SVKM’s NMIMS ASMSOC (NAVI MUMBAI CAMPUS)

Microeconomics for B.Sc (Finance) | Course Code : 42EC0C005

Students Handout / Notes

Session 9 – 18/08/23
Worksheets

Q#1. You are the manager of a store that carries soft drinks. Due to a local economic boom, your
customers’ incomes are forecasted to rise by five percent during the next month. The income elasticity
of demand for these products is estimated to be –2.0. Estimate the change in the quantity of your soft
drink orders required to accommodate the new demand without a surplus or shortage of inventory
(that is, how much will demand for the soft drinks change due to the increased income?).

Q#2. Concerned about the behavior of college students getting addicted to smoking, the government
of Maharashtra is considering policy to help reduce smoking by young college students. The
government is considering a special tax – Smoking Tax. While cigarettes is currently taxed, this tax
would increase the overall tax on cigarette. It would have the effect of raising the price of cigarette
(and thus the tax revenue raised per unit of cigarette sold) by 10%.

You are given the following information, and asked to calculate the effect of the tax on both
smoking and on government revenue.
Price elasticity of demand for smoking: -0.4
Number of packets of cigarettes currently consumed per year: l,000,000

a) By how much will consumption of cigarettes fall after the tax is imposed?
b) Will government revenue increase or decrease after the tax is imposed? How do you
know this?
c) How might your answers to (a) and (b) vary if looking at the long-run, rather than the immediate
effect?

Q#3. 7. Suppose the market for burgers in Mumbai has a supply curve of P = 30 + Q, and a demand
curve of P = 240 – 2Q.

Assume that the market is perfectly competitive.

a) What will the equilibrium price and quantity of burgers be?

b) Calculate the producer and consumer surplus associated with the equilibrium found in
part (a). Illustrate on a graph.
c) The local government wants to promote the consumption of Vada Pav and therefore they levy a tax
of Rs.18 per burger sold. What is the new quantity of burgers sold? What price do consumers pay?
What price do sellers receive? Illustrate on a graph.
d) Find the new producer and consumer surplus associated with your answer to part (c).
e) How much revenue does the government raise from the tax?
f) How does the sum of consumer surplus, producer surplus, and revenue after the tax (your answers
to (d) and (e)) compare to the sum of producer and consumer surplus found before the tax (your
answer to (b))? What does the difference between the two represent?

Q#4. Concerned about the high cost of housing in Mumbai, the BMC (Brihanmumbai Municipal
Corporation) solicited ideas to help residents afford new homes. Note that Mumbai is a densely
populated urban city. It is surrounded by the Arabian sea on both sides, so there is little room to
expand.

The following suggestions were received:

• A corporator, Suresh Shinde of BMC notes that the lack of space is a problem. He proposes easing
Costal Zoning restrictions, so that new flats can be built near the coastal zone which was till now,
prohibited
• Another corporator, Mahesh Manjerekar argues that Suresh’s plan will benefit developers, rather
than homebuyers. He suggests providing a Rs.10,000 housing subsidy to all Mumbai residents, arguing
that this extra cash will help them cope with the high cost of housing. You have been asked by city
leaders to evaluate these two proposals.

a) Using a supply and demand diagram, illustrate the effect of Suresh Shinde’s plan to ease
zoning restrictions. Be sure to show both the initial equilibrium and what changes occur after
the law is changed. Briefly explain why you have drawn the curves as you did.
b) Using a second supply and demand diagram, illustrate the effect of Mahesh Manjerekar’s
proposed subsidy. Again, be sure to show both the initial equilibrium and what changes occur
after the law is changed. Briefly explain why you have drawn the curves as you did.
c) Based on your analysis, which policy would you recommend? Why?

Q#4. In India, we consume both rice and wheat and therefore the markets for wheat and rice are
interrelated. The demand and supply equations are as follows:
Wheat Demand: Qd(w) = 8000 - 20P(w) + 0.2P(r)
Rice Demand: Qd(r) = 6000 - 15P(r) + 0.1P(w)
Wheat Supply: Qs(w) = 2000 + 30P(w)
Rice Supply: Qs(r) = 1800 + 25P(r)
Given that P(w) is the price of wheat in Rupees and P(r) is the price of rice in Rupees, determine the
equilibrium prices and quantities for both markets.

Q#5. In the Indian market for smartphones, the demand equation for a specific brand is given by:

Q=1000−10P+0.2I−0.1A
Where:
• Q is the quantity demanded in thousands of units
• P is the price in Indian Rupees
• I represents consumer income in lakhs of Rupees
• A denotes the brand's advertising expenditure in lakhs of Rupees

The current price of the smartphone is ₹20,000, the average consumer income is ₹5,00,000, and the
advertising expenditure is ₹2,00,000. The price elasticity of demand for this smartphone is estimated
to be -2.5.
Calculate the following:
a) The current quantity demanded (Q) for the smartphone.
b) The income elasticity of demand.
c) The advertising elasticity of demand.
d) If the government introduces a sales tax of 10% on smartphones, how much will the price increase,
and what will be the new quantity demanded? Discuss the tax incidence on consumers and producers.
Q#6. In the Indian market for luxury watches, the demand equation for a particular brand is given by:
Q=500−5P+0.2I−0.1A Where:

• Q is the quantity demanded in thousands of units

• P is the price in Rupees
• I represents consumer income in lakhs of Rupees
• A denotes the brand's advertising expenditure in lakhs of Rupees
Given the following initial values:
• Initial price (P1): ₹50,000
• Initial consumer income (I1): ₹10,00,000
• Initial advertising expenditure (A1): ₹3,00,000
After some changes, the new values are:
• New price (P2): ₹60,000
• New consumer income (I2): ₹12,00,000
• New advertising expenditure (A2): ₹3,50,000

Calculate the following:

a) The initial quantity demanded (Q1) and the new quantity demanded (Q2).
b) The percentage change in price (P).
c) The percentage change in consumer income (I).
d) The percentage change in advertising expenditure (A).
e) Using the arc elasticity formula, calculate the price elasticity of demand between the initial and new
situations.

Q#7. In our economy, there are two key sectors: Agriculture and Information Technology (IT). India
has limited resources and can produce only two goods: Wheat and Software Applications. The
following information is given:

Agriculture:
• Producing 1 ton of wheat requires 2 units of labour and 1 unit of land.
• Producing 1 software application requires 4 units of labour and 1 unit of land.

Information Technology (IT):

• Producing 1 ton of wheat requires 1 unit of labour and 2 units of land.
• Producing 1 software application requires 2 units of labour and 4 units of land.
Assume that there are a total of 500 units of labour and 300 units of land available.

Part 1:
a) Calculate the opportunity cost of producing 1 ton of wheat in terms of software applications in both
the Agriculture and IT sectors.
b) Calculate the opportunity cost of producing 1 software application in terms of tons of wheat in both
sectors.

Part 2: Given the resource constraints, draw the PPF for the Indian economy. Label the axes and the
points of inefficiency, feasibility, and scarcity.

Part 3: Calculate the MRT (Marginal Rate of Transformation) when the economy moves from
producing 100 tons of wheat to 200 tons of wheat. Interpret the MRT in terms of the trade-off
between wheat and software applications.

Part 4: If the economy is currently producing 150 tons of wheat and 50 software applications,
determine whether this point is efficient, feasible, or unattainable. Provide a rationale for your
answer.

Q#8. Case Study: Price Controls in the Indian Rice Market

In India, the government is concerned about the affordability of essential goods, particularly rice. To
address this concern, they have implemented both a price ceiling and a price floor in the rice market.

Price Ceiling: The government has imposed a maximum price of ₹20 per kilogram of rice. Any price
above this level is considered illegal. However, due to market dynamics, the equilibrium price and
quantity of rice might differ from this maximum price.

Price Floor: The government has also introduced a minimum price of ₹15 per kilogram of rice to
support local farmers. This means that rice cannot be sold at a price lower than ₹15 per kilogram.
Again, the market forces could lead to a different equilibrium price and quantity.

Scenario: The demand and supply equations for rice are as follows:
Demand: Qd=8000−20P
Supply: Qs=2000+30P

Part 1: Solving for Equilibrium without Price Controls:

a) Calculate the equilibrium price and quantity of rice without any price controls.
b) Calculate the consumer surplus, producer surplus, and total surplus at this equilibrium.

Part 2: Analyzing the Effects of Price Ceiling:

a) Determine the impact of the ₹20 price ceiling on the equilibrium price and quantity of rice, if any.
b) Calculate the deadweight loss resulting from the price ceiling.
c) Discuss the potential consequences of the price ceiling on consumer behavior and rice market
dynamics.

Part 3: Analyzing the Effects of Price Floor:

a) Determine the impact of the ₹15 price floor on the equilibrium price and quantity of rice, if any.
b) Calculate the surplus or shortage resulting from the price floor.
c) Discuss the potential implications of the price floor on the livelihoods of farmers and the efficiency
of the rice market.

Part 4: Finding the New Equilibrium: Considering both the price ceiling and price floor, determine the
actual equilibrium price and quantity of rice that would prevail in the market. Explain the rationale
behind this outcome.

Part 5: Evaluating the Price Controls:

a) Analyze the overall effectiveness of the government's interventions (price ceiling and price floor) in
achieving their intended goals.
b) Discuss any unintended consequences that could arise from these price controls and their potential
long-term impacts on the rice market.