Economics of Enterprise Answers

What effect will each of the following have on the equilibrium price and quantity of

motor car? Answer with graph.

i. A technological advance in the methods of producing tires.

ii. A decline in the number of firms in the motor car industry.

iii. An increase in the prices of rubber used in the production of tires.

iv. The expectation from consumer point of view that the price of motor car will be

lower in the future than currently.

v. The granting of a 50-cent-per-unit subsidy for each motor car produced.

What effect will each of the following have on the demand for small automobiles such

as the Mini-Cooper and Smart car? Answer with graph.

iv. Consumers anticipate that the price of small autos will greatly come down in the

near future.

v. The price of gasoline substantially drops.

What effect will each of the following have on the demand for small automobiles such

as the Mini-Cooper and Smart car? Answer with graph.

i. Small automobiles become more fashionable.

ii. The price of large automobiles rises (with the price of small autos remaining the

same).

iii. Income declines and small autos are an inferior good.

iv. Consumers anticipate that the price of small autos will greatly come down in the

near future.

v. The price of gasoline substantially drops.

16. The research department of the NEBICO Biscuit Company (NBC) estimate the following regression for the demand of the biscuit it sells: Qx = 1.0 – 2Px + 1.5Y + 0.8Py – 3 Pm + 1A. a. Estimate the demand for NEBICO biscuit when price of biscuit (Px) = Rs 20, income of the consumers (Y) = Rs 400, price of Substitute (Py) = Rs 22, Price of complements (Pm) = Rs 50 and advertising expenditure of biscuit (A) = Rs 30. 5 b. Using elasticities, estimate the level of demand for next year if the NBC reduces Px by 10 percent, increases advertising expenditure by 20 percent. Similarly, income of the consumer increases by 5 percent, price of substitute increases by 10 percent and price of complement decreases by 8 percent. 

14. The demand equation faced by Mercantile Communication for its personal computer is given by P = 10,000 – 4Q. a. Write the marginal revenue equation. b. At what price and quantity will marginal revenue be zero? c. At what price and quantity will total revenue be maximized? 4 d. If price is increased from $ 6,000 to $ 7,000, what will be the effect on total revenue? What does this imply about price elasticity?

13. A firm has hired a management consulting firm to analyze demand for its product. The results relating to this demand function are presented below: Qx = 1572 + 2A + 10Y + 3PY – 4Px Where, Qx = quantity demand for x good A = advertisement expenditure in thousands P = price of x good in rupees Py = price of another product in rupees Y = income in thousands a. Interpret the constant parameter and coefficients corresponding to Y and Px in the given demand equation. b. Find the quantity demanded if P =Rs 400, Y = Rs 15000, A = Rs 20000 and Py = Rs 500 c. If price is reduced to Rs 300, what is the change in quantity demand? d. Is the demand elastic or inelastic? What would be the effect of a rise in the price on the total income? e. Are two goods substitutes or complements? Give reason. 

12. Looking at the increasing trend of smoking habit of teenagers, Ministry of Health, research team undertake a study and found that the price elasticity of demand for cigarettes is about 0.75. If a pack of cigarettes currently costs Rs.75 and government wants to reduce smoking by 30 percent, by how much should it increase the price?

11. A firm has the demand function as Q = 1000 – 20P.Currenty the firm charges Rs. 30 for this product. By how much should the price be increased or decreased in order to maximize total revenue?

 10. Suppose your university decides to raise tuition fee from Rs. 60,000 per semester to Rs. 80,000 per semester of MBA students. The number of students getting admission is 100. The price elasticity of demand for the students is 0.4. 3 a. Find out the number of students getting admission after the increase in tuition fee. b. Find out the total revenue before and after the increase in tuition fee. c. Explain whether the increase in tuition fee is a wise decision or not on the basis of total revenue findings. 

9. Thompson Steel is a major producer of steel. Management estimates that the demand for the company’s steel is given by the equation QS = 5,000 – 1,000PS + 0.1I + 100 Pa Where, QS is steel demanded in thousands of tons per year, PS is the price of steel in dollars per pound, I is the income per capita, and Pa is the price of aluminum in dollars per pound. Initially, the price of steel is $1 per pound, income per capita is $20,000 and the price of aluminum is $0.80 per pound. a. How much steel will be demanded at the initial prices and income? b. What is the point income elasticity at the initial values? c. What is the point cross elasticity between steel and aluminum? Are steel and aluminum substitutes or complements? d. If the objective is to maintain the quantity of steel demanded as computed in part (a), what reduction in steel prices will be necessary to compensate for $0.20 reduction in the price of aluminum?