Question 1

The table below relates to an individual’s demand for good X.
Price of X

Individual’s Income

Individual’s Purchase of X

$ 2.20

$ 100

20 units

$1.45

$ 205

30 units

a) Define the term “demand elasticity” and “income elasticity”.
The demand elasticity refers to how sensitive the demand for a good is to changes in other economic
variables.
Income elasticity of demand is an economics term that refers to the sensitivity of the quantity
demanded for a certain product in response to a change in consumer incomes.

b) Using the mid-point formula, calculate the demand elasticity and income
elasticity for good X.
Demand elasticity = [(Q2 - Q1) / ((Q1 + Q2) / 2)] / [(P2 - P1) / ((P1 + P2) / 2)]
= [(30-20)/((30+20)/20)] / [(1.45-2.20)/((1.45+2.20)/2)]
= - 9.73
Income elasticity = [(Q2 - Q1) / ((Q1 + Q2) / 2)] / [(P2 - P1) / ((P1 + P2) / 2)]
= [(30-20)/((30+20)/20)] / [(205-100)/((205+100)/2)]
= 5.81

c) Interpret the figures in (b) that you have obtained by describing the type of
goods and its respective elasticity.
The higher the price elasticity, the more sensitive consumers are to price changes. Very high price
elasticity suggests that when the price of a good goes up, consumers will buy a great deal less of it and
when the price of that good goes down, consumers will buy a great deal more. Very low price elasticity
implies just the opposite, that changes in price have little influence on demand.

Generally any change in price will have two effects: The price effect: For inelastic goods. state what he could do in terms of the pricing of X to achieve his target. e) Illustrate the business decision in (d) through a demand diagram.d) If the producer wanted to increase his total revenue. while a decrease in unit price will tend to lead to more units sold. f) Based on your income elasticity and demand elasticity calculations. TR increases. The quantity effect: an increase in unit price will tend to lead to fewer units sold. while a decrease in price will tend to decrease revenue. Question 3 . suggest an example for good X and explain your choice of the answer. TR decreases. an increase in unit price will tend to increase revenue. A set of graphs shows the relationship between demand and total revenue (TR) for a linear demand curve. but in the inelastic range. As price decreases in the elastic range. TR is maximized at the quantity where PED = 1.

XYZ Private Ltd is facing diseconomies of scale in its quest for bigger slice of the businesses. c) ABC’s rival. ii. there are two kinds of inputs—fixed and variable. Briefly describe two (2) important considerations for ABC to achieve economies of scale in its expansion. For example. i. Briefly describe two (2) possible causes for XYZ if it fails in its ambition of achieving economies of scale. a) Give an example each for the four (4) factors of production and their respective associated cost for ABC Private Ltd. b) ABC is expanding and it hopes to achieve economies of scale. All four factors of production categories are important to the production of goods used in the wantsand-needs-satisfying process that keeps human beings alive from one day to the next and makes living just a little more enjoyable. “Economies of Scale” is defined as the cost advantage that arises with increased output of a product PRODUCTION FUNCTION AND INPUTS Production of a product (or a set of products) is generally based on a technological relationship— amounts of certain factors of production (inputs) are converted into a product based on some technological constraints. Briefly explain the term “diseconomies of scale”. A plant and a factory shed are examples of fixed inputs (or factors) of production. Land provides the basic raw materials that become the goods. if in a product required both gadget A and gadget B. 1) A specific process within a plant cannot produce the same quantity of output as another related process. Briefly explain the “economies of scale”. ii. And entrepreneurship organizes the entire process. 'Diseconomies of Scale' is defined as an economic concept referring to a situation in which economies of scale no longer function for a firm. It has many clients which are small and medium-sized companies specializing in food manufacturing. Capital is the tools that make the job easier. Labor does the hands-on work. FIXED AND VARIABLE INPUTS Primarily. diseconomies of scale might .ABC Private Ltd is a small accounting service provider. i.

the more the firm produces. the more it needs to ship to distant locations. 2) As output increases. .occur if gadget B is produced at a slower rate than gadget A. when a firm has a large plant capable of producing a large output located in one location. For example. costs of transporting the good to distant markets can increase enough to offset any economies of scale.