Managerial Economics

Unit-2

Short Questions:
1. The price elasticity of a product is 1.5. Should the seller raise the price, if his objective is to maximise sales
revenue. Explain with reasons.
2. If the demand for foodgrains is to be forecast for the country, what method of forecasting should be
used?
3. Explain the difference between the 'Price Elasticity of Demand' and 'Income Elasticity of Demand'.
4. Enumerate the basic assumptions underlying the demand forecasting.
5. Identify and explain the important determinants of demand.
6. Explain 'Delphi' method of demand forecasting.
7. Distinguish between expansion of demand and increase of demand.
8. Examine the role of price, income, prices of related goods and advertising on factors determining demand.
9. How is market demand schedule derived with the help of individual demand schedules?
10. Define normal good.
11. How does availability of substitute good affect the elasticity of demand?
12. Demand of good X falls due to increase in the income of the consumer what type of good X is.
13. What will be the impact on demand of the substitute good due to increase in price of the good?
14. Economics is both positive and a normative science. Explain.
15. A rise in price of a good results in a decrease in expenditure on it. Is its demand elastic or inelastic?
16. What is meant by market demand?
17. Define demand schedule.
18. What cause an upward movement along a demand curve?
19. If the number of consumers increase in which direction will the demand curve shift?
20. A straight line demand curve is given. What will be elasticity of demand on the mid point of this curve.
21. If the slope of a demand curve is parallel to X-axis, what will be the elasticity of demand?
22. Why is elasticity of demand negative?
23. Why is demand of water inelastic?
24. What happens to total expenditure on a commodity when its price falls and its demand is price elastic?
25. Why does total utility increases at diminishing rate due to continuous increase in units of a good
Consumed?
26. Due to decrease in price of pen why does the demand of ink increase?
27. What are the reasons behind Law of demand? State any two.
28. Differentiate between :
a.
Normal and Inferior goods
b.
Complimentary and substitute goods.

Long questions:
1. Explain the factors which determine the demand of a product.

2. Explain with example the 'law of demand' and discuss its main characteristics. What are the exceptions to
law of demand?
3. What is meant by 'demand schedule'; 'demand curve' and 'demand function'? Show how market
demand is calculated from individual demand?
4. Write notes on any two of the following :
a. Demand Schedule and Demand Functions
b. Price Elasticity Vs Income Elasticity of Demand
c. Law of demand
d. Cross - elasticity of demand
5. State elasticity of demand of followings
a. Luxurious goods
b. Goods of alternate use
c . Necessity goods.
6. What will be the slope of demand curve under following situations.
a. Perfectly elastic demand
b. Perfectly inelastic demand
c . Unit elastic demand.
7. State the factors of rightward shift of demand curve. Explain any one.
8. How does a portion of income spent on a good effect elasticity of demand.
9. What method of demand forecasting would you use for forecasting the demand of a new
product ?
10. Discuss briefly the various methods of forecasting demand and point out their limitations. What are the
criteria of a good forecasting method ?
11. Explain with the help of diagrams the effect of following changes on the demand of a commodity.
a. A fall in the price of substitute good.
b. A fall in the price of complementary good.
12. What is elasticity of demand? What are its managerial uses?
13. Explain the methods used for demand forecasting.
14. Explain the concept of income elasticity of demand and explain its role in business decisions.
15. What is Elasticity of Demand ? Highlight its role in business decision-making.
16. What are different methods of demand forecasting? Explain the 'trend projection' and 'collective opinion'
methods of demand forecasting.

Numerical Problems:
1. Calculate the price elasticity of demand for a commodity when its price increases by 25% and quantity
demanded falls from 150 units to 120 units.
2. The price elasticity of demand of good X and Y is same. If price of good X falls by 10% and price of
good Y increase by 10% then what changes will take place is demand of good X and good Y.

3. If the price of a commodity rises from Rs. 8 per unit to Rs. 10 per unit, a consumers demand falls from
110 units to 100 units. Find out the price elasticity of demand for this commodity.
4. At the price of Rs. 4 per unit, a consumer of demand is 2. How many units will the consumer buy at Rs.
3 per unit?
5. Price elasticity of demand of a good is 3. At a price of Rs. 5 per unit, 80 units of this good one bought.
How many units will be bought at a price of Rs. 4 per unit. Calculate.
6. A consumer buys 100 units of a good at a price of Rs. 5 per unit. When price changes he buys 140 units.
What is the new price if elasticity of demand is 2.
17. The demand function is as follows : QD = 30 1.5P
Where QD is quantity demanded and P is price. Find the elasticity of demand at a price of Rs
16.
18. In a perfectly competitive market the demand and supply functions are as follows :
QD =100 - 2P
Qs=10 + 3P
Where QD and Qs are quantities demanded and supplied and P is price.
(i) Find the equilibrium price in the market .
(ii) What will happen if the government fixes a price of Rs. 15 ?
19. Below is given a demand equation:
Q = 6P+400
Calculate price-elasticity of demand if price is (i) Rs. 4 , (ii) Rs. 10 and (iii) Rs. Is the demand at
theses price elastic or inelastic?
20. Suppose Individual demand schedule for A, B and C are given as followsPrice
As Demand
Bs Demand
Cs Demand
5
80
40
20
10
40
20
10
15
20
10
5
20
10
5
0
25
0
0
0
Find (i) Market Demand schedule (ii) Market demand curve (iii) Elasticity when price falls from Rs.15
to Rs. 10.
25. A publishing company has the following demand function.
Q= 5000-4000P +0.02 Pop + 0.5 I+ 1.5 A
Where Q= quantity demanded, P is the price, Pop is population, I is the disposable income per household, A is the
advertisement expenditure.
a) Find out the demand if P=10, pop. is 10,00,000, I= 30,000 and A= 10,000.
b) If the other variables being the same, advertising expenditure goes up to Rs. 15,000, what would be the new
demand?

26. Demand for mobile phone handsets by a popular company in Bangalore city is estimated to be
Qd = 2,50,000 - 35P. If this relationship is approximately valid for next year also,
a) How many mobile phones would be demanded at a price of Rs. 2,000, 4,000, and 6,000 a set?
b) Compute the arc price elasticity between 2,000 and 4,000; 4,000 and 6,000.
c) Calculate point elasticity at 2,000, 4,000 and 6,000.
d) If last year 25,000 units were sold, what would have been the average price?
e) What is the highest theoretical price for the mobile handset in Bangalore for this seller?
f)
27. The demand function for wall clocks in a city has been estimated to be
Q= 2000 +15Y-5.5P
Where Y is income in thousand rupees, Q is quantity in units, and P is unit price. When P=150, y =15, find

a) Price elasticity of demand

b) Income elasticity of demand
28. Pepsodent sells a toothbrush for Rs.25. Its sales have averaged 8,000 units per month over the last year.
Recently, its close competitor, Colgate, reduced the price of its product from Rs. 35 to Rs. 30 per toothbrush. As a
result, Pepsodents sales declined by 1,500 units per month.
a) What is their cross elasticity? What relationship it indicates?
b) If Pepsodent knows that it has a cross elasticity of 1.5 with Colgate, how much it should now charge
to restore previous sales after the price cut by Colgate? (Assume Colgate retains its price at Rs. 30 itself
and does not retaliate).
c) What is the total monthly revenue of Pepsodent before and after the price change in (2) above?