North South University

School of Business and Economics

MBA Program, Fall 2021
Midterm Exam: Managerial Economics
BUS 525- 5

Marks: 25 Time: 80 Minutes

(Including question 1 answer any three questions from the following)

1. (a) How would you apply the concept of elasticity to make your pricing decision?
Assume that you have been given the following equation: Qd = 120- 6P. Using the
equation show that slope remains same everywhere although the elasticities are not same
at different along this linear demand curve. [4]

(b) XYZ Corporation is a publisher of romance novels-nothing exotic or erotic – just

stories of common people falling in and out of fascination. The corporation hires you as
an economist to determine the demand of its product. After months of hard work and
submission of an exorbitant bill, you suggest the company that the demand for the firm’s
novels (Qx) is given by the following equation:

Qx  12,000  5,000 Px  5M  500PR

Assume that the initial values of Px, M, and P R are Taka 3, Taka 8,000 and Taka5
respectively. Calculate price elasticity, income elasticity and cross elasticity. Based on
your findings of elasticity show the effect of price elasticity on revenue (TR) and you
how would take your pricing decision using this relationship. . [3]

(c) Show that MR = P(1+1/E). Explain the factors influencing price elasticity of demand.

[2]

2. (a) Why does price Floor work? Explain graphically the deadweight loss with a suitable
example. [3]
(b) How consumers’ welfare would be impacted if government uses tariff or import
quota. Explain using a suitable graph. [3]

(c) Assume that you have been given the following demand and supply curves. Q d = 10
-4P and Qs = -2+8P. Solve for equilibrium price and quantity demand and supplied at
equilibrium price. Using the concept of pass-through effect calculate percentages of taxes
burden that consumer and producers would bear? [2]
3. (a) Using the following table calculate point price elasticity of demand, income elasticity,
and cross elasticity. [3]

Px PR M (= Income) QX
Taka 7 Taka 13 Taka 400 4
6 15 450 5

(b) Supply and demand equations for government housing are given below. Supply: Q S =
16,000 + 0.4P; Demand: QD = 32,000 - 0.4P. Now assume that, government has set a
price ceiling of 17, 000 Taka by considering the social need of the product/service. What
will be the impacts of this intervention? Do you support this type of intervention by
government? Why or why not? [3]

(c) Assume that income is Taka 10,000 and the sales are 80,000 units and the coefficient
(slope) of income in a regression equation is 5. What would be elasticity of income? Now
assume that sales are increased from 80,000 to 85,000 units and the income rose from
Taka 10,000 to Taka 12,000. What would be the income elasticity? What type of good is
this commodity? [2]

4. (a) Graphically explain the welfare effect of subsidy. Assume that demand equation is Q
= 8 – P; Supply equation is Q = -3 + P. Government has imposed an indirect tax of 1
Taka on the product. Find the new equilibrium, change in consumer and producer surplus
and amount of government revenue and DWL. [2+ 3 = 5]

(b) Define and briefly discuss how supply restriction mechanism works? [3]