Economics

Practice Problems
Q No 1: . It is known that quantity demanded decreases by two units for each $1 increase in
price. At a price of $5, quantity demanded is ten units.

a. What will be the quantity demanded if price is zero?

b. Write an equation for quantity demanded as a function of price.
c. Write an equation that expresses price as a function of quantity.
d. Write an equation for total revenue.

Answer
Let us assume that the demand function is given by Q = a + bP

It is given that quantity demanded decreases (ΔQ) by 2 units when Price increases (ΔP) by 1 unit

We know that Slope = ΔQ/ΔP = -2 (negative sign is because if Q decreases, P increases)

Substituting the value of slope in the above equation, we get

Q = a + bP……….. equation 1
Q=a + (-2)P
Q= a – 2P

At P = $5, Q=10
Q= a – 2P…………….. equation 2
So, 10 = a-2(5)
a = 20
putting the value of a=20 in equation 2
Q = 20 – 2P
a. At price=0, Q=20
b. Q=20-2P
c. Q= 20 – 2P =
20 – Q = 2P
20-Q / 2 = P
P=10-0.5Q
d. TR = PQ= (10 – 0.5Q) X Q
10Q-0.5Q2.
Q NO 2: A market consists of three people, A, B, and C, whose individual demand equations are
as follows:
A: P=35-0.5QA ……………. Eq 1
B: P=50- 0.25QB ……………Eq 2
C: P=40-2.00 QC……………..Eq3
The industry supply equation is given by QS = 40 +3.5 P………Eq4

a. Determine the equilibrium price and quantity.

b. Determine the amount that will be purchased by each individual.

Answer:

Market demand is the horizontal summation of individual demand. So, first find our individual
demand.
Rearrange Eq 1, 2, 3

Eq1. P=35-0.5 QA = 35/0.5 – P1/ 0.5 = QA

QA=70-2P

Eq2. P= 50 – 0.25 QB= 50/ 0.25 – P1/0.25=QB

QB=200-4P

Eq3. P= 40- 2QC= 40/2 – P1/2 = QC

QC= 20-0.5P

QD= QA+ QB+ QC= 290-6.5P

QD= (70 – 2P) + ( 200 – 4P) + (20 – 0.5 P)
QD= 290-6.5P………..Eq5

a.QS =QD (Since at equilibrium quantity demanded = quantity

supplied)
Equating the above equation.
40 + 3.5P = 290 – 6.5 P= 6.5P +3.5P = 290 - 40
10P = 250 we get P=25
putting the value of P in equation 5 QD= 290 – 6.5P
QD= 290 – 6.5 (10)
Q=127.5

we get P= 10 and Q= 127.5

put the values of P and Q in QA, QB and QC

b. QA=70-2P = 70-2*25 = 20
 QB=200-4P = 200-4*25 = 100
QC=20-0.5P = 20-0.5P = 7.5

Q No3. Cannot solve.

Q No4. The demand equation faced by Du Mont Electronics for its personal computers 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?
d. If price is increased from $6,000 to $7,000, what will the effect be on total revenue? What does
this imply about price elasticity?

Answer:

P=10000 – 4Q
a. MR =PQ = (10000 – 4Q) Q = 10000 – 4 Q^2
dPQ/dQ = 10000-4 (2)Q=
MR= 10000 – 8Q

b. MR= 0 = 10000-8Q
10000= 8Q
10000/8 = Q = 1250
So, Q = 1250, P=10000- 8(1250) = 10000 – 5000= 5000

when Q= 1250 and P= 5000 then marginal revenue is equal to zero.

c. TR is maximum when MR =0 , So, TR will be maximized when P=5000 and

Q=1250

d. P= 10000 – 4Q
6000 = 10000 – 4Q = 4000/4=Q
At price $6000, Q=1000, TR=PQ=6000 X 1000 = 6000000
7000 = 10000 – 4Q = 3000/ 4 = Q
At price $7000, Q=750, TR=PQ=7000 X 750= 5250000
Since TR decreases, demand is elastic.
Q No5: if the demand for handkerchiefs produced by the damn manufacturer has been
estimated to be P= 30 – Q/200.
a. compute the point elasticity at the P= Rs 10 at
P= Rs 15.
b. how does the point elasticity vary with the
price.

Q No6: a manager believes that the demand for his products is given by the equation P= 50 –
Q/100.
a. what is the arc elasticity of demand if price decrease from P= Rs 12 to P= Rs 10.
b. what is the arc elasticity of demand if price increase from P= Rs 10 to P= Rs 12.
Q No7: for the each of the following equations determine whether demand is elastic, inelastic or
unitary elastic at the given price.
a. Q= 100 – 4P at P= Rs20
b. Q= 1500 – 20P At P= Rs5
c. P= 50 – 0.1Q at P=Rs20

Q No8 : cannot solve

Q No9: demand for current affair is given by Q= 20000 – 300P the book is initial price is at
P=30
a. compute point price elasticity at P=30
b. if the objective increases total revenue should be the price increased or decreased explain.
c. compute the arc price elasticity for a price decrease from P= 30 to 20
d. compute the arc price elasticity for a price decrease from P= 20 to 15.

Answer

Q No 10: Write a demand equation for which the price elasticity of demand is zero for all prices.
Ans: QD = a