Q*’ = 10P*’ – 250 = 25 LCD screens
- However, once the tax is implemented, the post-tax price producers receive is just: 27.5 – 5 =
22.5$ per screen