ECW2731ManagerialEconomics

TutorialWeek4Solutions

1. MULTIPLECHOICE

1. Ifdemandincreaseswhilesupplydecreasesforaparticulargood:
a. itsequilibriumpricewillincreasewhilethequantityofthegoodproducedand
soldcouldincrease,decrease,orremainconstant.
b. thequantityofthegoodproducedandsoldwilldecreasewhileitsequilibrium
pricecouldincrease,decrease,orremainconstant.
c. thequantityofthegoodproducedandsoldwillincreasewhileitsequilibrium
pricecouldincrease,decreaseorremainconstant.
d. itsequilibriumpricewilldecreasewhilethequantityofthegoodproducedand
soldcouldincrease,decrease,orremainconstant.

ANS: A

2. Surplusisaconditionof:
a. excesssupply.
b. adeficiencyinsupply.
c. marketequilibrium.
d. excessdemand.

ANS: A

3. ThequantityofproductXsuppliedcanbeexpectedtorisewithafallin:
a. pricesofcompetingproducts.
b. priceofX.
c. energysavingtechnicalchange.
d. inputprices.

ANS: D

4. Deriveddemandisdirectlydeterminedby:
a. utility.
b. theprofitabilityofusinginputstoproduceoutput.
c. theabilitytosatisfyconsumerdesires.
d. personalconsumption.

ANS: B

5. Ademandcurveexpressestherelationbetweenthequantitydemandedand:
a. income.
b. advertising.
c. price.

d. alloftheabove.

ANS: C

2. DemandAnalysis.Thedemandforhighdefinitiontelevisionsets(HDTV)isoftendescribed
ashighlycyclical,andverysensitivetoHDTVpricesandinterestrates.Giventhese
characteristics,describetheeffectofeachofthefollowingintermsofwhetheritwould
increaseordecreasethequantitydemandedorthedemandofHDTVs.Moreover,when
priceisexpressedasafunctionofquantity,indicatewhethertheeffectofeachofthe
followingisanupwardordownwardmovementalongagivendemandcurveorinstead
involvesanoutwardorinwardshiftintherelevantdemandcurveforHDTVs.Explainyour
answers.

A. AdecreaseinHDTVprices

B. Afallininterestrates

C. Ariseininterestrates

D. Asevereeconomicrecession

E. Arobusteconomicexpansion

ANS:

A. AdecreaseinHDTVpriceswillincreasethequantitydemandedandinvolvea
downwardmovementalongtheHDTVdemandcurve.

B. AfallininterestrateswillincreasethedemandforHDTVsandcauseanoutward
shiftofthedemandcurve.

C. AriseininterestrateswilldecreasethedemandforHDTVsandcauseaninward
shiftofthedemandcurve.

D. Asevereeconomicrecession(fallinincome)willdecreasethedemandforHDTVs
andresultinaninwardshiftofthedemandcurve.

E. Arobusteconomicexpansion(riseinincome)willincreasethedemandforHDTVs
andresultinanoutwardshiftofthedemandcurve.

3.

ComparativeStatics.CouponPromotions,Inc.,isacouponbookpublisherwithmarketsin
severalsouthwesternstates.CPIcouponbooksareeithersolddirectlytothepublic,sold
throughreligiousandothercharitableorganizations,orgivenawayaspromotionalitems.
Operatingexperienceduringthepastyearsuggeststhefollowingdemandfunctionforits
couponbooks:

Q=10,0005,000P+0.02Pop+0.4I+0.6A

whereQisquantity,Pisprice($),Popispopulation,Iisdisposableincomepercapita($),
andAisadvertisingexpenditures($).

A. DeterminethedemandcurvefacedbyCPIinatypicalmarketwhereP=$5,Pop=
1,000,000persons,I=$35,000andA=$10,000.Showthedemandcurvewith
quantityexpressedasafunctionofprice,andpriceexpressedasafunctionof
quantity.

B. Calculatethequantitydemandedatpricesof$5,$2.50,and$0.

C. Calculatethepricesnecessarytosell10,000,25,000,and50,000units.

ANS:

A. Thevalueforeachrespectivenonpricevariablemustbesubstitutedintothe
demandfunctioninordertoderivetherelevantdemandcurve:

Q=10,0005,000P+0.02Pop+0.4I+0.6A

=10,0005,000P+0.02(1,000,000)+0.4(35,000)+0.6(10,000)

Q=50,0005,000P

Then,priceasafunctionofquantityis:

Q=50,0005,000P

5,000P=50,000Q

P=$10$0.0002Q

B. At,

P=$5:
Q=50,0005,000(5)=25,000

P=$2.50:
Q=50,0005,000(2.5)=37,500

P=$0:
Q=50,0005,000(0)=50,000

C. At,

Q=10,000: P=$10$0.0002(10,000)=$8

Q=25,000: P=$10$0.0002(25,000)=$5

Q=50,000: P=$10$0.0002(50,000)=$0


4.. QuantityDemanded.GurglingSprings,Inc.isabottlerofnaturalspringwaterdistributed
throughouttheNewEnglandstates.FivegalloncontainersofGSIspringwaterare
regionallypromotedanddistributedthroughgrocerychains.Operatingexperienceduring
thepastyearsuggeststhefollowingdemandfunctionforitsspringwater:

Q=250100P+0.0001Pop+0.003I+0.003A

whereQisquantityinthousandsoffivegalloncontainers,Pisprice($),Popispopulation,
Iisdisposableincomepercapita($),andAisadvertisingexpenditures($).

A. DeterminethedemandcurvefacedbyCPIinatypicalmarketwhereP=$4,Pop=
4,000,000persons,I=$50,000andA=$400,000.Showthedemandcurvewith
quantityexpressedasafunctionofprice,andpriceexpressedasafunctionof
quantity.

B. Calculatethequantitydemandedatpricesof$5,$4,and$3.

C. Calculatethepricesnecessarytosell1,250,1,500,and1,750thousandsoffive
galloncontainers.

ANS:

A. Thevalueforeachrespectivenonpricevariablemustbesubstitutedintothe
demandfunctioninordertoderivetherelevantdemandcurve:

Q=250100P+0.0001Pop+0.005I+0.003A

=250100P+0.0001(4,000,000)+0.003(50,000)+0.003(400,000)

Q=2,000100P

Then,priceasafunctionofquantityis:

Q=2,000100P

100P=2,000Q

P=$20$0.01Q

B. At,

P=$5:
Q=2,000100(5)=1,500

P=$4:
Q=2,000100(4)=1,600

P=$3:
Q=2,000100(3)=1,700

C. At,

Q=1,250:
P=$20$0.01(1,250)=$7.50

Q=1,500:
P=$20$0.01(1,500)=$5

Q=1,750:

P=$20$0.01(1,750)=$2.50