MANAGERIAL ECONOMICS:

TUTORIAL #1
Presenters:
Mr. X
Mrs. Y
QUESTION 1

The X-Corporation produces a good (called X) that

is a normal good. Its competitor, Y- Corporation,
makes a substitute good that it markets under the
name “Y”. Good Y is an inferior good.
(a). How will the demand for good X change if consumer income increase?

Income
• When income
increases, the
demand curve for
D2 normal goods shifts
D1 outward as more will
be demanded at all
P2 prices.
• Since X is a normal
good; an increase in
P1 income, indicates a
right shift from D1 to
D2

D1 D2

Quantity of Good X
(b). How will the demand for Good Y change if consumer income decrease?
Income
• An inferior good
increase in demand
when consumer
D2 income decrease.
D1

• Since Y is a inferior
P1 good; a decrease in
income, indicates a
right shift from D1 to
D2
P2

D1 D2

Quantity of Good X
(c). How will the demand for good X change if the price of good Y decreases?
Price of Good Y

• When the price of a

substitute good Y
D1
D2 decreases, the
quantity demanded
for good X also
P1
decreases.
Therefore the
demand curve for
P2 good X will shift to
the left.

D2 D1

Quantity of Good X
(d). Is good Y a lower-quality product than good X? Explain

• No. The term inferior good does not mean a lower-quality.

It basically means that both income and demand are
inversely related.

• For example; Car

QUESTION 2
The demand for good X is given by:

Q = 1200 – Px/2 + Py/4 – 8Pz + M/10

Research shows that the prices of related goods are

given by Py= $5,900 and Pz= $90, while the average
income of individuals consuming this product is M=
$55,000.
(a). Indicate whether goods Y and Z are substitutes or complements for good X.

Good Y is a substitute for X, while good Z are complement for X.

(b). Is X an inferior or a normal good?

X is a normal good.

(c). How many units of good X will be purchased when Px= $4,910??

Q = 1,200 – $4,910/2 + $5,900/4 – 8 x $90 + $55,000/10 = 5000 units

(d). Determine the demand function and inverse demand function for good X.
Graph the demand curve for good X.

Q = 1200 – 0.5 Px = 1475 - 720+ 5,500

= 7455 – ½ Px

½ Px = 7466-Qx
Px = 14,910-2Qx

Price

14,910

7455
Question 3
(Refer to question 2 of page 66 from ME textbook)

• Good X is produced in a competitive market

using input A. Explain what would happen to the
supply of good X in each of the following
situations:
A) The price of input A increases
B) An excise tax of $1 is imposed on good X
C) An ad valorem tax of 5% is imposed on good X
D) A technological change reduces the cost of producing
additional units of good X.
 Question 3
(Refer to question 2 of page 66 from me textbook)

A) The price of input A increases

Price
 Cost of producing good X
S1
increases
 Supplier is less willing to S0
produce more.
 Therefore, supply of good
X will decrease.

 Supply curve of good X

will shift to the left.
Quantity of Good X
 Question 3
(Refer to question 2 of page 66 from me textbook)

B) An excise tax of $1 is imposed on good X

Price
 Supplier is willing to S0 + t
supply the same quantity
of good X when he S0
receives additional $1 per
unit of good X. $1

 Selling price per unit + $1

excise tax.
 Supply curve will shift
vertically up by exactly $1
for each output level. Quantity of Good X
 Question 3
(Refer to question 2 of page 66 from me textbook)

C) An ad valorem tax of 5% is imposed on good X

Price
 Supplier is willing to supply S0 x 1.05 t
the same quantity of good X
when the unit price of S0
production goes up by 5%.
 Selling price per unit x 5%
ad valorem tax.
 Supply curve will rotate
counterclockwise. The new
curve will shift farther away
from original curve when
Quantity of Good X
the price increases.
 Question 3
(Refer to question 2 of page 66 from me textbook)

D) A technological change reduces the cost of producing

additional units of good X Price

 Supplier is willing to S0
produce more. S1

 Supply of good X will

increase.
 Supply curve will shift to
the right.

Quantity of Good X
QUESTION 4
(Refer to question 7 of page 67 from me textbook)

• Suppose demand and supply are given by

QDX = 7 – ½ PX and QSX = ¼ PX – ½

A) Determine the equilibrium price and quantity. Show

the equilibrium graphically.
B) Suppose a $6 excise tax is imposed on the good.
Determine the new equilibrium price and quantity.
C) How much tax revenue does the government earn
with the $6 tax?
 QUESTION 4
(Refer to question 7 of page 67 from me textbook)

Determine the equilibrium price and quantity. Show the

equilibrium graphically.

Market equilibrium occurs when market supply intersects

with market demand
QDX = QSX
7 – ½ PX = ¼ PX – ½
¾ PX = 7½
PX = $10
QUESTION 4
(Refer to question 7 of page 67 from me textbook)

Using demand equation:

QDX = 7 – ½ PX
QDX = 7 – ½ (10)
QDX =7–5
QDX = 2 units

Equilibrium price = $10

Equilibrium quantity = 2 units
Question 4
(Refer to question 2 of page 67 from me textbook)

Price 20
Supply
18 PX = 2 + 4Qs
16

14

12

10 Equilibrium
8

2 Demand
Quantity of
0 1 2 3 4 5 6 7 Good X
 QUESTION 4
(Refer to question 7 of page 67 from me textbook)

B) Suppose a $6 excise tax is imposed on the good. Determine the new

equilibrium price and quantity.

Price 20 So + t PX = 8 + 4Qs
So PX = 2 + 4Qs
Supply equation without tax: 18

PX = 2 + 4QS 16

14

12
Supply equation with tax:
10
PX = 2 + 4QS + 6
8
PX = 8 + 4QS
6

4
So, QS = ¼ PX - 2
2

0 1 2 3 4 5 6 7

Quantity of Good X
QUESTION 4
(Refer to question 7 of page 67 from me textbook)

• To calculate new equilibrium price and quantity:

QDX = 7 – ½ PX
QSX = ¼ PX – 2
7 – ½ PX = ¼ PX – 2
¾ PX = 7+2
PX = $12

QDX = 7 – ½ (12)
QDX = 1 unit

New equilibrium price = $12

New equilibrium quantity = 1 unit
QUESTION 4
(Refer to question 7 of page 67 from me textbook)

C) How much tax revenue does the government earn with

the $6 tax?

Unit sold after tax = 1

Tax = $6
Therefore,
Tax revenue = 1 x $6
Tax revenue = $6