Q.

1 A firm has following demand and supply functions:

Demand: Qd = 1300 – 20P
Supply: Qs = 100 + 10P
1. Demand-Supply schedule, 2. Calculate equilibrium price and quantity and draw diagram, 3. Show
impact of price floor and ceiling and 4. Show impact of shifts in demand curve, supply curve and
simultaneous shifts.

Price Rs. Quantity Quantity

demanded supplied
65 0 750
60 100 700
50 300 600
40 500 500
30 700 400
20 900 300
10 1100 200

Q.2 Demand schedule for product ‘X’ for the last five years is given below:
Px Qx Py I A
Year
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
1 10 1,000 9 15,000 50,000
2 10 950 10 15,000 50,000
3 10 1,050 9 16,000 50,000
4 10 1,100 9 15,000 60,000
5 15 900 9 15,000 50,000
Px = Price of product ‘X’
Qx = Quantity of ‘X’ demanded
Py = Price of ‘Y’, a related good to ‘X’
I = Per capita income
A = Promotional expenditure
Required:
a. Using arc-elasticity, estimate the price, cross, income and promotional elasticities of demand.
b. Based on your answer in part (a), comment on
i. The nature of the product ‘X’
ii. The relation between the products ‘X’ and ‘Y’
iii. The effect of an increase in the price of product ‘X’ on total revenue.
Price elasticity : Between years 1&5 = (-100)/5*{(10+15)/2}/{(1000+900)/2} When only price has changes and
other factors have remained the same.

Q3. A firm has following demand and supply function:

Demand: Qd = 13500 – 500P
Supply: Qs = 3000 + 200P
A. From the above functions, find the equilibrium price.
 B. If the government imposes specific sales tax of Rs. 10, what would be the new equilibrium price?
C. Show the same with the help of a diagram and incidence of tax on buyer and seller.
D. If the government imposes lumpsum tax of Rs. 1000, what would be the equilibrium price of the good?

a. Price P is 15
b. Price P is 17.86
c. Equilibrium Q is 6000 and P is 15

Q4. You study survey data and observe that if Coca-Cola costs Rs.8 per case, then 5 cases of Pepsi are
demanded, while if Coca-Cola costs Rs.16 per case, 11 cases of Pepsi are demanded. Calculate the Cross Price
Elasticity of Demand for cases of Pepsi. How are these two goods related?
(5-11)/5/(16-8)/8 =1.2, they are substitutes.

Q5. To determine whether a good is considered normal or inferior, one would consider the good’s

Quantity of Good Quantity of Good y

Income X Purchased Purchased
Rs. 30,000 2 20
Rs. 40,000 5 10
Using the table above, calculate income elasticity of good X and good Y and comment on the nature of the two
goods. 3 marks
Income elasticity for good X = 3/10000*35000/3.5 =3 Normal good
Income elasticity for good Y = -10/10000*35000/15 =-2.3 Inferior good

Q6. Suppose that 50 chocolate bars are demanded at a particular price. If the price of candy bars rises by 4 percent, the
number of chocolate bars demanded falls to 46 candy bars. Calculate elasticity and was the decision to increase price
correct? 2 marks
=50-46/46*100= 8.69%, elasticity = 8.69%/ 4% = -2.17. No price should have been reduced.

Q7. Knowing that the demand for wheat is inelastic, if all farmers voluntarily plowed 10 percent less of their wheat crop,
then their total revenue would increase.

Q8. If a 6 percent increase in income results in a 10 percent increase in the quantity demanded of pizza, then the income
elasticity of demand for pizza is 1.667 and it is a luxury item.

Q9. Suppose the price elasticity of demand for yachts equals 4.04, while the price elasticity of supply for yachts equals
0.22. If Congress reinstates a luxury tax on yachts, who will pay more of the tax?
Burden on consumer: Es/(Ed+Es) Burden on Supplier: Ed/(Ed+Es)