Economic & Finance

Exercises

1. A government is looking to raise the amount of tax levied on each unit of a

specific product sold, if the government is concerned about the amount of
tax revenue, it will generate, should it levy the tax on a product with elastic
or inelastic demand ?
2. Suppose that you know that the price elasticity of demand is 0.5., If
we decrease the price of the this product, then that the total revenue will
a) Decrease.
b) Remain unchanged.
c) Increase
d) None the above
3. A firm charge $800 for its unique word processor. If total revenue is $56,000
in July, how many word processors were sold that month?.
4. Suppose that you estimated the following demand curve for footballs.
Q = 400 – 6p + 0.005I
Q Represents quantity demanded, P represents price and I represents average
income. You know that the current market price is $50 and average income
is $20,000
a) Calculate current demand.
b) Calculate the price elasticity of demand if the price increase 10%.
5. Consider the demand curve drawn below.

At which of the following prices and quantities is, revenue maximized.

a) P = 40; Q = 0.
b) P = 30; Q = 5.
c) P = 20; Q = 10.
d) P = 0; Q = 20.
6. Use the demand curve diagram below to answer the following TWO
questions.

1. What is the own-price elasticity of demand as price decreases from $8 per unit to $6
per unit? Use the mid-point formula in your calculation.
a) Infinity.
b) 7.0
c) 2.0.
d) 1.75

2. At what point is demand unit-elastic?

a) P = $6, Q = 12.
b) P = $4, Q = 8.
c) P = $2, Q = 12.
d) None of the above.
3. Which of the following statements about the relationship between the price
elasticity of demand and revenue is TRUE?
a) If demand is price inelastic, then increasing price will decrease revenue.
b) If demand is price elastic, then decreasing price will increase revenue.
c) If demand is perfectly inelastic, then revenue is the same at any price.
d) Elasticity is constant along a linear demand curve and so too is revenue.

7. Let us suppose we have two simple supply and demand equations, find
equilibrium price
 Qd = 20 – 2P
 Qs = -10 + 2P
 8. Use the demand diagram below to answer this question. Note that P × Q
equals $900 at every point on this demand curve.

Which of the following statements correctly describes own-price elasticity of

demand, for this particular demand curve?
I. Demand is unit elastic at a price of $30, and elastic at all prices greater than $30.
II. Demand is unit elastic at a price of $30 and inelastic at all prices less than $30.
III. Demand is unit elastic for all prices.
a) I and II only.
b) I only.
c) I, II and III.
d) III only.

9. Suppose that you have the following demand and supply curve for rental
cars
 Qd = 500 - 2p
 Qs = 100 + 6p

a) Solve for the equilibrium price and quantity.

b) Calculate consumer expenditures on rental cars
 10.A) Complete the following table of values for the supply function
P = 1 / 2 Q + 20

Q 0 50
P 25
Hence, draw an accurate sketch of this function using axes with values of Q and P
between 0 and 50.
B) On the same axes draw the graph of the demand function
P = 50 – Q and hence find the equilibrium quantity and price.

11.Fill in the missing entries in the following cost table:

AVERAGE AVERAGE AVERAGE MARGINAL

OUTPUT TOTAL COST FIXED COST VARIABLE COST COST
1 160 40
2 95
3 30
4
5 47 15
6 23