Managerial Economics Tutorial-1 (Solutions)

Demand and Supply

(Correct Answers have been highlighted)

1. This is an assumption of law of demand:

a) Price of the commodity should not change
b) Quantity should not change
c) Supply should not change
d) Income of consumer should not change

2. Which of the following is a demand function?

a) Q + 4P = 20
b) Q = 35 + 3P
c) Q - 2P - 15 = 0
d) 5P - Q = 4

3. Consider fries as a complement to burgers and wraps as a substitute for burgers. The
demand for burger increases when the price of wraps ________. It also increases
when the price of fries ________.
a) falls; falls
b) rises; falls
c) rises; rises
d) falls; rises

4. Which way will the demand curve shift if the government decides to increase the
existing subsidy for the demand for education?
a) outwards
b) inwards
c) lead to a movement
d) no change
5. Find the slope of an assumed linear demand curve for theatre tickets, when a person
purchases 1,000 tickets at $5.00 per ticket and 200 tickets at $15.00 per ticket.
a) -2/35
b) -1/80
c) 1/60
 d) None of the above

6. If the demand and supply curve for computers are:

D = 100 - 6P, S = 28 + 3P where P is the price of computers, what is the quantity of

computers bought and sold at equilibrium?

a) 65 units

b) 29 units

c) 52 units

d) 15 units

7. Irrespective of price, Sofia always spends Rs. 100 a week on ice cream, we conclude
that:

a) Elasticity of demand is 0
b) Elasticity of demand is 1
c) Elasticity of demand is infinite
d) The law of demand has been violated

8. Mr. Raees Ahmad bought 50 litres of petrol when his monthly income was Rs.
25,000. Now his monthly income has risen to Rs. 50,000 and he purchases 100 litre
of petrol. His income elasticity of demand for petrol is:

a) 1
b) 100% (It won’t be 100% as elasticity is expressed as a number and not as
percentage)
c) Less than 1
d) More than 1

9. What best explains a shift in market supply curve to the right?

a) An advertising campaign is successful in promoting the good

b) A new technique makes it cheaper to produce the good

c) The government introduces a tax on the good

d) The price of raw materials increases

10. In May 2013, firm was supplying 500kg of sugar of market price of Rs. 30 per kg.
During June 2013, firm's supply of sugar had decreased to 450kg at price Rs. 20/- per
kg. These changes show that supply of sugar is:
 a) Perfectly elastic
b) Perfectly inelastic
c) Less elastic
d) More elastic

11. Which of the following is most likely to have the most elastic demand?
a) A good with vertical demand curve
b) Cold drinks
c) Cigarettes
d) Medicines

12. Other things equal, if a good has more substitutes, its price elasticity of demand is:

a) Unity

b) Smaller

c) Larger

d) Zero

13. Use demand and supply curves to illustrate how each of the following events would
affect the price and the quantity of butter bought and sold:
 An increase in the price of cheese
 An increase in the price of milk

ANS: Considering cheese and butter to be substitutes, increase in the

price of cheese will increase the demand for butter. Demand curve shifts
to the right, supply curve remains constant. Equilibrium price and
quantity both increase. (Graph as done in the tutorial)

As milk is an essential raw material for butter, increase in the price of milk
will decrease the supply of butter. Supply curve shifts leftward, demand
curve remains constant. Equilibrium price rises, equilibrium quantity falls.
(Graph as done in the tutorial)

14. Thailand’s chicken population was recently inflicted with bird flu, but its production
of mutton was unaffected. What is its effect on?
 Market demand and supply of mutton
 Equilibrium price of mutton

ANS: Market demand for mutton increases, market supply remains

unchanged.
 Demand curve shifts to the right, supply curve remains constant.
Equilibrium price and quantity both increase. (Graph as done in the
tutorial)

15. The inverse demand curve for product X is given by: PX = 25 – 0.005Q + 0.15PY
where PX represents price in dollar per unit, Q represents rate of sales in pounds per
week, and PY represents selling price of another product Y in dollar per unit. The
inverse supply curve of product X is given by PX = 5 + 0.004Q
a) What is the equilibrium price and sales of X when Py=$10.
b) Determine whether X and Y are substitutes or complements.
c) Now if Py rises to $20, is there excess demand or excess supply at the
old equilibrium?
d) Find the new equilibrium at Py = $20

ANS: a) 25 – 0.005Q + 0.15PY = 5 + 0.004Q (Put Py=$10)

Equilibrium Price (PX) = $14.56 per unit
Equlibrium Quantity (Q) = 2388.9 units per week

b) Substitutes because there is a positive relation between Price

of Y and quantity of X

c) Put the values of Px and Py in the equation

PX = 25 – 0.005Q + 0.15PY and find Q (Demand)
Put the value of Px in the equation
PX = 5 + 0.004Q and find Q (Supply)

Q (Demand)= 2688 units per week

Q (Supply) = 2390 units per week

Excess Demand= 298 units per week

d)Same as a). Replace Py=10 with Py=20.

Equilibrium Price (PX) = $15.22 per unit
Equlibrium Quantity (Q) = 2555.6 units per week
16. Consider a competitive market for which the quantities demanded and supplied (per
year) at various prices are given as follows:
Price (Rupees) 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 increases from
Rupees 80 to Rupees 100.
b) Calculate the price elasticity of supply when the price increases from Rupees
80 to Rupees 100.

ANS: a) Apply the elasticity formula. Ep= -0.4

b)Apply formula (Remember that this is supply). Es=0.5

17. Consider the following demand function: Q=15000-50P. Find out the point price
elasticity of demand at P=100 and P=10.

ANS: Elasticity at P=100; Ep= -0.5

Elasticity at P=10; Ep=-0.34