Assignment 1

Business Economics

M1 and M2

1) Beef supplies are sharply reduced because of drought in the beef-raising states, and consumers turn to pork as a substitute for beef. How would you illustrate this change in the beef-market in supply-and-demand terms? (Draw the changes in the supply-demand curves) 2) In December, the price of Christmas trees rises and the quantity of trees sold rises. Is this a violation of the law of demand?

3) If a 12% fall in price leads to a 3% increase in quantity demanded, what is the price elasticity of demand? 4) Brand X sold 500,000 items at 100 each last year. It is known that its price elasticity of demand is -0.5 (calculated at the current price and quantity). What would sales in number of units sold be this year if there are no other changes affecting demand and the price per unit is raised to 110? 5) Assume that the demand curve for a commodity is Qd = 10-P. Using the table below to complete parts a-c (a) Fill in column two, which identifies quantity demanded associated with each price. For example, when price equals 1, Qd = 10 - 1 = 9. (b) Now fill in column three which identifies the revenue that the producer will receive at each price. For example if price equals 1, 9 units will be demanded and hence the firm will receive 9. Comment on how total revenue changes as we move up the demand curve (from Price =0). (c) Calculate the price elasticity at each point on the demand curve. Comment on how price elasticity of demand changes as we move up the demand curve (from Price = 0). (d) If you have a pencil and paper nearby, sketch out the demand curve showing how price elasticity of demand changes as we move along it. Identify the areas on the demand curve for which demand is price elastic, which are price inelastic and the point at which price elasticity = -1 Price () 0 1 2 3 4 5 6 7 8 9 10 9 9 Quantity Demanded Total revenue (PXQ) Price Elasticity of Demand

Instructor: Komal Afzal Rao

6)

Assume that two baskets A and B lie on the same indifference curve. Assume

that basket A contains more of good Y than basket B but less of good X than basket B . As the consumer moves down and to the right (from basket A to basket B ) along his indifference curve, total utility a) increases. b) remains constant. c) decreases.

d) is ambiguous.
7) Why will the supply of houses be relatively more price elastic in the long run than in the short run?

8) Define income effect and substitution effect. *keep your answers short and consise* 8) Other than the giffen good can you think up other situations when an increase in price can still lead to an increase in demand for a commodity? 10) Question no: 3 from chapter 2 *Managerial Economics* By Bruce Allen, Keith Weiglet 11) Find out the effect of price-elasticity on the firms marginal revenue. Pg 44. *Managerial Economics* By Bruce Allen, Keith Weiglet

Instructor: Komal Afzal Rao