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EC101 MICROECONOMICS TUTORIAL
DISCUSSION QUESTIONS
econ/notice/21/06/08
Compiled by Charumbira M.
Students are advised to discuss the questions in groups.
One
Given the following table on own price and cross price elasticities, comment on the
interpretations of the elasticity values and the factors that can possibly explain each of
the values.
Bread
Butternut
Bread
-0.09
0.8
Butternut
0.8
-2.3
Two
Suppose the number of cameras demanded in Zimbabwe at various prices is follows
Price of cameras $ Quantity demanded per year (millions)
80
20
100
18
120
16
Calculate the arc elasticity of demand when
a) The price is between $80 and $100
b) The price is between $100 and $120
c) Comment on your findings
Three
Explain the calculation, interpretation and practical uses of each of the following
elasticities:
 Own-price elasticity of demand
 Cross elasticity of demand
 Income elasticity of demand
Four
The table below shows levels of income and spending on two goods, clothing and
housing over two years. Assume the prices of the two goods do not change over the
time period, say whether each of the goods is luxury or a necessity.
1
Year
1
2
Spending on
clothing in $
million
50
100
Income in $
million
600
1500
Spending on
housing in $
million
100
240
Five
Suppose that the demand curve for shoes is given by
P  120  3Q D
Where P is the price per pair and Q D is the quantity demanded per year (in
thousands).
Suppose that the supply curve for shoes is given by: P  5Q S , where Q S is the
quantity supplied (in thousands) and P is the price.
You are required to
a) Draw/plot the demand and supply curves
b) Calculate the equilibrium quantity produced and the corresponding price.
c) State the quantity demanded and the quantity supplied and the corresponding
excess demand or excess supply at the following prices:
i)
$60
ii)
$80
iii)
$100
d) Indicate whether the following will shift the demand curve for shoes or have
no effect at all.
i)
A 10% increase in the price of socks
ii)
A 10% increase in the price of sandals
iii)
A 20% increase in income
iv)
A 10% increase in the wages of workers who produce shoes
v)
A report from a study that concluded that shoes cause cancer
Six
Describe the strategies that the government can use to solve the problem of
externalities. Use illustrations where necessary.
Seven
Use the kinked demand model to explain why prices are sticky in non-collusive
oligopoly markets. Use applicable the relevant graph(s) complemented by
examples from Zimbabwe.
Eight
Distinguish between monopoly and monopolistic competition. Invoke graphical
and descriptive techniques in your comparison.
Nine
Calculate the total revenue, average revenue and marginal revenue using the table
below:
Price ($) 23.50 20.00 17.00 19.50 18.00 17.00
Quantity 0
1
2
3
4
2
5
Ten
Explain the effect of each of the following on revenue
 Price rises and demand is elastic
 Price falls and demand is inelastic
 Price rises and demand is inelastic
Eleven
“If the demand for a good is perfectly elastic, a sales tax imposed on it will be
borne entirely by the producers”. Use diagrams to examine the validity of this
statement.
Twelve
a) The cross elasticity of demand for two goods, X and Y, is 0.7. Are the goods
complements or substitutes? Explain your answer using cross elasticity
formula and relevant.
b) If the price of a good rises from $50 to $60 and the quantity demanded falls
from 4000 to 3800, what is the elasticity of demand? Comment on what type
of good this could be?
Thirteen
“Perfect competition is the socially ideal market structure whilst monopoly is a
social hazard”. Explain the above statement and in particular the efficiency
implications of each of the two market structures.
Fourteen
Using graphical analysis and examples, explain the differences (and similarities,
if any) between giffen goods and normal goods. How do elasticities provide a
guide towards the classification of goods into the following categories:
 Normal versus inferior
 Normal versus giffen
 Luxuries versus necessities
Fifteen
Using supply and demand curves, show and explain the likely effects of the
following policies
a) Minimum wages on the labour market.
b) Setting of a price ceiling (below the equilibrium) on the rent to be paid on
houses in a certain town.
c) Fixing the exchange rate in the forex market.
d) Introducing a price control in the commodity market.
Sixteen
Explain carefully the difference between
a) Diminishing returns to labour (or any other variable input) and
b) Decreasing returns to scale.
Seventeen
Distinguish between capacity and MES (minimum efficient scale).
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Eighteen
Explain, using the appropriate graph(s), the relationship between productivity and
costs.
Nineteen
a) What is meant by a cartel?
b) Describe the difference between collusive and non-collusive oligopoly. Apply
graphical analysis to identify the profit maximisation position of each.
c) Why is it that cartels are often short-lived?
Twenty
“A firm under monopolistic competition has monopoly over its product but faces
competition in the overall product range”. Discuss the above statement
highlighting the extent to which the features of monopoly and those of
competitiveness manifest themselves in the above market structure.
Twenty-one
a) What is the difference between demand and quantity demanded? Use
graphs to support your answer.
b) Explain the term ‘market clearing. Would you say there is any difference
between the above term and ‘equilibrium’?
Twenty-Two
a) Describe the consumer’s equilibrium position.
b) Why is it that the indifference curves would never intersect at any point?
What would be the implications if you allowed them to do so?
Twenty-Three
a) What is a public good and what are its key characteristics?
b) Explain how the externalities distort the determination of equilibrium on
the market. Use illustrate diagrams (Hint: Your analysis should be based
on the marginal cost and marginal benefit curves)
Twenty-Four
Why is monopoly considered to be a social evil? Is there any basis to believe that
perfect competition is immune from the inefficiencies and other shortcomings
associated with monopolies?
Twenty-Five
The oligopoly market is characterised by price-undercutting, direct rivalry and
uncertainty. What factors would you say contribute towards such behaviour by
firms in such a market? Do we have ready examples of oligopoly markets in
Zimbabwe that display the above features?
Twenty-Six
The monopolist can set either price or quantity, but not both. Use the profit
maximisation graph of the monopoly firm to explain this statement.
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Twenty-Seven
What is meant by the term excess capacity? Identify excess capacity in the longrun profit maximisation position of the firm in monopolistic competition.
Twenty-Eight
Explain how the externalities, positive and negative distort the determination of
equilibrium on the market. Use illustrate diagrams (Hint: Your analysis should be
based on the marginal cost and marginal benefit curves.
Twenty-Nine
Use the kinked demand model to explain why prices are sticky in non-collusive
oligopoly markets. Use applicable examples from Zimbabwe.
Thirty
Distinguish between monopoly and monopolistic competition. Invoke graphical
and descriptive techniques in your comparison.
Thirty-One
What is a public good and what are its key characteristics?
Thirty-Two
Explain the meanings of each of the following:




Diminishing marginal returns
Constant returns to scale
increasing returns to scale
decreasing returns to scale
Thirty-Three
Explain the effect of each of the following on revenue
 Price rises and demand is elastic
 Price falls and demand is inelastic
 Price rises and demand is inelastic
Thirty-Four
If the demand for a good is perfectly elastic, a sales tax imposed on it will be
borne entirely by the producers. Use diagrams to examine the validity of this
statement.
Thirty-Five
a) What is a production function?
b) Distinguish between the short-run and the long-run in production.
c) Using information given below, calculate the average product and the
marginal product of labour:
5
Amount of labour
Total output
0
0
1
12
2
29
3
58
4
70
5
78
6
78
7
75
Average product
Marginal product
of labour
of labour
--
--
d) Explain the concept of diminishing returns and in particular what causes the
diminishing returns to set in?
e) Explain the difference between economies of scale and diseconomies of scale?
Thirty-Six
“Perfect competition is the socially ideal market structure whilst monopoly is a social
hazard”. Explain the above statement and in particular the efficiency implications of
each of the two market structures.
Thirty-Seven
Explain why firms under perfect competition are considered to be price-takers.
Thirty-Eight
Explain what the indifference curve shows. Why is the indifference curve downward
sloping and convex to the origin?
Thirty-Nine
Suppose a firm’s demand curve lies below its average total cost curve at all its levels
of output. Explain the circumstances where production might still be the best option
illustrating your answer using diagrams.
Forty
Explain the meanings of each of the following:




Diminishing marginal returns
Constant returns to scale
increasing returns to scale
decreasing returns to scale
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