PRINCIPLES OF MICROECONOMICS PMIC02-5, FORMATIVE ASSESSMENT – ASSIGNMENT C ANSWERS, 2024

Answer compiled by Ranga (PhD economics current) Call/Whatsapp
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MILPARK EDUCATION

PRINCIPLES OF MICROECONOMICS PMIC02-5

FORMATIVE ASSESSMENT – ASSIGNMENT C

Question 1

1.1. According to the law of supply, there is a positive relationship between the price and the
quantity of a good supplied on the market. Thus, as price increases, the quantity supplied also
increases because producer surplus increases (suppliers are happy). As the price decreases, the
quantity supplied also decreases. This positive relationship between the price and quantity
supplied of a product is shown by an upward sloping supply curve.
1.2.
1.2.1. An increase in the price of margarine: Margarine may be a substitute to peanut butter,
therefore an increase in the price of margarine will cause consumers to switch to butter.
The diagram below show the impact on the price and quantity demanded of butter.

, Answer compiled by Ranga (PhD economics current) Call/Whatsapp
0618441387
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An increase in price of margarine increases the demand of butter, demand curve shifts from
D1 to D2. Supply remaining the same, the equilibrium in the butter market changes from
E1 to E2. As a result, Price increases from P1 to P2. Quantity demanded (or equilibrium
quantity) also increases from Q1 to Q2.


1.2.2. An increase in the price of bread: Bread is a compliment to butter, that is, they are jointly
demanded therefore an increase in the price of bread will cause consumers to buy less
bread. Since bread and butter are compliments, the demand for butter decreases. The
diagram below show the impact on the price and quantity demanded of butter.