3/24/2020

Economic Policy and Issues in Global

Perspective

Exercise: 3nd

Resource person: Dr. Rukhsana Kalim

Program: MBA 1.5(Evening)

Submitted By: ID#

Fasih Abbas F2019273035
Umar Farooq F2019273016
Asad Ullah F2019273008
Muhammad Sheraz F2019273012
Aleem Inam F2019273013
Section: G
Q#1:
If the demand curve for wheat in United States is
P = 12.4 – 4Qd
Where P is the farm price of wheat, Q d is the quantity of wheat and supply curve of wheat in United States is
P = -2.6 + 2Qs;
What is the equilibrium price of wheat? What is the equilibrium quantity of wheat sold?
Solution:
Setting demand equal to supply yields
P = 12.4 – 4Qd
P = –2.6 + 2Qs
Rearranging Equations:
4Qd = 12.4 – P
Qd = 12.4 – P
4
– 2Qs = –2.6 – P
Qs = –2.6 – P
–2
Qd = Qs
12.4 – P  – 2.6 – P
4 –2
(12.4 – P) = 4 (– 2.6 – P)
–2
12.4 – P = 5.2 + 2P
12.4 – 5.2 = 2P + P
7.2 P
3
P = $2.4
Qd = 12.4 – 2.4 = 2.5
4
The actual price need not be equal to equilibrium price, although it will generally
tend to move toward it because of the equilibrating effects of shortage
and surplus. Factors that might prevent the actual price from equaling the equilibrium
price include the cost and availability of information, transportation
costs, and a lack of opportunities for price equalizing arbitrage.

2
Q#2:
KRMY-TV is contemplating a T-shirt advertising promotion. Monthly sales data from T-shirt shops
marketing the “Eye Watch KRMY-TV” design indicate that
Q = 1,500 – 200P
Where Q is T-shirt sales and P is price.
A. How many T-shirts could KRMY-TV sell at $4.50 each?
Solution:

T-shirts sales @ $4.50

Quantity of T-shirts at the price $4.50 is:

Q = 1,500 – 200 (4.5) = 600 (T-shirts)

600 T-shirts could be sold at price of $4.50 per T-shirt

B. What price would KEMY-TV have to charge to sell 900 T-shirts?

Price for selling 900 T-shirts is:
Solution:
900 = 1,500 – 200P
200P = 1,500 – 900
P= 600
200

P = $3

C. At what price would T-shirt sales equal zero.

T-shirts sales equal zero at the price:
1,500 – 200P = 0
200P = 1,500
P = 1500
200

P = $7.5

D. Calculate the point price elasticity of demand at a price of $5.

Solution:
% change in Q
% change in P

or (Qd/Pd) × (P/Q)

given P = 5
Q = 1500 - 200 × 5 = 500

(Qd/Pd) × (P/Q) = -200 × (5/500)

=-1000/500
=-2

2
Q#3:
The South Beach Café recently reduced appetizer prices from $10 to $6 for afternoon “early bird” customers
and enjoyed a resulting increase in sales from 60 to 180 orders per day. Beverage sales also increased from
30 to 150 units per day.
A. Calculate the arc price elasticity of demand from 30 to 150 units per day.
Solution:

P1 = $10 P2 = $6
Q1 = 30 Q2 = 150

Mid-Point Formula =

Ed = ∆Q ∆P
Q1 + Q2 ÷ P1 + P2
2 2

120 –4
= ÷
180 90 16 8
2 2

120 4 –4 1
÷
90 3 8 2
4
=– × 2
3

=–8
3
= – 2.67

B. Calculate the arc cross-elasticity of demand between beverage sales and appetizer prices.
Solution:

% change in P
4
= × 100
10
 40%
180 – 30 = 120
% change in Qd
120
× 100
30
=400 400
Cross elasticity of demand = = 10
40
10 > 0
This shows that the second goods are substitute.