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The demand function of a good is as follows: Q1=100-6P1-4P2+2P3+0.003Y WHERE P1 and Q1 are the price and quantity values of good 1 P2 and P3 are the prices of good 2 and good 3 and Y is the income of the consumer. The initial values are given: P1 =7 P2 =15 P3 =4 Y=8000 Q1 =30 You are required to: a) Using the concept of cross elasticity determine the relationship between good 1 and others. b) Determine the effect on Q1 due to a 10 % increase in the price of good 2 and good 3 Ans:
When the price of p2 is raised by 10%, the change in demand is Q1 = 100-6(4)-4(16.5) +2(4) +0.03(8000) = 24 Calculating the Percentage Change in Quantity Demanded of Good 1 The formula used to calculate the percentage change in quantity demanded is: [Q Demand (NEW) – Q Demand (OLD)] Q Demand (OLD) = (24-30)/30 = -0.2 Calculating the Percentage Change in Price of Good 2 The formula used to calculate the percentage change in price is: [Price (NEW) - Price (OLD)] Price (OLD) = (16.5-15)/15 = 0.1. Cross elasticity of demand=% change in demand of prdt 1/ % change in the price of prdt 2
= -0.2/0.1 = -2% It means if the price of the price of the one pdrt increases then the demand for another pdt decreases it means this good are substitute goods. Change in price of the pdt 3. Then the change in demand is Q1 = 100-42-60+8.08+24 = 30.08.
Calculating the Percentage Change in Quantity Demanded of Good 1 The formula used to calculate the percentage change in quantity demanded is: [Q Demand (NEW) – Q Demand (OLD)] Q Demand (OLD) = 30.08-30/30 = 0.026.
Calculating the Percentage Change in Price of Good 3 The formula used to calculate the percentage change in price is: [Price (NEW) – Price (OLD)] Price (OLD) = (4.04-4)/4 = 0.01 Cross elasticity of demand=% change in demand of pdt 1/ % change in the price of pdt 3 = 0.01/0.026 = 0.38 or 38% This means, if the price of one good increases, it increases the demand for another product. i.e they are complementary goods.
2Q . What are factors that determine the demand curve? Explain Ans: Graphing a demand curve begins with two perpendicular lines forming a right angle.
The y-axis, or vertical line, represents “price” as the dependent variable, and the x-axis, or horizontal line, represents the “quantity demanded” as the independent variable. Price increments move up along the outside of the y-axis with the highest price nearest the top. Quantity increments move from left to right just below the x-axis line with the lowest figure nearest to the 90° point of the angle. The increment spacing at both lines is such that straight lines drawn from each price across and upwards from each quantity will form perfect graph squares on the inside of the angle; that is, there is equal spacing between the units on the x- and y-axes. The demand points (i.e., the correlative quantity for each price at which there is a buyer) are now plotted within the graph to correspond to both a price on the y-axis and a quantity on the x-axis. By connecting the points, the demand curve is formed. The points along the demand curve show how the quantity demanded depends on the price of the goods. Since price will always have a negative effect on consumer demand, all demand curves will have a downward slope. A shift or change in the slope of the curve due to influential factors other than price is called a "change in demand." These factors, or determinants, affect the consumer’s willingness to buy and, therefore, the "quantity demanded." Obvious determinants would include fluctuating income, personal preferences, price change anticipation, a sudden boom in the market population, and price increases on complementary products or substitutes. For example, an increase in demand due to an increase in income would shift the demand curve to the right, and a decrease in demand due to a decrease in the price of a comparable substitute product would shift the demand curve to the left.
3. Q A firm supplied 300 pens at the rate of Rs 10. Next month , due to a rise in the pries to Rs 22 /Pen the supply of the firm increase to 5000 pens . Find the elasticity?
Ans: Original supplied pens = 3000 Newly Supplied = 5000 Original Rate = Rs 10 New Rate = Rs 22 price Demand X 10 3000 =
Elasticity of demand = Change in demand X Change in price 5000-3000 22-10
4.Q Brief Explain the Profit – maximization model? Ans: Profit – maximization model:Profit making is one of the most traditional basic and major objectives of a firm. Profit motive is the driving – force behind all business activities of a company. It is the primary measure of success of failure of a firm in the market. It is an acid test of economic ability and status of an individual fir. There is no place for a firm earns a responsible amount of profit in the business and maintains in tact the wealth producing agents. It is widely accepted goal and there is nothing bad or immoral about it. Earlier profit max was the sole objective of a firm. Both small and large firms consistently make an attempt to measure the profit by adopting nodal techniques in business. Constant production , cost cutting and cost out put behavior of a firm under changing market conditions like tax rates wages salaries, bonus, the degree of availability of resources, technology etc. it is very simple and unambiguous model. It is the single most ideal model that can normal behavior of a firm. Main propositions of profit maximization:The main model is based on the assumption that each firm seeks to maximize its profit given technical and market constants. Following are the main proportions: A firm is a producing unit and as such it converts various inputs into out puts of the higher value under a given technique of production. The basic object of each firm is to earn maximum profit A firm will select that alternative course of action which helps to maximize consistent profit. A firm makes an attempt to change its price, inputs and out put quantity to maximize its profits.
Assumptions of the model: Profit maximization in the main goal of the firm Rational behavior on the part of the firm to achieve its goal of profit maximization The firm is managed by owner entrepreneur.
5Q. What is Cyert and March’s behavior theory? What are the demerits? Ans:
The behavioral approach, as developed in particular by Richard Cyert and James G. March of the Carnegie School places emphasis on explaining how decisions are taken within the firm, and goes well beyond neo-classical economics. Much of this depended on Herbert Simon’s work in the 1950s concerning behavior in situations of uncertainty, which argued that “people possess limited cognitive ability and so can exercise only ‘bounded rationality’ when making decisions in complex, uncertain situations.” Thus individuals and groups tend to ‘satisfies’— that is, to attempt to attain realistic goals, rather than maximize a utility or profit function. Cyert and March argued that the firm cannot be regarded as a monolith, because different individuals and groups within it have their own aspirations and conflicting interests, and that firm behavior is the weighted outcome of these conflicts. Organizational mechanisms (such as ‘satisficing’ and sequential decision-taking) exist to maintain conflict at levels that are not unacceptably detrimental. Compared to ideal state of productive efficiency, there is organizational slack. Demerits: They solve out problems and wait for another. For example, when there are conflicts, the authors let the firm to set these conflicts as constraints and solve out a possible solution. As another example, the firm makes decision on some given problems and waits for other problems to come. In my own view this could be a major weak point for this Theory. Even we need to adopt dynamic system to analyze problem, it is not necessary that we can only solve problem one by one. For example, we know that for a social contract, people use law to eliminate conflicts. At a firm level, common knowledge like accounting system also helps to avoid conflicts. There is no doubt that maximization problem at some level help people to make decision. But on one hand the solution might not exist, on the other hand we really want to find out ways to use the maximization problem as few as possible, that is, to solve the problem as a whole.
6Q. What is Boumal’s Static and Dynamic? Ans:
Boumal's model highlights that the primary objective of a firm is to maximize its sales rather than profit maximization. It states that the goal of a firm is maximization of sales revenue subject to a minimum profit constraint. Prof. Boumal has developed two models: 1st is Static Model and 2nd is Dynamic model The Static Model:
This model is based on the following assumptions, 1. The model is applicable to a particular time period and the model does not operate at different periods of time. 2. The firm aims at maximizing its sales revenue subject to a minimum profit constraint. 3. The demand curve of the firm slope downwards from left to right. 4. The average cost curve of the firm is U-shaped one. Dynamic Model: This model explains how changes in advertisement expenditure, a major determinant of demand, would affect the sales revenue of a firm under severe competitions. Few assumptions of this model are, 1. Higher advertisement expenditure would certainly increase sales of a firm. 2. Market price remains constant. 3. Demand and cost curves of the firm are conventional in nature.
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