ASSIGNMENT-PRINCIPLES OF MICRO ECONOMICS

Q1. Give three reasons why the firm might need accurate demand information.

Q2. Payal spends all her money on food and clothing. When the price of clothing
decreases she buys more clothing.
a. Does the substitution effect cause her to buy more clothing? Explain?
b. Does the income effect cause her to buy more clothing? Explain?

Q3. Calculate the following elasticities: the own price elasticity of demand for
cars when the original price of a car of Rs. 8 lakhs is raised to Rs. 9 lakhs,
resulting in a fall in the number of cars sold from 50,000 to 40,000.
The advertisement elasticity of demand when a firm increases its spending on
advertising from Rs. 10,000 to Rs. 15,000, which leads to a rise in the number of
chocolate bars sold from 50,000 to 75,000.

Q4. Mr. Balakrishnan, the research manager for marketing at the Maruti Udyog
Limited has specified the following Demand function for Maruti 800 in India:
(10)
QM = f (Pm, N, I, PH, PG, A, PI)

Where Q-, is the quantity demanded of Maruti 800 per year, Pm is the price of
Maruti, N is the population, I is the disposable income, P H is the price of Hyundai,
PG is the price of gasoline, A is the amount of advertisement on Maruti 800 and P I
is the credit incentive to purchase Maruti 800. Indicate whether you expect each
independent or explanatory variable to be directly or inversely related to the
quantity demanded of Maruti 800 and the reason for your expectation.

Q5. If demand is elastic, it will pay a businessman to charge relatively low prices,
if demand is inelastic, he would be better off with a higher price. Discuss and
point out the role of price elasticity in business decisions.

Q6. Consider the following data:

Price Sales
3.5 80
3.4 85
3.3 90
3.2 95
3.1 100
3.0 105
2.9 110
2.8 115
2.7 120
2.6 125
 a. Does this relationship follow the law of demand? Explain.
b. Calculate the value of the arc price elasticity for a change in price from Rs.
3.4 to Rs. 3.3. Is demand elastic or inelastic in this region?
c. Plot these 10 observations with price on the Y-axis. Connect them to form
a demand curve.
d. Based on this graph, how many units would you expect the firm to sell at a
price of Rs. 2.95?
e. The algebric equation for the firms demand function based on the data is
P =5.10 −0.2Q
If the firm has a target sales level of 118 units, what price should be used?
f. Find the algebric expression for the firm’s total revenue (TR) as a function
of sales (Q).
g. What is the algebric functions for MR.
h. Find the price and the corresponding level of sales that would maximize
total revenue for the firm.
i. Rewrite the firms demand function with Q as a function of P rather than P
as a function of Q, as given.
j. What is the point price elasticity of demand at a price of Rs. 3.15? is
demand elastic or inelastic at a point?

Q7. Given the demand function Q= 100-0.2 P, determine:

(a) The total revenue equation as a function of Q.

(c) The value of Q that maximizes total revenue. Also, the price and point
elasticity at this point.

(d) If the firm is charging Rs. 60, should price be increased or decreased to
increase total revenue?

Q8. What is meant by Demand Schedule and Demand Function?

Calculate price-elasticity of demand for different years from the following data:

YEAR % CHANGE IN QUANTITY % CHANGE IN PRICE

1990-91 Zero 1.3
1991-92 2.2 3.1
1992-93 4.5 1.2
1993-94 7.4 7.4

Q9. State the Law of Demand. Explain with examples the difference in demand
curve for substitutes and complements.

Q10. A bookstore opens across the street from the universal bookstore (UBS).
The new store carries the same textbooks but offers a price 20 percent lower
than the UBS. If the cross elasticity is estimated to be 1.5, and UBS does not
respond to its competition, how much of its sales is it going to lose?