Introduction to Microeconomics Assignment - Fall Semester 2024

This microeconomics assignment solution covers several key concepts including the Production Possibility Frontier (PPF), demand and supply analysis, and price elasticity of demand. The solution analyzes how to meet increased demand using PPF and discusses revenue changes with price fluctuations. It calculates market equilibrium, consumer and producer surplus, and deadweight loss. Furthermore, the assignment delves into the impact of alcohol tax on teenage binge drinking, exploring its effectiveness, potential revenue generation, and the distribution of tax burden between buyers and sellers. The solution also suggests intervention strategies like awareness campaigns and counseling to reduce binge drinking. The assignment provides detailed calculations, graphs, and explanations to illustrate these economic principles and their real-world applications.

Introduction to Microeconomics
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Introduction to Microeconomics
Question 1
a) The requisite PPF based on the given information is indicated below.
b) PPF based on the above graph may be defined as a hypothetical curve which tends to
indicate the various maximising output combinations that are possible if the available
factors of production are utilised in an efficient manner.
The various assumptions on which the PPF is based on are highlighted below.
 The resources or the various factors of production can be utilised only for production
of one or both of the products outlined in the PPF.
 There is no change in the available resources or else the PPF would change since
production depends on the resources available.
 Further, it is also assumed that the production technique and underlying technology
remains static as improvement in the technology can increase the production beyond
the boundaries highlighted by the PPF.
 The available resources or factors of production are used in the most efficient manner
possible under the above constraints.
The various properties of PPF are highlighted below.

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 PPF always slopes downwards which implies that to increase the production of one
particular good, sacrifice would have to be incurred by reducing the production of
another good so that there could be reallocation of resources.
 It is concave in slope which implies that the downward slope does not remain constant
but instead tends to increase as one goes downwards.
c) Three ways in which the new demand can be met are highlighted below.
 The PPF could shift outwards to accommodate the increased demand if there is a
change in the production process which can increase the overall production
capacity. Since, change of production techniques typically happens over long term,
the assumption for this solution is that such change is possible in the short term.
 The PPF could shift outwards to accommodate the increased demand if there is a
change in the available resources such as capital and labour. Since, these changes
are also normally long term, hence it is assumed that the same can be enabled in
the short term with the assistance of another nation perhaps.
 While continuing with the maximum possible production within the PPF, the
economy can import the deficit amount of cars and bicycles from other countries.
Since the resources are fixed, hence the underlying assumption is that the exporter
would be more efficient at production of these products than Newland. This would
ensure that even with the same resources, by deploying some resources to imports,
the increased demand can be met.
Question 2

Introduction to Microeconomics
Part 1
a) The demand schedule for the computer chips has been presented.
Revenue change when price falls from $ 400 to $ 350
At price = $ 400, quantity demanded = 30 million, hence annual revenue = 400*30million = $
12 billion
At price = $ 350, quantity demanded = 35 million, hence annual revenue = 350*35million = $
12.25 billion
Hence, it may be concluded that revenue tends to increase as price falls from $ 400 to $ 350.
Revenue change when price falls from $ 350 to $ 300
At price = $ 350, quantity demanded = 35 million, hence annual revenue = 350*35million = $
12.25 billion
At price = $ 300, quantity demanded = 40 million, hence annual revenue = 300*40million = $
12 billion
Hence, it may be concluded that revenue tends to decrease as price falls from $ 350 to $ 300.
b) The total revenue based approach to price elasticity is based on the respective directions in
which the price and total revenue move.
Revenue change when price increases from $ 300 to $ 350
At price = $ 300, quantity demanded = 40 million, hence annual revenue = 300*40million = $
12 billion
At price = $ 350, quantity demanded = 35 million, hence annual revenue = 350*35million = $
12.25 billion
Hence, it may be concluded that revenue tends to increase as price increases from $ 300 to $
350.

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Revenue change when price decreases from $ 300 to $ 250
At price = $ 300, quantity demanded = 40 million, hence annual revenue = 300*40million = $
12 billion
At price = $ 250, quantity demanded = 45 million, hence annual revenue = 250*45million = $
11.25 billion
Hence, it may be concluded that revenue tends to decrease as price decreases from $ 300 to
$250.
Based on the above computation, it may be concluded that price and total revenue tend to
move in the same direction which indicates that the demand for computer chips is inelastic.
Part 2
c) In order to find the market equilibrium, it is imperative to equate the demand and supply
equations as indicated below.
100-5P = 5P
Hence, we get that P = $ 10
Substituting P=$10, in either the demand or supply function, we get Q = 50
Thus, the equilibrium price is $ 10 while the equilibrium quantity is 50 units.
d) Consumer surplus at equilibrium = 0.5*50*(20-10) = 250 units
Producer surplus at equilibrium = 0.5*50*(10-0) = 250 units
Hence, total surplus = Consumer surplus + Producer surplus = 250 +250 = 500 units
Kindly note that in the given case there is no deadweight loss and hence no contribution of
the same is apparent in the total surplus.
e) Case 1: Market price = $ 15, Maximum quantity = 45 units
Consumer surplus = 0.5*(20-15)]*25 = 62.5 units

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Producer Surplus = 0.5*[(15-5) + (15-0)]*25 = 312.5 units
Deadweight loss = 0.5*(15-5)*(50- 25) = 125 units
Case 2: Market price = $ 5, Maximum quantity = 45 units
Consumer surplus = 0.5*[(15-5)+(20-5)]*25 = 312.5 units
Producer Surplus = 0.5*(5-0)*25 = 62.5 units
Deadweight loss = 0.5*(15-5)* (50-25) = 125 units
f) The requisite graph for part (d) is shown below.
The requisite graph for part (f) is shown below.

Introduction to Microeconomics

Introduction to Microeconomics
Question 3
a) Alcohol tax is an indirect tax which is levied on the suppliers of alcohol who then pass a
large portion of the same to the consumers. With the levying of alcohol tax, there would a
decrease in the supply owing to higher price which can be explained through the demand
supply curve highlighted below.
It is apparent that owing to the levying of the alcohol tax, the supply curve has shifted in
the upward direction which should lead to higher prices and lower quantity consumed.
Thus, it may be expected on account of the account that there should be a reduction in the
teenage binge drinking coupled with revenue generation.
However, the non-reduction of teenage binge drinking may be attributed to lack of
awareness amongst the teenagers with regards to harmful effects of binge drinking. For the
teenagers binge drinking is considered to be social event which is considered as fun and
hence it is imperative that a part of the revenue collected from alcohol tax must be
diverted into an awareness campaign to highlight the adverse impact of binge drinking.
Only then would alcohol tax act as a successful deterrent. Increasing the price alone does
not lead to much difference and hence the outcome is not very unexpected. Further, lower
than the projected revenue may be on account of tax evasion by some supplier who may
be smuggling alcohol and supplying it to the consumers.

Introduction to Microeconomics
b) With regards to sharing the burden of the alcohol tax between the buyers and sellers, the
critical aspect is price elasticity of demand. This is because if the demand of the
underlying product is elastic, then the majority of the price burden would be borne by the
seller as passing on the price to the buyer would result in significant fall in quantity
demanded and thus would adversely impact total revenue. However, if the demand of the
underlying product is inelastic, then the majority of the price burden would be borne by
the buyer as passing on the price to the buyer would result in insignificant fall in quantity
demanded and thus would not adversely impact total revenue.
Assuming that price elasticity of demand for alcohol tends to be inelastic, the following graph
illustrates the distribution of tax burden between buyers and sellers.
From the above, it may be concluded that the majority of the burden is borne by the buyers
while the sellers bear only a small part of the burden.
c) One of the key intervention strategies is to spread awareness campaign through using
social media specially targeted at the teenage population so that the harmful effects can be
highlighted. Messages in this regards can be issued at various public coupled with cinema
halls and other places where the teenagers regularly visit or hang out. Besides, counselling
sessions must also be organised at various universities where anyone who might be
addicted to alcohol may avail free counselling. Thus, the objective of the above mentioned
policies is to ensure that the teenagers understand the peril of binge drinking and tend to
stay away owing to the adverse consequences. The above strategies need to be
supplemented with raising the price through the levying of alcohol taxes.