Page 89 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes 4. The market demand function of a commodity is represented by Q = 20 – 2P – 0.5 P + 0.01 Y,
A A B
where Q is the quantity demanded of A, P is the price of A, P is the price of B, and Y is the
A A B
consumer’s income. Calculate price and cross elasticities of demand for A when P = 5,
A
P = 10 and Y = 1000.
B
5. When the price of good X falls from 10 to 9, the demand for good Y increase from
20 Kg. to 25 Kg.
(a) What is the cross elasticity of demand of good Y for good X?
(b) Are goods X and Y compliments or substitutes?
6. You are given market data that says when the price of pizza is 60, the quantity demanded
of pizza is 80 slices and the quantity demanded of cheese bread is 120 pieces. When the
price of pizza is 30, the quantity demanded of pizza is 100 slices and the quantity demanded
of cheese bread is 100 pieces.
(a) Can the Price-Elasticity of Demand be calculated for either good?
(b) If so, calculate the Price Elasiticity of Demand for each product.

7. Consider the markets for screw-gauge and vernier caliper. You study survey data and
observe that if a screw-gauge costs 50, 100 screw-gauges are demanded. You also observe
that if a screw-gauge cost 30, 150 vernier calipers are demanded and if a screw-gauge cost
40 then 100 vernier calipers are demanded. If a vernier caliper costs 20, 125 vernier
calipers are demanded.
(a) Can the Price-Elasticity of Demand be calculated for either good?
(b) If so, calculate the Price Elasiticity of Demand for each good.
8. As a business manager, how do you find the demand elasticity to be useful? Also, can you
forecast you revenues in case you know the demand elasticity?
9. Examine the concept of price elasticity of demand. Which of the two methods of measuring
it is preferred by you and why?
10. When an individual's income was 2000, the demand for rice was 10kg. An increase of
500 in the individual's income leads to a fall in the demand of rice by 2kg. Assuming that
the price of rice remained constant, what is the income elasticity of demand for rice?
11. Think and state one situation where a business manager will use promotional elasticity to
make business decisions.
12. Discuss cross elasticity of demand, prove its utility for business managers.
13. What will be the impact of price elasticity of the demand on the following product ranges
available in the Indian market: (a) edible oil (b) computer hardware.

Answers: Self Assessment

1. (a) Price, income of consumers and price of other goods
(b) Perfectly elastic (c) Unit elastic
(d) Perfectly elastic (e) More elastic
2. (a) True (b) True (c) False

(d) True (e) False

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