Mendoza, Jesiel S.

BSE 3-2 Managerial Economics

Exercise No. 1

1. Consider a competitive market for which the quantities demanded and supplied (per year) at
various prices are given as follow:

Price (Php) Demand (Thousands) Supply (Thousands)

60 22 14
80 20 16
100 18 18
120 16 20

a. Calculate the price elasticity of demand when the price is Php 80 and when the price is
Php 100.
ΔQD
QD 𝑃 ΔQ D
𝐸𝐷 = =
ΔP 𝑄𝐷 Δ𝑃
P

For every Php 20 increase in price, the quantity demanded decreases by 2000.
ΔQ d 2000
=− = −100
Δ𝑃 20

𝐴𝑡 𝑷 = 𝟖𝟎, 𝑸𝒅 = 𝟐𝟎 Therefore,
𝑃 ΔQ d 80
= (−100)
𝑄𝑑 Δ𝑃 20
𝑬𝑫 = −𝟒𝟎𝟎

𝐴𝑡 𝑷 = 𝟏𝟎𝟎, 𝑸𝒅 = 𝟏𝟖 Therefore,

𝑃 ΔQ d 100
= (−100)
𝑄𝑑 Δ𝑃 18

𝑬𝑫 = −𝟓𝟓𝟓. 𝟓𝟔

b. Calculate the price elasticity of supply when the price is Php 80 and when the price is
Php 100.
ΔQ S
QS 𝑃 ΔQ S
𝐸𝑆 = =
ΔP 𝑄𝑆 Δ𝑃
P
 For every Php 20 increase in price, the quantity supplied increases by 2000.
Δ𝑄𝑠 2000
= = 100
Δ𝑃 20

𝐴𝑡 𝑷 = 𝟖𝟎, 𝑸𝑺 = 𝟏𝟔 Therefore,
𝑃 ΔQ s 80
= (100)
𝑄𝑠 Δ𝑃 16

𝑬𝒔 = 𝟓𝟎𝟎

𝐴𝑡 𝑷 = 𝟏𝟎𝟎, 𝑸𝑺 = 𝟏𝟖 Therefore,
𝑃 ΔQ s 100
= (100)
𝑄𝑠 Δ𝑃 18

𝑬𝒔 = 𝟓𝟓𝟓. 𝟓𝟔

c. What are the equilibrium price and quantity?

𝑄𝑑 = 28000 − 100𝑃
𝑄𝑠 = 8000 + 100𝑃

Solving for equilibrium price:

28000 − 100𝑃 = 8000 + 100𝑃
20000 = 200𝑃
𝑷 = 𝑷𝒉𝒑 𝟏𝟎𝟎

Solving for equilibrium quantity:

𝑄 = 28000 − 100𝑃
𝑄 = 28000 − 100(100)
𝑄 = 28000 − 10000
𝑸 = 𝟏𝟖, 𝟎𝟎𝟎

d. Suppose the government sets a price ceiling of Php 80. Will there be a shortage, and if
so, how large will it be?

When the price upholds Php 80, the consumers will want to buy goods worth 20
thousand pesos, but the producers will only produce goods worth 16 thousand pesos.
Therefore, there is a shortage of 4 thousand pesos.
2. Much of the demand for US agricultural output has come from other countries. In 1998, the
total demand for wheat was 𝑄 = 3244 − 283𝑃. Of this, total domestic demand was
𝑄𝑑 = 1700 − 107𝑃 and domestic supply was 𝑄𝑠 = 1944 + 207𝑃. Suppose the export demand
for wheat falls by 40 percent.
a. US farmers are concerned about the drop in export demand. What happens to the free-
market price of wheat in the US? Do farmers have much reason to worry?

Given the total demand, 𝑄 = 3244 − 283𝑃 and the total domestic demand
𝑄𝑑 = 1700 − 107𝑃. We may subtract these functions in order to determine the export
demand.
𝑄𝑒 = 3244 − 283𝑃 − (1700 − 107𝑃)
𝑄𝑒 = 1544 − 176𝑃

The initial market equilibrium price is

3244 − 283𝑃 = 1944 + 207𝑃
1300 = 490𝑃
𝑃 = $2.65

There is a 40% drop in export demand for wheat, the remaining 60 percent will be
determined as follows:
𝑄𝑒 = 1544 − 176𝑃
(0.60)𝑄𝑒 = 0.60(1544 − 176𝑃)
(0.60)𝑄𝑒 = 926.4 − 105.6𝑃

Total demand becomes

𝑄𝐷 = 𝑄𝑑 + (0.60)𝑄𝑒
𝑄𝐷 = 1700 − 107𝑃 + 926.4 − 105.6𝑃
𝑄𝐷 = 2626.4 − 212.6𝑃

Equating total demand to total supply:

2626.4 − 212.6𝑃 = 1944 + 207𝑃
682.4 = 419.6𝑃
𝑷 = $𝟏. 𝟔𝟑

There is a significant decrease from the initial equilibrium price which amounts to
$2.65 per bushel. At the price of 1.63, the equilibrium quantity is 2280.65 million bushels.
Total revenue has decreased from $6614.6 million to $3709.0 million. Definitely, most
farmers would worry.
b. Now suppose the US government wants to buy enough wheat to raise the price of $3.50
per bushel. With the drop in the export demand. How much wheat would the government
have to buy? How much would this cost the government?

As can be seen below, quantity demanded and quantity supplied are not in equilibrium.
𝑄𝐷 = 2626.4 − 212.6(3.50)
𝑸𝑫 = 𝟏𝟖𝟖𝟐. 𝟑
𝑄𝑠 = 1944 + 207(3.50)
𝑸𝒔 = 𝟐𝟔𝟔𝟖. 𝟓

There is an excess supply of 786.2. With that the government must purchase this amount
to support a price of $3.50, it will spend: $3.5(786.2) = $𝟐𝟕𝟓𝟏. 𝟕 𝐩𝐞𝐫 𝐲𝐞𝐚𝐫.