University of the Philippines

SCHOOL OF ECONOMICS
Economics 100.2
Problem Set 1

Prof. A. Arcenas J. Abesamis/A. Castro/R. Guzman

Instructions: Write your answers on yellow pad. Deadline is on 12 September 2017 during lecture class.

1. Define scarcity and relate it to the study of Economics. Contrast scarce and free goods. (2 points)

2. What is Economic efficiency? Explain briefly how efficiency is related to scarcity. (2 points)

3. Using the production possibility frontier discuss the relationships between scarcity and opportunity
cost. What does the production possibility frontier represent? (2 points)

4. Demonstrate graphically how the production possibility frontier for Guns (x) and Butter (y) shifts
outward when all inputs are doubled. Show an analogous demonstration when one input is doubled
and the other is held constant. (4 points)

5. Consider a competitive market for hamburgers. Restaurants would be willing to supply 50 pieces of
hamburgers at price of Php 50.00, 200 pieces at Php 200.00, 300 pieces at Php 300.00 and 400 pieces
at Php 400.00. Consumers of hamburgers are willing to purchase 150 pieces at Php 350.00, 200
pieces at Php 300.00, 300 pieces at Php 200 Pesos, 400 pieces at Php 100.00.

a. Draw the market supply and demand curve. (2 points)

b. Solve for the market demand function and market supply function. (4 points)
c. Solve for the equilibrium price and quantity. (2 points)
d. Explain the concept behind equilibrium price and quantity. (2 points)

6. Consider the market for smartphones. If an innovation improves the assembly of smartphones and an
aggressive advertising campaign makes smartphones the latest trend. What would happen to
equilibrium price and quantity ceteris paribus? Show graphically. (3 points)

7. Explain the three fundamental problems of Economic organization. Provide examples of how various
societies attempt to meet these problems. (5 points)

8. The Duterte administrations proposed tax reform includes a tax on petroleum products which will
increase gasoline prices and may help decongest the roads.
a. Define the substitution effect and the income effect. (2 points)
b. Using the concept of Substitution Effect and Income Effect, explain why a tax on petroleum
products will lead to fewer cars on the road ceteris paribus (5 points)

9. The Department of Health (DOH) found out that cigarettes have high income elasticities.
a. Define income and price elasticities. (2 points)
b. Suppose income increases, should the DOH be concerned for a possible increase in cigarette
demand, explain why or why not? (3 points)

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 University of the Philippines
SCHOOL OF ECONOMICS
Economics 100.2
Problem Set 1

10. Consider the budget line and indifference curve between jatropha (x) and palay (y) below:

a. Suppose the price of jathropa (x) experiences a decrease of a hundred percent. Draw the new
budget line and indifference curve and label the new optimal bundle B. (3 points)
b. Derive the demand curve for jathropa. Label all relevant points. (4 points)

A (4, 3)

IC1

8 x

11. Define utility and how is it used in microeconomics. What is the difference between total utility and
marginal utility? Explain the law of diminishing marginal utility. (3 points)

END