SEMESTER SPRING 2017

ECONOMICS (ECO401)
ASSIGNMENT SOLUTION
MARKS: 15
ASSIGNMENT:
The Surgical Industry in Pakistan is growing rapidly and has become export potential
industry. Suppose Afzaal enterprises and Master Corporation are two surgical
manufacturers. Master Corporation is doing business from last ten years while an Afzaal
enterprise has started business in last year. Afzaal enterprises and Master Corporation is
facing the following demand functions for surgical products:

Demand function for surgical products of Master Corporation:

Qd = 7000-40P+2P2
Demand function for surgical products of Afzaal enterprises:
Qd = 4000-20P+3P2
Qd is quantity demanded and P is the market price of surgical products.

Questions:
1. Calculate price elasticity of demand of surgical products using point elasticity
method for Afzaal enterprises and Master Corporation if market price of surgical
products is Rs. 50.
2. What happens to total revenue of Afzaal enterprises and Master Corporation if
market price of surgical products increases from Rs. 50 to Rs. 70? Explain
logically using the concept of price elasticity of demand.
3. If government subsidized Surgical Industry then how it will impact the supply and
prices of the surgical products in domestic market.
(Marks: 8+4+3)

SOLUTION:

I.

Demand function for surgical products of Master Corporation:

Qd = 7000-40P+2P2

Formula for point elasticity of demand

= dQ/dP x P/Q
dQ/dP = -40+4P

As P= Rs. 50

dQ/dP = -40+4 (50) =160

Qd = 7000-40 (50) + 2(50)2

= 7000- 2000+5000

= 10000

= 160*50/10000

= 0.8

Demand function for surgical products of Afzaal enterprises:

Qd = 4000-20P+3P2

Formula for point elasticity of demand

= dQ/dP x P/Q

dQ/dP = -20 + 6P

As P= Rs. 50

dQ/dP = -20+6 (50) =280

Qd = 4000-20 (50) + 3(50)2

= 4000- 1000+7500

= 10500

= 280x 50/10500

=1.33

II.

Total revenue of both Master Corporation and Afzaal Enterprises increases with increase
in market price because price elasticity of demand is positive in given case. Total revenue
of Afzaal Enterprises increases more than total revenue of Master Corporation because its
demand is relatively more price elastic.
III. Producers increase production of surgical products, as a result, supply of surgical
products will increase in the market and market price of surgical products will
decrease.