Econ 111 SET A

Lahore University of Management Sciences ECON 111: Principles of Microeconomics (Autumn Semester 09) Quiz 1 (Section 1)

Pages: 6 (including the cover page)

Instructor: Ayesha Khalid Duration: 50 minutes Total marks: 45 marks

Name: Roll number:

Instructions: Answer all questions. Give clear and concise answers to the questions. Support your arguments with the help of equations and/or diagrams where you feel necessary. Also, make sure that you label the graphs properly and mark all necessary values.

Question 1:
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Econ 111 SET A

In Country Faraway, cigarettes are forbidden, so people trade cigarettes in a black market. The cigarette demand is QD = 12 P , and the cigarette supply is Qs = 2P . [10 marks] (a) Find the equilibrium price and quantity in the black market.

(b) The government becomes aware of the black market and reinforces the police so that half of the cigarette supply would be seized and destroyed. Under this circumstance, what are the demand and supply functions? What is the new equilibrium price and quantity? Show the change by using a supply and demand diagram.

(c) How does the consumer surplus change between (a) and (b)?

Question 2:
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Econ 111 SET A

i) Marys demand curve for food is Q = 10 2P. Her price elasticity of demand for food at price P* equals 2/3. Calculate P*? [4 marks]

ii) The elasticity of demand curve for cotton is -1.5. When bad weather increases the price of cotton, what will happen to total revenue? [3 marks]

Question 3: i) If Sara spent her entire allowance, she could afford 8 candy bars and 8 comic books a week. She could also just afford 10 candy bars and 4 comic books a week. The price of a candy bar is $0.5. What is Sara's weekly allowance? [4 marks]

ii) Saman has ranked a few TV channels as follows:

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Econ 111 SET A

Geo

ARY; Star-plus CNN; Star-plus ARY; Ten-Sports Masala;

CNN

Ten-Sports

(Note:

denotes indifference)

Given the information above, how does Saman rank Geo and Masala? [3 marks]

Question 4: Every other day Ali visits KFC. His utility function is given by U(C, F) = C2F where C = chicken pieces and F = orders of fries. If a chicken piece costs $10 and an order of fries costs $20 and Alis monthly income(that must be spent on chicken pieces and order of fries) is $300, what is Alis utility-maximizing consumption bundle? [6 marks]

Question 5:
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Econ 111 SET A

i) For the following set of goods draw two indifference curves, U 1 and U 2 such that
U 2 > U 1 . Draw each graph placing the amount of the first good on the horizontal axis. [1.5

marks each] (a) Nuts (the consumer neither likes nor dislikes) and ice-cream (which the consumer likes)

(b) Apples (which the consumer likes) and liver (which the consumer dislikes)

ii) What kind of assumption on preferences and/or utility functions would rule out the following? [1 mark each] (a) upward sloping indifference curves

(b) linear indifference curves Question 6: A Giffen good violates the law of downward sloping demand curve.
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Econ 111 SET A

Explain the above statement, using the Hicks substitution and income effect.

[10 marks]

Note: Illustrate using a price increase of good 1 (which is the Giffen good). Mark good 1 on the x-axis and good 2 on the y-axis. Be concise in your explanation.