Introductory Microeconomics (CDS)

ECON 111 - Introductory Microeconomics (CDS)

Assignment One

Summer 2016

Due: June 5th before 11:55pm

No late submissions will be accepted

No ‘Photocopy’ answers or plagiarism will be accepted

Assignments uploaded to Moodle MUST be in .pdf format otherwise a grade of

ZERO will be assigned.



Instructions

1. Covers chapters 1, 2, 3, 4 and 33 pgs. 823-835 from Ragan 14th ed.

2. Please review the Practice Problems to see examples of how to answer both types of

question.

3. Include diagrams with the relevant question (don’t put them all at the end). An

useful diagram-drawing app can be found on the MyEconLab site. It allows you to

draw, save, and email yourself diagrams.



Write clearly and concisely. Devote some time to give the graphs, plots and tables a

format that is easy to understand. The way you present your answers matter for the final

grade. Even if a question is mainly analytical, briefly explain what you are doing, stressing

the economic meaning of the various steps. Being able to convey your thoughts effectively

is an invaluable asset in life.



True, False, or Uncertain (6 each)

Explain why each of the following statements is True, False, or Uncertain according to

the economic theory you have learned. A diagram with an explanation or a two to four

sentence explanation supporting your conclusion should be sufficient. Unsupported answers

will receive no marks.

A1-1.

When considering the cost of post-secondary education, the salary of unskilled labourers is

immaterial.

A1-2.

If the production possibilities boundary shifts outward (away from the origin) fewer goods

of every type can be produced.

A1-3.

The following statement is a purely positive economic statement: ‘everyone should be able

to find employment.’

A1-4.

The function y = α + βx − γx2 never exhibits marginal diminishing returns.

A1-5.

A linear demand curve has a constant elasticity of demand for every quantity and price

combination.

A1-6.

An increase in the cost of inputs and a simultaneous increase in demand will increase the

equilibrium value of prices and quantities.

A1-7.

With a per unit sales tax, producers bear more of the burden when the demand curve for

the product is less elastic.

A1-8.

There are always gains from trade.



2



A1-9.

Using supply and demand diagram separately analyse the effects of each of the following

events on the market for solar energy. From an initial market equilibrium, how will output

and price change?

part a (3)

The cost of oil increases.

part b (3)

The cost of producing solar panels increases.

part c (3)

The cost of producing energy from wind power increases.

part d (3)

The Canadian government announces it will pay a subsidy to producers of one cent per

kilowatt-hour of solar power produced.

A1-10.

Consider the following supply and demand equations for frozen poutine: a Montreal

favourite.

Qd = 485 − 3P



Qs = 85 + P



Qs is the quantity supplied and Qd is quantity demanded while P represents the price.

part a (4)

Neatly graph the supply and demand curves being sure to identify the P and Q intercepts

for the demand curve and the P intercept for the supply curve.

part b (4)

Calculate the equilibrium price and quantity. Identify it on your diagram.

part c (4)

Calculate the price elasticities of both supply and demand at the equilibrium point. [Hint:

You can use the point method if you are comfortable with it or by choosing prices just above

and below the equilibrium and the associated quantity, you can use the average arc method.]

part d (5)

(d) Imagine that consumers realize that frozen poutine tastes terrible, yuck! They had

forgotten just how good a fresh poutine can be! Suddenly they demand 40 fewer units of

instant poutine at any price. What is the new demand curve? What is the new equilibrium

level of output and prices?

part e (3)

By how much did the equilibrium quantity change in part d? Why did it not decrease

by 40 units? Explain.

3



A1-11.

The peoples of Leafsland and Habstown are historical rivals however recently they have

fallen on hard economic times. A young economist tells them that if they trade with each

other, they may be able to enjoy more goods. Currently neither peoples trade with the other.

Leafsland can produce output mix codenamed ‘Dougie’ or output mix codenamed ‘Wendel’.

Habsland can produce output mix codenamed ‘Maurice’ or output mix codenamed ‘Jean’.

The table below illustrates the output mixes available.



Leafsland

Habstown

Output Mix food hockey sticks Output Mix food hockey sticks

Dougie

6

18

Maurice

3

18

Wendel

18

6

Jean

8

4



part a (4)

What is the opportunity cost of producing hockey sticks for each peoples and for each

output mix.

part b (2)

With no trade, Leafsland chooses output mix ‘Dougie’ and Habstown chooses output mix

‘Jean’. What is the total output of each good?

part c (6)

Consider the case when Leafsland chooses output mix ‘Dougie’ and Habsland chooses

output mix ‘Maurice’. Does either country have an absolute advantage in making either

good? Would there be any gains from trade? Explain why or why not.

part d (5)

(d) Suppose that trade between the two peoples is now allowed. To maximize total output,

which country should export food and which should export hockey sticks? Which output

mix does each country choose? What is the world output of food and hockey sticks?

part e (3)

Following from part (d), what is the range of relative prices that food trades at? Hint: the

price of food is measured in foregone units of hockey sticks.



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