Comprehensive Microeconomics Assignment: Theory and Application

This microeconomics assignment analyzes key concepts including production possibility frontiers, supply and demand, and market equilibrium. The solution begins by illustrating the production possibility frontier and its properties. It then delves into supply and demand functions, calculating equilibrium prices and quantities for pizza, and analyzing the impact of taxes, including consumer tax incidence and deadweight loss. The assignment further examines market interventions like price floors in the wheat market, assessing their effects on consumer and producer surplus, and discussing the fairness of related policies like the Farm Bill. Finally, the solution explores how changes in supply and demand affect the coffee market, including the impact of fires and droughts in Brazil and shifts in international demand due to successful trials of new species. The analysis uses graphical representations to illustrate the concepts and provides detailed explanations for each part of the assignment.

Running head: INTRODUCTION TO MICROECONOMICS
Introduction to microeconomics
Name of the university
Name of the student
Author Note

1INTRODUCTION TO MICROECONOMICS
Table of Contents
Answer 1:...................................................................................................................................2
Answer 2:...................................................................................................................................4
Part I.......................................................................................................................................4
Part II......................................................................................................................................6
Answer 3:...................................................................................................................................9
References:...............................................................................................................................12

2INTRODUCTION TO MICROECONOMICS
Answer 1:
a)
0 5000 10000 15000 20000 25000 30000 35000
0
1000
2000
3000
4000
5000
6000
Production Possibility Frontier
Cars
Bicycles
Figure 1: Production Possibility Frontier
Source: (created by author)
b)
The production possibility frontier (PPF) represents maximum combinations of two
goods that can be achieved by using given inputs (Brea‐Solís, Casadesus‐Masanell and
Grifell‐Tatjé 2015).
Assumptions:
i) Inputs are utilized for producing only one good or combinations of two goods,
ii) Quantities of resources of resources or inputs are given,
iii) Production process is technically efficient for using resources,
iv) Technology and techniques of production are constant,
Properties:
i) The PPF is a downward slopping curve indicating that to produce extra unit of one good,
some amount of other good needs to scarifies,
ii) This curve is concave to the origin,

3INTRODUCTION TO MICROECONOMICS
c)
To increase the production of cars and bicycles together, the country can improve its
production technology or by increasing trade and exchange with other countries and this in
turn can increase the supply of relative inputs of production.

4INTRODUCTION TO MICROECONOMICS
Answer 2:
Part I.
Demand function of Pizza is: QD = 20- 2P
 2P= 20 - QD
 P = 10 - QD / 2 …. (1)
Supply function of Pizza is : QS = P-1
 P = QS + 1 …. (2)
Hence, equilibrium amount of Pizza and its corresponding price can be obtained by equating
inverse demand and inverse supply functions (Davis 2014):
10 - QD / 2 = QS + 1
 Q + Q/2 = 9
 3Q = 18
 Q = 6
Hence, equilibrium amount of output is : Q = 6
Substituting this value in inverse demand function the amount of equilibrium price can be
obtained:
P = 10 - 6/ 2
 P = 7
Equilibrium price is P = $ 7
After imposition of tax on per unit pizza purchase, the equation of supply function
becomes:
P = QS + 1 + 3
P = QS + 4 …. (3)
After imposition of tax, new equilibrium amount of pizza can be obtained by equating
equation1 and equation 3:

Original supply
Supply + tax
Demand
Price of Pizza ($)
O Amount of pizza
8
7
4 6
DWL = $1
5INTRODUCTION TO MICROECONOMICS
10 - QD / 2 = QS + 4
 Q + Q/2 = 10 – 4
 3 Q = 12
 Q = 4
Substituting this amount in equation 3 equilibrium price can be measured:
P = QS + 4
 P = 4 + 4
 P = 8
Hence, the corresponding price is $ 8.
Consumer tax incidence is:
$ (8 – 7) * 4
 $ 4
Deadweight loss (DWL) = (1/2) ($8 -$7) (6-4)
 DWL = ½ * $1* 2
 DWL = $1
Figure 1: Equilibrium price and amount of pizza
Source: (created by author)

6INTRODUCTION TO MICROECONOMICS
supply
Demand
Price of wheat ($)
O
Amount of wheat
300
250
W*** W*
DWL
Part II.
a.
Figure 2: price floor in wheat market
Source: (created by author)
Due to price flooring, equilibrium quantity of wheat has decreased by W** W*
amount while price has increased by $ (300 – 250) = $ 50 amount. Hence, at this moment,
consumer can get lower amount of wheat at a higher price (Davis 2014).

7INTRODUCTION TO MICROECONOMICS
Supply
Demand
Price of wheat ($)
O Amount of wheat
P**
P*
W*** W*
DWL
A
B
D
C
F
b.
Figure 3: change in consumer and producer surplus and DWL in wheat market
Source: (created by author)
Initial amount of consumer surplus has the area of triangle ACP*
After price floor, amount of consumer surplus has become the area of triangle ABP**
Hence, consumer surplus has decreased by the area of P* P** amount.
On the other side, initial amount of producer surplus has the area of triangle DCP*
After price floor, amount of producer surplus has become the area DFBP**
Hence, producer surplus has increased by the area of P* P** amount.
Deadweight loss has represented by two arrows in figure 3.
c.
After price flooring, the amount of quantity demanded and quantity supplied have will
be proportional with each other to avoid consumer and producer surplus.

8INTRODUCTION TO MICROECONOMICS
$(300 – 250) = $ 50
Producer surplus is 1000 – 800 = 200000 tons
Consumer surplus is 1200 – 1000 = 200000 tons
d.
This Farm Bill is not fare in the U.S.A. This is because the with the help of this bill,
producers of wheat market get benefits while producers of other markets need to compete
higher to earn same amount of revenue like wheat producers (Davis 2014). Hence, this is not
a fair rule as it spreads inequality in the market and consequently, outcome is also not fair.

9INTRODUCTION TO MICROECONOMICS
Supply
Demand
Price of coffee ($)
O Amount of coffee
P1
P*
C1 C*
Supply of coffee after destroy
Answer 3:
a)
Figure 4: Decrease in supply of coffee after fire and drought
Source: (created by author)
After fires and drought, coffee supply in Brazil is going to decrease. For this,
the supply has shifted to the left. Thus, in domestic market, price of coffee can
increase by P*P1 amount.

10INTRODUCTION TO MICROECONOMICS
Supply
D0
Price of coffee ($)
O Amount of coffee
Pw
P*
C*Cw
Supply of coffee after destroy
Dw
b)
Figure 5: Increase in demand of coffee in international market
Source: (created by author)
Increase in demand for coffee in international market is represented by right
ward shift of demand curve from D0 to Dw (Pan, Shi and Tang 2018). Consequently,
equilibrium price in international market has increased by P*Pw unit while the
equilibrium amount of coffee has decreased by CwC* unit.

11INTRODUCTION TO MICROECONOMICS
Supply
D0
Price of coffee ($)
O Amount of coffee
Pw
P*
C* Cw
Dw
c)
Figure 6: Increase in demand and initial supply of coffee in international market
Source: (created by author)
After successful trial of producing new species, supply of coffee may increase
and can come to its initial position while demand for coffee in world market has
increased (Pan, Shi and Tang 2018). This further can influence the equilibrium price
to increase by P*Pw unit while equilibrium quantity has also increased by C*Cw unit.

12INTRODUCTION TO MICROECONOMICS
References:
Brea‐Solís, H., Casadesus‐Masanell, R. and Grifell‐Tatjé, E., 2015. Business model
evaluation: quantifying Walmart's sources of advantage. Strategic Entrepreneurship
Journal, 9(1), pp.12-33.
Davis, L.W., 2014. The economic cost of global fuel subsidies. American Economic
Review, 104(5), pp.581-85.
Pan, J., Shi, W. and Tang, X., 2018. Pricing and ordering strategies of supply chain with
selling gift cards. Journal of Industrial & Management Optimization, 14(1), pp.349-369.