Business Economics

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Business Economics

Note: Answer all questions. Kindly note that answers for 10 marks questions should be approximately of 400 words. Each question is followed by evaluation scheme.

1. There is a fruit seller who has 30 Kgs of apples to be sold and he wants to fix a price so that all the apples are sold. There are three customers in the market and their individual demand functions are given below:

D1=25-.05P

D2=20-.025P

D3=15-.075P

Where D is the demand and P is the price

Determine :

• Market demand equation for the fruit seller (2.5 marks)

• Price at which he can sell all the apples (2.5 marks)

• Individual demands of each of the three customers (5 marks)

Answer:It is unlikely that any of the goods you consume are Giffen goods.  One possible exception may be goods where you have a specific budget for two or more items, where one item is much cheaper: e.g. fruit bought from a greengrocer.  If, say, apples are initially much cheaper than bananas, you may be able to afford some of each.  Then you find that apples have gone up in price, but are still cheaper than bananas.  What do you do?  By continuing to buy some of each fruit you may feel that you are not eating enough pieces of fruit

2. a) Determine the market equilibrium price if the demand and supply function is given as:

D = 12p + 8

S = 14p – 4 (5 marks)

Where D= demand

S=supply

p= price

b) Determine the equilibrium quantity if price is the same as above

D = 4p – 4q

S = 8q – 4p (5 marks)

Where D= demand

S=supply

p= price

q= quantity

Answer:The equilibrium price is the market price where the quantity of goods supplied is equal to the quantity of goods demanded. This is the point at which the demand and supply curves in the market intersect.  To determine the equilibrium price, you have to figure out at what price the demand and supply curves intersect.

3. a) Suppose the monthly income of an individual increases from Rs 20,000 to Rs 25,000 which increases his demand for clothes from 40 units to 60 units. Calculate the income elasticity of demand. (5 marks)

Answer: Calculating the income elasticity of demand is essentially the same as calculating the price elasticity of demand, except you’re now determining how much the quantity purchase changes in response to a change in income.  The formula used to calculate the income elasticity of demand is

The symbol ηI represents the income elasticity of demand; η is the general symbol used for elasticity, and the subscript I represents income. In the formula, the symbol Q0 represents the initial demand or quantity purchased that exists when income equals I0. The symbol Q1 represents the new demand that exists when income changes to I1.

b) Quantity demanded for tea has increased from 300 to 400 units with an increase in the price of the coffee powder from Rs 25 to Rs 35. Calculate the cross elasticity of demand between tea and coffee. (5 marks)

Answer: When the price of related commodities like complementary goods or substitutes Change what will be its impact on the demand? Two commodities X and Y are said to be complements if With an increase in the price of X not only the demand for X but the demand for Y also goes down. For example we can consider Pen and ink, Tea and sugar, car and petrol are complements. On the other hand two commodities X and Y are said to be substitutes if with an increase in the price of X the demand for Y increases. For example Coca-cola

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