ASSIGNMENT 2

COURSE TITLE : PRINCIPLES OF MICROECONOMICS

COURSE CODE : CIX1001
DUE DATE/ TIME/VENUE : 18 April 2018/5:00 p.m./A1-29
TOTAL MARKS : 10% of total assessment
ACADEMIC SESSION : 2017/2018 (semester 2)
LECTURER : Dr. Chan Sok Gee/ Dr. Aidil Rizal Bin Shahrin

GROUP MEMBER :

NO NAME MATRIC
NUMBER
1 Ainul Jariah Binti Ali Asgar CIA170006

2 Sharifatul Aida Binti Lokman CIB170100

3 Nurshazwani Shahidah Binti Azman CIB170066
4 Norsyamimi Binti Ismail CIC170066
​Question 1
The demand for a bushel of wheat in 1981 was given by the equation Q​D = 3550 - 266P. At a
price of $3.46 per bushel, what is the price elasticity of demand? If the price of wheat falls to
$3.27 per bushel, what happens to the revenue generated from the sale of wheat?

​(5 marks)

Answer:

Q​D​ = 3550 - 266P, P​1​ = $3.46, P​2 =

​ $3.27

Substitute P in equation Q​D ​:

Q​D​ = 3550 - 266P
Q​D​ = 3550 – 266(3.46)
Q​D​ = 2629.64 units
When the price per bushel is $3.46, then the quantity demanded is 2629.64 units.

P ercentage change in QD of bushel

Elasticity of demand (Ed) = P ercentage change in P of bushel

△Q P
= △P × Q

△Q −266
= △P = 1 = -​266
When the price change by $1, then the quantity demanded change by -266 units.

3.46
At price $3.46, Ed = -266 x 2629.64

= - 0.35
Based on the calculation above, the ​price elasticity of demand is 0.35. When the price changes
by 1% the quantity demanded changes by 0.35%. At price $3.46, price elasticity of demand is
inelastic because ​Ed is lesser than 1 ​and percentage changes in quantity demanded of bushel is
lower than​ percentage changes in price of bushel.
Revenue = Price x Quantity
P​1 =
​ $3.46, Revenue ​ =
​ 3.46 x (2629.64)

= $9098.55

P​2 =
​ $3.27, Revenue = 3.27 x (2680.18)
= $8764.19

Based on the calculation above, ​when the price is reduced from $3.46 to $3.27, the ​revenue
will decreases​ from $9098.55 to $8764.19 by $334.36

Based on the price elasticity demand, Ed, ​when price are inelastic​, ​price and total revenue
move in the same direction​. So, ​if the price decreases ​from $3.46 to $3.27 then, ​total revenue
will also decrease.
Question 2
The demand for packs of Pokemon cards is given by the equation Q​D = 500,000 - 45,000P. At a
price of $2.50 per pack, what is the quantity demanded? At $5.00 per pack, what is the price
elasticity of demand?
(5 marks)
Answer:
At price, ​P​ = $2.50, QD = 500, 000 − 45, 000 (2.50)
= 387,000 units
When price of packs of Pokemon is $2.50, the quantity demanded is 387,000 units.

At price, P 1 = $5.00, QD1 = 500, 000 − 45, 000( 5.00)

= 275,000 units
When price of packs of Pokemon is $5.00, the quantity demanded is 275,000 units.

P ercentage change in QD of packs of P okemon

Elasticity of demand (Ed) ​=​ P ercentage change in P of packs of P okemon

△Q P
= △P × Q

When the price change by $1, then the quantity demanded changes by -45,000 units.

△Q − 45,000
△P =​ 1 = - 45,000

5.00
Ed = - 45,000 × 275,000
​= - 0.82
Based on the calculation, ​price elasticity of demand is 0.82. When the price change by 1% then
the quantity demanded changes by 0.82%.

At price ​$5.00​, ​price elasticity of demand ​is inelastic because Ed is lesser than 1 ​( Ed < 1) and
the percentage change ( %△ ) in quantity demand ​is lesser than %△ in price of packs of
Pokemon​.
Question 3

The monthly supply of desktop personal computers is given by the equation Q​S = 15,000 +
43.75P. At a price of $800, what is the price elasticity of supply?
(5 marks)

Answer:
At ​P​ = $800, Q​S​ = 15,000 + 43.75 (800)
= 50,000 units
When the price of desktop personal computers is $800, then the quantity supply for a
month is 50,000 units.

P ercentage change in quantity supply (Qs )

Elasticity of supply (Es) = P ercentage change in price (P )
△Q P
= △P × Q

When the price change by $1, then the quantity supply change 43.75.

△Q 43.75
△P = 1
= 43.75

At price $800,
△Q P
Es = △P × Q
800
= 43.75 × 50,000
​= 0.7
Based on the calculation, ​price elasticity of desktop personal computer is 0.7​. When the price
changes by 1%, the the quantity supplied changes by 0.7%.

At price $800​, the ​price elasticity of supply is ​inelastic ​because Es is lesser than 1 (Es < 1) and
percentage change​ ( %△ ) in quantity supply < %△ in price of desktop personal computers.

Question 4
The demand for tickets to the Daytona 500 NASCAR event is given by the equation Q​D =
350,000 - 800P. The supply of tickets to the event is given by the capacity of the Daytona track,
which is 150,000. What is the equilibrium price of tickets to the event? What is the price
elasticity of demand at the equilibrium price? What is the price elasticity of supply at the
equilibrium price?
​(5 marks)

Answer:

Qd = 350,000 – 800P Qs= 150,000

At equilibrium price quantity demanded is equal to quantity supplied.

Qs = Qd
150,000 = 350,000 – 800P
P = $250
Equilibrium price of tickets to the event is $250.

P ercentage change in Qd of tickets to Daytona 500 N ASCAR

Ed = P ercentage change in price of tickets to Daytona 500 N ASCAR

△Q P
= △P × Q

When the price change by $1, then the Qd changes by -800 units.

Change in Qd​ = ​- 800​ x = - 800

Change in P 1
250
Ed = - 800 x 150,000
= - 1.33

Based on the calculation, ​price elasticity of demand is 1.33. ​When the price change by 1%
then the quantity demanded changes by 1.33%. At price of $250, ​price elasticity of demand
is elastic ​because ​Ed is greater than 1 (Ed > 1) and because percentage change in quantity
demand is ​greater than​ percentage of change in price.
The price elasticity of supply is:
 P ercentage change in Qd of tickets to Daytona 500 N ASCAR
Es = P ercentage change in price of tickets to Daytona 500 N ASCAR

△Q P
= △P × Q

When the price changes by $1 then the quantity supply changes by zero.

​Change in quantity = ​0​ = 0

Change in Price 1

250
Es = 0 x 150 000
Es = 0

Based on the calculation above, ​price elasticity of supply is zero​. When the price changes by
1% then the quantity supplied changes by 1% then the quantity supplied changes by 0%. At price
of $250, the ​price elasticity of supply is perfectly inelastic​, because ​Es is equal to zero
(Es = 0).

Question 5
Midcontinent Plastics makes 80 fiberglass truck hoods per day for large truck manufacturers.
Each hood sells for $500.00. Midcontinent sells all of its product to the large truck
manufacturers. Suppose the own price elasticity of demand for hoods is 0.4 and the price
elasticity of supply is 1.5.

a) Compute the slope and intercept coefficients for the linear supply and demand equations.
​(5 marks)
b) If the total county government imposed a per unit tax of $25.00 per hood manufactured,
what would be the new equilibrium price of hoods to the truck manufacturer ?
​(5 marks)
c) Would a per unit tax on hoods change the revenue received by Midcontinent ?
​(5 marks)

Answer:

a) Given​ P​ = $500 ​ ​ = 80 Unit

Q
Ed = - 0.4 Es = 1.5

Let QD = X 0 + X 1 P

Slope = change in QD with respect to change in ​P

When P change by $1 then quantity demanded change by X 1
△Q X1
Slope = △P = 1 = X1

△Q P
Ed ​= △P × Q
△Q P
△P × Q =​ ​- 0.4
X 1 x 500 =​ ​- 0.4
80
X1 =​ - 0.064

QD = X 0 − 0.064P
80 = X 0 − 0.064 (500)
 X 0 = 112

∴ QD = 112 − 0.064P
Slope of demand = - 0.064

Let QS = Y 0 + Y 1 P

Slope = change in QS with respect to change in ​P

When P change by $1 then quantity supply change by Y 1
△Q Y 1
Slope = △P = 1 = Y1

△Q P
Es = △P × Q
△Q P
△P × Q =​ ​1.5
Y 1 x 500 =​ ​1.5
80
Y1 = ​0.24

QS = Y 0 + 0.24P
= Y 0 + 0.24 (500)
Y 0 = - ​40

∴ QS = − 40 + 0.24P
Slope of supply = 0.24

In conclusion, the demand for truck hoods is QD = 112 − 0.064P with a slope of -
0.064 while the supply is QS = − 40 + 0.24P with a slope of 0.24

Answer:
 b) ​If the total county government imposed a per unit tax of $25.00 per hood manufactured,
it would adjust the supply curve vertically upward by $25.

Q​S ​= - 40 + 0.24P
Q​S​ + 40 = 0.24P
Qs
P = 166.67 +​ 0.24

When $25 per unit tax imposed, P rises up by $25.

Qs
P = 166.67 +​ 0.24 + 25
Qs
P = 191.67 +​ 0.24
Qs
P - 191.67 = ​ 0.24
​new Q​S​ =
​ - 46 + 0.24P

new supply = demand

-46 + 0.24P = 112 - 0.064P
0.304P = 158
P = $ 519.74

The new equilibrium price of hoods to the truck manufacturer is $519.74.

Answer:
c) Revenue = Price x Quantity
Initial revenue = $500 x $80
= $40,000

New equilibrium price = $519.74

New equilibrium quantity = 112 - 0.064P
= 112 - 0.064 (519.74)
= 78.74 units

Revenue as tax is imposed = 78.74 x 519.74

= $40924

Based on the calculation above, the per unit tax on hood does change the revenue
received by Midcontinent. Before per unit tax were imposed total revenue gain was
$40,000. However, after per unit tax were imposed, the revenue is $40,924, showing that
the revenue change (increase) by $924.