EXERCISE DEMAND THEORY

To submitted the exercise of Business Economic

by:
Antonius Cliff Setiawan 29119033
Azharry Adha 29119231
Mega Zhafarina Purwono 29119227
Suryanti Rahayu 29119108

Lecturer: Mr. Taufik Faturohman

MASTER BUSINESS OF ADMINISTRATION

INSTITUT TEKNOLOGI BANDUNG
2019-2020
EXERCISE PROBLEM

SD P4-2

1. Suppose that GM’s Smith estimated the following regression equation for Chevrolet
automobiles:

𝑄𝑐 = 100,000 − 100𝑃𝑐 + 2,000𝑁 + 50𝐼 + 30𝑃𝑓 − 1,000𝑃𝐺 + 3𝐴 + 40,000𝑃𝐼

Where,

𝑄𝑐 : quantity demanded per year of Chevrolet automobiles

𝑃𝑐 : price of Chevrolet automobiles, in dollars

𝑁 : population of the United States, in millions

𝐼 : per capita disposables, in dollars

𝑃𝑓 : price of ford automobiles, in dollars

𝑃𝐺 : real price of gasoline, in cents per gallon

𝐴 : advertising expenditures by Chevrolet in dollars per year

𝑃𝐼 : credit incentives to purchase Chevrolets, in percentage points below the rate of

interest on borrowing in the absence of incentives.

a) Indicate the change in the number of Chevrolets purchase per year (𝑄𝑐 ) for each unit change
in the independent or explanatory variables.
Answer:
The number of Chevrolets purchased per year, will be decreases 100 unit for each $1
increase in price of Chevrolet (𝑃𝑐 ), increases by 2,000 units for each 1 million increases in
population (𝑁), increases 50 units for each $1 increase per capita disposable income (𝐼),
increases 30 units for each $1 increase price of Ford automobiles (𝑃𝑓 ), decreases 1,000
units for each 1 cent in real price of gasoline (𝑃𝐺 ), increases 3 units for each $1 in
advertising expenditures (𝐴) and increases 40,000 units for each 1 percentage points in the
rate of interest on borrowing.
b) Find the value of 𝑄𝑐 , if the average value of 𝑃𝑐 = $9,000 , 𝑁 = 200 million , 𝐼 = $10,000 ,
𝑃𝑓 = $8,000 , 𝑃𝐺 = 80 cents and 𝐴 = $200,000 and if 𝑃𝐼 = 1.
Answer:

𝑄𝑐 = 100,000 − 100𝑃𝑐 + 2,000𝑁 + 50𝐼 + 30𝑃𝑓 − 1,000𝑃𝐺 + 3𝐴 + 40,000𝑃𝐼

𝑄𝑐 = 100,000 − 100 (9,000) + 2,000(200) + 50(10,000) + 30(8,000) − 1,000(80)

+3(200,000) + 40,000(1)
𝑄𝑐 = 900,000

c) Derive the equation for demand curve for Chevrolet

Answer:
𝑄𝑑𝑐 = 100,000 − 100𝑃𝑐 + 2,000(200) + 50(10,000) + 30(8,000) − 1,000(80)
+3(200,000) + 40,000(1)

𝑄𝑑𝑐 = 1,800,000 − 100𝑃𝑐

d) Plot it
Assume that the price of Chevrolet is $5,000, $10,000, and $15,000. So the quantity is
𝑄𝑑𝑐 = 1,300,000, 𝑄𝑑𝑐 = 800,000, and 𝑄𝑑𝑐 = 300,000. We can plotting price and quantity
value and get demand curve of Chevrolet.

Pc ($)

15,000

10,000

5,000
Dc

300 800 1,300 Qc (000)

SD P4-11

9. A researcher estimated that the price elasticity of demand for automobiles in the United
States is -1.2, while the income elasticity of demand is 3.0. Next year, U.S automakers
intend to increase the average price automobiles by 5 percent, and they expect consumers’
disposable income to rise by 3 percent. (a) If sales of domestically produced automobiles
are 8 million this year, how many automobiles do you expect U.S automakers to sell next
year? (b) By how much should domestic automakers increase the price of automobiles if
they wish to increase sales by 5 percent next year?
Answer:
𝐸𝑝 = -1.2, 𝐸𝐼 = 3.0, %∆𝑃 = 5%, %∆𝐼 = 3%
a)
%∆𝑄 %∆𝑄
> 𝐸𝑃 = > 𝐸𝐼 =
%∆𝑃 %∆𝐼
%∆𝑄 %∆𝑄
−1.2 = 3.0 =
5% 3%
%∆𝑄 = −1.2 𝑥 5% %∆𝑄 = 3.0 𝑥 3%
%∆𝑄 = −6% %∆𝑄 = 9%

> So, %∆𝑄 = -6% + 9%

= 3%

The U.S automaker expect to sell next year is (assume ceteris paribus):
8,000,000 x (100% + 3%) = 8,000,000 x 103%
= 8,240,000 automobiles
b) Assume that the price of automobile is X, so:

> %∆𝑄 = X% + 9% 𝑋%
> 𝐸𝑃 =
5% = X% + 9% %∆𝑃
−4%
𝑋% = -4% −1,2 =
%∆𝑃
−4%
%∆𝑃 = = 3.3%
−1.2
So, domestic automakers can increase the price of automobiles 3.3% to sales next year.
12. The management of the Mini Mill Steel Company estimated the following elasticity for a
special type of steel: 𝐸𝑝 = 2, 𝐸𝐼 = 1, and 𝐸𝑋𝑌 = 1,5 , where X refers to steel and Y to
aluminum. Next year, the firm would like to increase the price of the steel it sells by 6
percent. The management forecasts that income will rise by 4 percent next year and that
the price of aluminum will fall by 2 percent. (a) If the sales this year are 1,200 tons of the
steel, how many tons can the firm expect to sell next year? (b) By what percentage must
the firm change the price of steel to keep its sales at 1,200 tons next year?
Answer:
a)

%∆𝑄 %∆𝑄
> 𝐸𝑃 = > 𝐸𝐼 =
%∆𝑃 %∆𝐼
%∆𝑄 %∆𝑄
2 = 1 =
6% 4%
%∆𝑄 = 2 𝑥 6% %∆𝑄 = 1 𝑥 4%
%∆𝑄 = 12% %∆𝑄 = 4%

%∆𝑄 > So, %∆𝑄 = 12% + 4% - 3%

> 𝐸𝑋𝑌 = = 13%
%∆𝑃
%∆𝑄
1,5 =
−2% The firm expect to sell next year is
%∆𝑄 = 1,5 𝑥 − 2% 1,200 x (100% + 13%) = 1,200 x 113%
%∆𝑄 = −3% = 1,356 tons

b) Assume that the price steel is Y and because the quantity is constant so the %∆𝑄 = 0,
so:

> %∆𝑄 = Y% + 4% - 3% 𝑌%
> 𝐸𝑃 =
0 = Y% + 4% - 3% %∆𝑃
−1%
𝑌% = -1% 2 =
%∆𝑃
−1%
%∆𝑃 = = −0,5%
2
So, the firm can change the price of steel by decrease 0,5%
Case 4-2 Demand for Sweet Potatoes in the United States

Data for the year, equation is

𝑄𝐷𝑠 = 7609 − 1606𝑃𝑠 + 59𝑁 + 947𝐼 + 479𝑃𝑤 − 271𝑡
where,
Q is the quantity of sweet potatoes in US per 1000 cwt
Ps is the real dollar price of sweet potatoes per hundredweight received by farmers
N is the average population in US
I is per capita disposable income
Pw is the real dollar price of white potatoes per hundredweight received by farmers
t is time trend or shifting in trend and taste ( t= 1 in 1949, t=2 in 1950 and t=24 in 1972)

By entering data of the year 1949 and 1972, we will find out the Demand equation of each years

1949
𝑄𝐷𝑠 = 7609 − 1606𝑃𝑠 + 59(150.73) + 947(1.76) + 479(2.94) − 271(1)
𝑄𝐷𝑠 = 7609 − 1606𝑃𝑠 + 11968 − 271
𝑄𝐷𝑠 = 19306 − 1606𝑃𝑠

1972
𝑄𝐷𝑠 = 7609 − 1606𝑃𝑠 + 59(208.78) + 947(3.19) + 479(2.41) − 271(24)
𝑄𝐷𝑠 = 7609 − 1606𝑃𝑠 + 16493 − 6504
𝑄𝐷𝑠 = 17598 − 1606𝑃𝑠

With this data can be summarized that increase in both income (I) and population (N) didn’t
really affect the demand but instead the shifting in taste (t) really affecting the demand. Although
there are decrease in the price of white potatoes as substitute goods, but the decrease is not
significant compared in shifting of taste, with this can be concluded shifting in taste change the
demand of the year 1972 the quantity demand is decreasing compared to year 1949 overwhelms
the change increase in Income and Population.