The Copperbelt University

Directorate of Distance Education and Open Learning

BBA/BS/BSP/HRM/BF 110/BSE 140: Principles of Economics

Problem Set One

1. Based on your acquired knowledge write brief notes on the following
a) Economics.
b) The economic problem.
c) Opportunity cost.
d) Production possibility frontier.
e) Pareto improvement.
f) Economic systems.
g) Positive and normative economics.
h) Micro and macroeconomics.
2. List and explain the fundamental questions that have to be addressed before an
allocation of scarce resources is made by society. In your explanation use a relevant
practical example.
3. Give two examples of a positive and normative statement.
4. Table 1 shows different output produced by a hypothetical society.
Table 1: Output of Food and Weapons
Output Food Weapons
A 0 30
B 5 28
C 10 25
D 15 21
E 20 15
F 25 0

a) Draw the production possibility frontier from the information given with weapon
production on the vertical axis. Label the inefficient point as 𝐺 and the unattainable
point as 𝐻.
b) What does the production possibility frontier show?
c) What does producing at point 𝐴 mean for society?
d) Can this society produce 28 units of food and 15 units of weapons? Explain.
e) Would society produce 10 units of food and 15 units of weapons? Explain.

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 f) Fill in Table 2 using the information given.
Table 2: Calculation of Opportunity cost
Movement along Change Change Opportunity cost
the curve in food in weapons of food
From A to B
From B to C
From C to D
From D to E
From E to F

5. Suppose that the demand and supply schedules for meat are as presented in Table 3:
Table 3: Demand and Supply Schedule of Meat
Price of meat (K) 68 70 72 74 76
Quantity demanded 16 15 14 13 12
Quantity supplied 4 6 8 10 12

a) Draw the supply and demand curves for meat.

b) What price will consumers pay for the meat at equilibrium? What quantity will they buy
and how much will be supplied?
c) Suppose the government imposes a price of K70 per kilogramme, explain what will
happen in this market.
d) What is likely to happen if the price of meat became K80 per kilogramme?
6. In economics, we say that the price of a good regulates the quantities demanded and
supplied. If the price is too high, the quantity supplied exceeds the quantity demanded. If
the price is too low, the quantity demanded exceeds the quantity supplied. Table 4
shows the demand and supply schedules for tea.
Table 4: Demand and Supply Schedule of Tea
Price of meat (K) 0.5 1.0 1.5 2.0 2.5
Quantity demanded 9 6 4 3 2
Quantity supplied 0 3 4 5 6

a) Draw the supply and demand curves for tea.

b) Determine the equilibrium price and quantity for tea.
c) Presenting the solution in a table, calculate the shortage or surplus at each price.
d) What happens to the price of tea when there is a shortage? What happens to the price
tea when there is a surplus.
e) Explain what is happening when the price is K1 and K2.
f) Suppose the price of honey falls, what is expected to the demand for tea?

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g) Let us suppose that the quantity demanded now becomes as shown below while the
quantity supplied remains as presented in Table 4.
Quantity demanded 13 10 8 7 6

Answer the questions (a) to (d) using this new information. Note: The old quantity
demanded and supplied must be shown.
h) The producer of tea develops a new technology which allows it to produce the new
quantities produced as follows.
Quantity supplied 3 6 8 10 12

Answer the questions (a) to (d) using this new information. Note: The old quantity
demanded and supplied must be shown.
7. The demand and supply functions of a good are, respectively, given by:
𝑃 = 50 − 2𝑄 and 𝑃 = 𝑄/2 + 25
where 𝑃 denotes the price and 𝑄 quantity demanded and quantity supplied.
a) Determine the equilibrium price and quantity.
b) Using a well-labelled diagram, show the equilibrium price and quantity.
c) If the government decides to impose a fixed tax of K5 on each good, find the new
equilibrium price and quantity.
d) Using a well-labelled diagram, show the new equilibrium price and quantity.
e) From the solutions found, explain the effect of the fixed tax on the price paid by
consumers, price received by suppliers and the market equilibrium.
f) How much more does the consumer pay per good? How much is paid by the firm?
g) What would happen if the government set the price of the good at K40?
8. The price of apples in Shoprite rises from K2,950 per kg to K3,050 per kg and, as a result,
the quantity of apples that households purchase decreases from 5,100 kg to 4,900 kg per
week. Consequently, the quantity of oranges that households purchase increases from
3,950 kg to 4,050kg per week. Suppose further that the individual’s income also changes
from K4,000 to K4,500.
a) Based on the above data, calculate the price elasticity of demand for apples over the
said price interval.
b) Would you say the demand for apples is elastic or inelastic? Explain.

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 c) Calculate the cross-price elasticity for oranges over the same price interval. Using the
answer to (c) above, explain whether oranges are substitutes or compliments to
apples.
d) Determine the income elasticity of demand for apples and interpret it.
e) What type of good are apples in this case?
9. The demand function for good 𝐴 is given by 𝑄𝐴 = 520 − 20𝑃𝐴 + 0.6𝑌 + 2.9𝑃𝐵 where 𝑃𝐴 is
the good’s own price, 𝑌 is income and 𝑃𝐵 is the price of a related good to 𝐴. Suppose you
are given that 𝑃𝐴 = 10, 𝑌 = 700 and 𝑃𝐵 = 21.
a) Find the quantity demanded at the given prices of goods and individual income.
b) Calculate and interpret the good’s own price elasticity of demand.
c) Determine whether the related good is substitutable or complementary? Show and
give a reason for your answer.
d) Find and interpret the income elasticity of demand for good 𝐴.
e) Intuitively giving a reason for your answer, classify good 𝐴.
10. Suppose that the consumer has the total utilities derived from the consumption of goods
𝑥 and 𝑦 of Table 4. Suppose further that the consumer has money income of K10 while
the prices of goods 𝑥 and 𝑦 are K2 and K1 respectively.
Table 4: Total Utilities of Consuming Goods 𝒙 and 𝒚
Units of 𝒙 and 𝒚 1 2 3 4 5 6 7 8 9 10
Total Utility (𝒙) 14 26 37 47 56 64 70 74 77 78
Total Utility (𝒚) 13 24 34 42 49 55 58 60 60 55

a) Determine the possible equilibrium utility maximising quantities of the two goods.
b) Outlining the conditions, find the optimal utility maximising quantities.
c) What is the total utility at the optimal level of consumption for the individual?
d) Use a graph and an appropriate assumption, derive the demand curve for good 𝑥.
Be sure to propose the price change and find the new optimal levels to aid the
process.
11. A firm uses the inputs, labour and greenhouses, to produce roses. Suppose that when the
number of greenhouses is fixed, the relationship between labour and the number of
roses produced is given in Table 5.
Table 5: Number of Workers and Total Product
Number of Workers 0 1 2 3 4 5 6
Total Product of Roses 0 3 8 12 14 14 12

a) What is the average and marginal product of labour at each level of output?

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 b) Show the total output, average product and marginal product of labour in one well-
labelled graph.
c) Explain the law of diminishing marginal returns using the solution in (b).
d) Using the graph in (b), show the three stages of production.
12. Differentiate costs in the short run from those in the long run.
13. Table 6 shows a firm’s various costs of producing up to five units of output.
Table 6: Output and Short-Run Costs
Output TC TVC TFC ATC AVC AFC MC
0 60
1 80
2 90
3 105
4 140
5 195

a) Complete Table 6 by filling in the missing figures.

b) Show all the cost functions in one well-labelled graph.
14. Differentiate economies of scale from economies of scope.
15. Firms are known to have different objectives that they pursue. List and explain four of
them.
16. Table 7 shows information about a firm that is producing and selling eggs at the
indicated prices as presented in the schedule.
Table 7: Quantity and Revenue of Sales
Quantity Price/Average Total Marginal
Revenue Revenue Revenue
1 30
2 25
3 20
4 15
5 10
6 5

a) Complete Table 7 using your knowledge of relevant relationships in economics.

b) Indicate the quantity sold at the point where total revenue is maximum. What is the
value of marginal revenue at that level of output.
c) Is it reasonable to operate in the negative region of the marginal revenue? Explain
using the solutions obtained before.
d) Draw the demand and all the revenue curves. From your observation, how does the
marginal revenue relate to the average revenue curve?

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17. Table 8 displays information about a firm that is producing titanium batteries and selling
them at K5 each.
Table 8: Sales Per Hour and Associated Total Costs
Sales per hour 0 1 2 3 4 5 6 7 8 9 10 11
Total costs 10 15 18 20 21 23 26 30 35 41 48 56

a) Presenting the solutions in table form, calculate the total revenue and total profit
for the firm.
b) Use your solution in (a) to determine the profit maximising output.
c) Draw a graph showing the interrelationships among the total, average and marginal
revenue then total, average and marginal costs as well as profit on the same graph.
What do you notice in the graph?
18. A firm is a perfectly competitive producer and sells two goods 1 and 2 at K1000 and
K800, respectively. The total cost of producing these goods is given by
𝑇𝐶 = 2𝑄12 + 2𝑄1 𝑄2 + 𝑄22
where 𝑄1 and 𝑄2 denote the output levels of good 1 and good 2, respectively.
a) Determine the profit maximising values of good 1 and 2.
b) What is the total revenue and total cost at the level of output found in (a)?
c) Using the results in (b), calculate the profit. What do you observe?
d) Is the firm operating in the short run or long run? Explain your reasoning.
19. A monopoly is a single producer of a product which has no close substitutes.
a) Give an example of a Zambian firm which is a monopoly.
b) What is price discrimination?
c) State the necessary conditions required for price discrimination to be profitable.
d) Why is the monopoly able to practice price discrimination?
20. Monopolistic competition is known to be the middle ground between perfect
competition and monopoly.
a) What does product differentiation under this type of market structure mean?
b) What is meant by selling costs? How are selling costs different from advertising
costs? Why do firms in monopolistic competition incur selling costs?

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21. A monopolistically competitive industry faces the following demand and total cost
equations for its product.

𝑃 = 60 − 3𝑄
𝑇𝐶 = 100 − 5𝑄 + 𝑄 2
a) What is the firm’s profit-maximising price and quantity?
b) Find the firm’s economic profit.

Suppose that the existence of economic profit attracts new firms into the industry such that
the new demand curve facing the typical firm in this industry is 𝑃 = 35 − 3𝑄. Assuming no
change in the firm’s total cost function, find the new profit-maximising price and output
level.
c) Calculate the firm’s economic profit.
d) Is the market in the long run or short run? Explain.
22. A monopolistic firm produces goods in a market where the demand function is
𝑃 = 43 − 0.3𝑄
and the corresponding total cost function is given by:
𝑇𝐶 = 0.01𝑄 3 − 0.4𝑄 2 + 3𝑄
where 𝑃 is the per unit price of the good and 𝑄 is the output.
a) Find the level of output which maximises profit.
b) Is the firm operating in the short run or long run? Explain the reasoning for your
answer.
23. Economists argue that there is price rigidity in the oligopoly market. Explain why price
rigidity is often a characteristic of the oligopolistic industries.
24. What are the main differences between oligopoly and the monopolistically competitive
market?
25. What is meant by a cartel? Why do firms in an oligopoly market form a cartel?