Assignment 1-A

Global and Managerial Economy

NUST Business School
Q 1: Managerial Economics is an integration of economic theory with business practices
for the purpose of facilitating decision making and forward planning by management".
Discuss.
Q 2: Give short answers of the following questions:
i)
The Energy Department estimates that domestic demand for natural gas will
grow by more than 40% between now and 2025. Distinguish between a
demand function and a demand curve. What is the difference between a
change in the quantity demanded and a shift in the demand curve?
ii)

Distinguish between a supply function and a supply curve. What is the

difference between a change in the quantity supplied and a shift in the supply
curve?

iii)

Demand Analysis. The demand for housing is often described as being highly
cyclical and very sensitive to housing prices and interest rates. Given these
characteristics, describe the effect of each of the following in terms of whether
it would increase or decrease the quantity demanded or the demand for
housing. Moreover, when price is expressed as a function of quantity, indicate
whether the effect of each of the following is an upward or downward
movement along a given demand curve or involves an outward or inward shift
in the relevant demand curve for housing. Explain your answers.
(A). An increase in housing prices
(B). A fall in interest rates
(C). A rise in interest rates
(D). A severe economic recession
(E). A robust economic expansion.

iv)

Demand Function. The Creative Publishing Company (CPC) is a coupon book

publisher with markets in several southeastern states. CPC coupon books are
either sold directly to the public, sold through religious and other charitable
organizations, or given away as promotional items. Operating experience
during the past year suggests the following demand function for CPC=s
coupon books: Q = 5,000 - 4,000P + 0.02Pop + 0.375I + 1.5A, where Q is
quantity, P is price ($), Pop is population, I is disposable income per
household ($), and A is advertising expenditures ($).
(A). Determine the demand faced by CPC in a typical market in which P =
$10, Pop = 1,000,000 persons, I = $40,000, and A = $10,000.
(B). Calculate the level of demand if CPC increases annual advertising
expenditures from $10,000 to $15,000.
(C). Calculate the demand curves faced by CPC in parts (A) and (B).

v)

Supply Function. A review of industry wide data for the jelly and jam
manufacturing industry suggests the following industry supply function:
Q = -59,000,000 + 500,000P - 125,000PL - 500,000PK + 2,000,000W, where
Q is cases supplied per year, P is the wholesale price per case ($), PL is the
average price paid for unskilled labor ($), PK is the average price of capital
(in percent), and W is weather measured by the average seasonal rainfall in
growing areas (in inches).
(A). Determine the industry supply curve for a recent year when PL = $8, PK
= 10 percent, and W = 20 inches of rainfall. Show the industry supply curve
with quantity expressed as a function of price and price expressed as a
function of quantity.
(B). Calculate the quantity supplied by the industry at prices of $50, $60, and
$70 per case.
(C). Calculate the prices necessary to generate a supply of 4 million, 6 million,
and 8 million cases.

vi)

Market Equilibrium. Eye-de-ho Potatoes is a product of the Coeur d=Alene

Growers= Association. Producers in the area are able to switch back and forth
between potato and wheat production depending on market conditions.
Similarly, consumers tend to regard potatoes and wheat (bread and bakery
products) as substitutes. As a result, the demand and supply of Eye-de-ho
Potatoes are highly sensitive to changes in both potato and wheat prices.
Demand and supply functions for Eye-de-ho Potatoes are as follows: QD = 1,450 - 25P + 12.5PW + 0.2Y, (Demand) QS = -100 + 75P - 25PW - 12.5PL +
10R, (Supply) where P is the average wholesale price of Eye-de-ho Potatoes
($ per bushel), PW is the average wholesale price of wheat ($ per bushel), Y is
income (GNP in $ billions), PL is the average price of unskilled labor ($ per
hour), and R is the average annual rainfall (in inches). Both QD and QS are in
millions of bushels of potatoes.
(A). When quantity is expressed as a function of price, what are the Eye-de-ho
Potatoes demand and supply curves if PW = $4, Y = $7,500 billion, PL = $8,
and R = 20 inches?
(B). Calculate the surplus or shortage of Eye-de-ho Potatoes when P = $1.50,
$2, and $2.50.
(C). Calculate the market equilibrium price/output combination.

vii)

Economists have observed that spending on restaurant meals declines more

during economic downturns than does spending on food to be eaten at home.
How might the concept of elasticity help to explain this phenomenon?

viii)

Two driversTom and Jerryeach drive up to a gas station. Before looking

at the price, each places an order. Tom says, Id like 10 gallons of gas. Jerry
says, Id like $10 of gas. What is each drivers price elasticity of demand?

ix)

Consider public policy aimed at smoking.

(A). Studies indicate that the price elasticity of demand for cigarettes is about
0.4. If a pack of cigarettes currently costs $2 and the government wants to
reduce smoking by 20 percent, by how much should it increase the price?
(B). If the government permanently increases the price of cigarettes, will the
policy have a larger effect on smoking one year from now or five years from
now?
(C). Studies also find that teenagers have a higher price elasticity than do
adults. Why might this be true?
Q 3: Answer the following questions:
i)
Plot a demand curve from a linear function (eg, Qd = 60 5P). Identify the
slope of the demand curve as the slope of the demand function Qd = a bP,
that is b (the coefficient of P). Outline why, if the a term changes, there
will be a shift of the demand curve. Outline how a change in b affects the
steepness.
ii)

Plot a supply curve from a linear function (eg, Qs = 30 + 20 P). Identify the
slope of the supply curve as the slope of the supply function Qs = c + dP, that
is d (the coefficient of P). Outline why, if the c term changes, there will be a
shift of the supply curve. Outline how a change in d affects the steepness of
the supply curve.

iii)

Calculate the equilibrium price and equilibrium quantity from linear demand
and supply functions. Plot demand and supply curves from linear functions,
and identify the equilibrium price and equilibrium quantity. State the quantity
of excess demand or excess supply. Calculate consumer surplus and producer
surplus. Show that welfare will be maximum when firm charge the
equilibrium price.

Q 4: For the following functions determine equilibrium output, equilibrium price,

consumer surplus, producer surplus, and overall welfare of the society. Moreover, show
all of your analysis graphically.
i)

The following relations describe demand and supply conditions in the

lumber/forest products industry QD = 80,000 - 20,000P (Demand)
QS = -20,000 + 20,000P (Supply).

ii)

The following relations describe monthly demand and supply conditions in the
metropolitan area for recyclable aluminum QD = 317,500 - 10,000P (Demand)
QS = 2,500 + 7,500P, (Supply).

iii)

The following relations describe monthly demand and supply relations for dry
cleaning services in the metropolitan area: QD = 500,000 - 50,000P (Demand)
QS = -100,000 + 100,000P (Supply)

Q 5: For the following functions determine type of the commodities using the concept of
price elasticity, income elasticity, and cross price elasticity.
i)
Suppose that business travelers and vacationers have the following demand
for airline tickets from New York to Boston:
Price
$ 150
$ 200
$ 250
$ 300

Quantity Demanded
(Business Travelers)
2100
2000
1900
1800

Quantity Demanded
(Vacationers)
1000
800
600
400

(A). As the price of tickets rises from $200 to $250, what is the price elasticity
of demand for (i) business travelers and (ii) vacationers? (Use the midpoint
method in your calculations.)
(B). Why might vacationers have a different elasticity than business travelers?
ii)

Suppose that your demand schedule for compact discs is as follows:

Price
Rs 8
Rs 10
Rs 12
Rs 14
Rs 16

Quantity Demanded
(Income = Rs 10,000)
40
32
24
16
8

Quantity Demanded
(Income = Rs 12,000)
50
45
30
20
12

(A). Use the midpoint method to calculate your price elasticity of demand as
the price of compact discs increases from $8 to Rs 10 if (i) your income is Rs
10,000, and (ii) your income is Rs 12,000.
(B). Calculate your income elasticity of demand as your income increases
from Rs 10,000 to Rs 12,000 if (i) the price is Rs12, and (ii) the price is Rs16.
iii)

Emily has decided always to spend one-third of her income on clothing.

(A). What is her income elasticity of clothing demand?
(B). What is her price elasticity of clothing demand?
(C). If Emilys tastes change and she decides to spend only one-fourth of her
income on clothing, how does her demand curve change? What are her
income elasticity and price elasticity now?

iv)

The accompanying table lists the cross-price elasticities of demand for several
goods, where the percent quantity change is measured for the first good of the
pair, and the percent price change is measured for the second good.

Good
Air-conditioning units and kilowatts of electricity
Coke and Pepsi
High-fuel-consuming sport-utility vehicles (SUVs)
and gasoline
McDonalds burgers and Burger King burgers
Butter and margarine

Cross-price
elasticities of demand
-0.34
+0.63
-0.28
+0.82
+1.54

(A). Explain the sign of each of the cross-price elasticities. What does it imply
about the relationship between the two goods in question?
(B). Compare the absolute values of the cross-price elasticities and explain
their magnitudes. For example, why is the cross-price elasticity of
McDonalds burgers and Burger King burgers less than the cross-price
elasticity of butter and margarine?
(C). Use the information in the table to calculate how a 5% increase in the
price of Pepsi affects the quantity of Coke demanded.
Q 6: Measure elasticity for the following cases and also define the type of the commodity:
(i)
= 15,
= 20,
= 10,
=8
(ii)

= 15,

(iii)

= 20,

(iv)

(v)

= 120,

= 20,
= 25,

= 22,

=
= 15,

= 15,
= 220,

=8
= 12
= 18

= 15000,

= 18000

Where, X and Y are the commodities, P is for the price, D indicates the demand, and M is
used for the income of the individual.