Question

QUESTION 1

1. The market for bananas and muffins are interrelated. Assume that bananas and muffins have a typical upward sloping supply and downward sloping demand curves. In a market for bananas, the current equilibrium price is $1.00 per kilogram and the equilibrium quantity is 1,000 kilograms per week. Suppose the government imposes a price floor on bananas at $1.20 per kg, causing the quantity supplied to increase to 1,500 kg per week.

                                                    

1. Based on the above information, draw a diagram showing the demand, supply and market equilibrium price and quantity for bananas before the introduction of the price floor. Would the price floor result in a shortage, a surplus or neither? Explain and show it in the same diagram. .

(2 marks)

2. Calculate the price elasticity of supply if the price increases from $1.00 to $1.20. Show your work using the mid-point formula.

(2 marks)

3. Between $1.00 and $1.20, is the supply of bananas elastic, unit elastic or inelastic? Briefly explain.

(1 mark)

4. Bananas are an input for producing muffins. Draw a new market diagram for muffins and show graphically the impact of the introduction of the price floor for bananas on the market equilibrium price and quantity for muffins. Label and compare the old equilibrium and the new equilibrium points.   
   2. marks)

2. The government is considering to impose a per unit tax of $2.50 on DVDs. Market surveys have shown that the demand for DVDs in Malaysia is perfectly elastic. If the supply of DVDs is a typical upward sloping curve, show graphically the impact of this per unit tax on the market for DVDs. How will the tax burden be shared between buyers and sellers of DVDs?
   3. marks)

3. Assume Salina has $10 to spend on pizza, ice cream sundaes, or some combination of the two. Assume the price of a slice of pizza (P_P) is $2, and the price of ice cream sundae (P_I) is $3. The total utility from consuming various quantities of pizza and ice cream sundaes are given in the table below.

Pizza	TU for Pizza	Ice Cream	TU for Ice Cream
0	0	0	0
1	16	1	21
2	28	2	39
3	36	3	48
4	40	4	54
5	42	5	57

            Knowing that Salina is a utility maximizer, use the information in the table above to predict the quantities of slices of pizza and ice cream sundaes Salina would purchase with $10. Compute the total utility she would enjoy with that purchase. Show your work. (5 marks)

Answer 1

classmate Date Page Question 1. (bananas) (i) $1-2 Surplus price floor E $1 1000 ISO Q (bananas) # Equilibrium occurs at point E. * Due to price price floor above equilibrium price, it results in surplus, as Quantity supplied is more than quantity demanded Price supply 1000 1500 $1.20 ed % A En quantity supplied % A in price 1500-1000 x 100 (000 SO che lo 1.20-1 X 100 0 20x100 50 20. (H) 2.5 So, price elasticity of supply is 25 Since elasticity is greater than 1 (2:57 1), supply of elache, le supply is very responsive to changes in price Since bananas are an input for muffin, as because of price floor, price of bananas Increase cost of production due to which henit. Scanned by TapScanner PV) n... linds of muffins Increases,