ME ASS 1 FNL
-
Upload
julio-mende -
Category
Documents
-
view
220 -
download
0
Transcript of ME ASS 1 FNL
7/31/2019 ME ASS 1 FNL
http://slidepdf.com/reader/full/me-ass-1-fnl 1/10
Question One
The following equations have been derived from the books of NCPB on demand and supply of
rice: Q=69+2P and Q=90-5P where Q is the quantity and P is price of rice. As the board chief strategist advice the CEO on the following;
a) What function could represent demand curve, supply curve why
The following function would represent the demand curve: Q=90-5P this is because the demand
curve as a negative slope indicating an inverse relationship between price and quantity demanded.
Thus an increase in price would cause a decrease in quantity demanded and vice versa.
b) Compute the equilibrium price and quantity and explain whether equilibrium is
always desirable for both consumers and producers
At equilibrium Qd=Qs Therefore 90-5P=69+2P
-5P-2P=69-90
-7P=-21
Equilibrium Price =3
Substituting for p: Q=90-5(3)
Equilibrium Quantity =75
Q p= 3 Qd=75
Comment
Equilibrium price and quantity is always desirable because the quantity demanded is equal to the
quantity supplied hence there is no deficit or surplus thus at equilibrium both the supplier and the
consumer needs are satisfied
1
7/31/2019 ME ASS 1 FNL
http://slidepdf.com/reader/full/me-ass-1-fnl 2/10
c) Suppose supply changes to Q=55+2P with no change in demand determine the new
equilibrium price and quantity and explain whether this represents change in
quantity supplied or change in supply
Q=55+2P= Q=90-5P
2P+5P=90-55
7P=35
Equilibrium Price=5
New Equilibrium Quantity; Q=55+2(5)
Equilibrium Quantity =65
2
7/31/2019 ME ASS 1 FNL
http://slidepdf.com/reader/full/me-ass-1-fnl 3/10
d) Provide four possible reasons for the change in supply indicated in (c) above
The supply change above is as a result of the following factors
Changes in the prices of other goods: Suppliers are frequently able to switch their production
processes from one type of good to another. Farmers, for example, might decide to grow less
wheat and more corn on the same land if the price of corn rises relative to the price of wheat. In
this case, the supply curve for wheat would shift to the left
Changes in the prices of inputs: The prices of the raw materials or inputs used to produce a
good also cause the supply curve to shift. An increase in the prices of a good's inputs will raise
costs to suppliers and cause suppliers to supply less of that good at all prices. Therefore, an
increase in the prices of a good's inputs leads to a leftward shift of the supply curve for that
good, as in Figure 2 (a). A decrease in the prices of a good's inputs reduces costs and allows
suppliers to supply more of that good at all prices. Therefore, a decrease in the prices of a
good's inputs leads to a rightward shift of the supply curve for that good,
Changes in technology: Advances in technology often have the effect of lowering the costs of
production, allowing suppliers to supply more goods at all prices. For example, the
development of pesticides has reduced the amount of damage done to certain crops and
therefore has reduced the cost of farming. The result has been an increase in the supply of these
crops at all prices, which can be represented by a shift to the right in the supply curves for
these crops
The cost of production would cause a change in quantity supplied
Government tax policy may also cause a change in quantity supplied
Climatic and Weather conditions are also another factor causing a change in quantitysupplied
The price for substitute products
3
7/31/2019 ME ASS 1 FNL
http://slidepdf.com/reader/full/me-ass-1-fnl 4/10
e) Suppose after the supply change the government fixes the price of rice at Ksh 7 per unit.
Explain the economic effects of this policy indicating clearly whether this would result in a
surplus or shortage of rice and advice the CEO on how the board could deal with this
situation
There will be a producers surplus because of the high price ceiling of Ksh 7
The consumers will look for cheaper substitutes this calls for the CEO to advice the
company to invest in substitutes
There will be a surplus this is because suppliers will offer to sale while the demand is not
sufficient to clear the quantity supplied
Revenues will decrease hence the CEO should advice the board to diversify into other
markets
The company should also increase marketing and promotional campaigns for instance
packaging in bigger quantities
Diversifying into other products
The board could also fix the price below the ceiling which represents a price cutting
The board should also consider value addition to the product in order to justify the price
increment
Question 2
A sales manager of a certain company wishes t study the characteristics of revenue received by the
firm. He notices from his study that when the price is Ksh 30 per unit, 100 units of output are sold
while when the price rises to Ksh 50 only 20 units are sold
i) Assuming a linear relationship between these data, determine the Demand, total revenue,
Average revenue and Marginal revenue functions
4
7/31/2019 ME ASS 1 FNL
http://slidepdf.com/reader/full/me-ass-1-fnl 5/10
Change
Q 100 20 80
P 30 50 -20
Demand Function
q = mp + b
100=m-30b…i
20=m-50b……ii
80= -20b
b= - 4
∆Y/∆X=(100-20)/(30-50)= -4
Substituting for b in above equation
100=m-30*-4=
M=220
Demand Equation=
Q d =
Total Revenue=AR
TR= (220-4b)
TR=
Average Revenue (AR)
=AR=
5
7/31/2019 ME ASS 1 FNL
http://slidepdf.com/reader/full/me-ass-1-fnl 6/10
=
=
MR= =220b-
=
ii) Compute the price elasticity of demand when total revenue is maximum and comment on the
results
=
= =
= =
6
7/31/2019 ME ASS 1 FNL
http://slidepdf.com/reader/full/me-ass-1-fnl 7/10
= =
= %
Comment
A small change in price causes will produce a greater change in quantity demanded, thus this
means that for every 1 per cent change in price the quantity demanded will rise by 2.67% per cent.
b) The concept of price elasticity of demand is a versatile tool of economic analysis. Explain this
statement with practical examples
The concept of price elasticity enables a firm to alter its profitability by increasing or decreasing its
price to stimulate demand. However price elasticity enables firms to determine whether to alter
prices of commodities whose demand is elastic and keep commodities whose prices is inelastic
constant. Therefore the concept of price elasticity is a key decision making tool which will enable
firms to alter its price in order to increase or decrease demand for a commodity.
7
7/31/2019 ME ASS 1 FNL
http://slidepdf.com/reader/full/me-ass-1-fnl 8/10
Question Three
The following data shows the prices of goods X and Y the annual income of the consumer and the
Quantities of X and Y consumed during the last six Years.
Year Price of X ($) Quantity of X Price of Y($) Annual Income ($)
2000 100 80 50 20000
2001 110 90 40 18000
2002 90 100 40 18000
2003 100 100 50 20000
2004 100 90 40 20000
2005 100 110 40 20000
Required
i. What pair of years would you use to calculate the price elasticity of demand for X and why
Years
The above years represents a change both in price and quantities demanded hence price elasticity
of demand can be calculated
ii. Complete the arc price elasticity of demand for X and interpret the coefficient obtained
Arc Elasticity of Demand for X=
= =
8
7/31/2019 ME ASS 1 FNL
http://slidepdf.com/reader/full/me-ass-1-fnl 9/10
= =
Comment
The above product is
iii. What pair of years would you use to calculate the price elasticity of demand for Y and why
Assumption: All annual income is spent on the two commodities
Thus:
Year 2000 2001 2002 2003 2004 2005
Q 240 202.5 225 200 275 225
Therefore years (2000-2001), (2002-2003) and (2003-2004) can be used to calculate price
elasticity of demand because they exhibit both a change in price as well as quantity demanded
iv. Compute the cross elasticity of demand X and indicate the possible relationship between
goods X and Y
Cross elasticity =
9
7/31/2019 ME ASS 1 FNL
http://slidepdf.com/reader/full/me-ass-1-fnl 10/10
=
= -
v. Explain whether you would expect the price elasticity of demand for a product to be more
or less elastic in the long run than in the short run
Cross elasticity will be positive for a substitute and negative for a compliment thus goods X
and Y are complements for example Pen and ink
Price elasticity of demand in short run and long run
In the long run elasticity of demand is affected by change in technology, changes in prices of
substitute products, new entrants, income levels, distribution of income
In the long run price will therefore be elastic while in the short run price will be inelastic
10