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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