Assignment 1 Solutions:

1. Suppose the market demand for car rentals is given by Qd=50-p+0.2m, where Qd is the
quantity demanded in rentals a month, p is the price in dollars per rental and m is the average
income. Assume that m=50.
a) Draw the market demand curve. Show the effect of a cut in price from p=30 to p=20.
b) Show the effect of an increase in income from m=50 to m=60.

a) When m = 50,
Demand: Qd = 50 – P + 0.2 (50) = 60-p
Inverse demand: P = 60 – Qd
(Intercept = +60, slope = -1)

It is a movement along the demand curve since price is changing

When P=30, Qd = 60-30 = 30
When P=20, Qd = 60-20 = 40

b) When income increases from 50 to 60, demand increases.

New Demand: Qd = 50 – P + 0.2(60) = 62 – P
New Inverse Demand: P = 62 – Qd
(New intercept is =62, slope remains as -1)
It is a shift of the demand curve because other factors (i.e. income) is changing and not price.

2. In Singapore, demand for movie tickets per quarter comes from 3 different age groups:
students, adults and senior citizens. Each students has demand P=10-QSt, adults have demand
P=6-2QA, and senior citizens have demand P=8-2QSC. There are 1,000 students, 5,000 adults
and 2,000 senior citizens. Find the equation that represents market demand.

Because each group has different price intercepts, there will be two kinks, one at P=8, and one
at P=6. If P>10 then demand will be zero.

0 0 (nobody buys)
10000 1000 10 8 (only students buy)
18000 2000 8 6 (both students and senior citizens buy)
33000 4500 6 0 (all groups buy)
33000 0.

3. You are planning to buy a non-glasses 3D Television set which has been launched by Toshiba. The
price of the television set is $2500. You believe that the TV set has a 3 year life and you will get a
“benefit” of $900 for the next three years. Should you buy the TV set if the discount rate is 5%?
The NPV of buying the TV is positive and you should buy it. The benefit from buying the TV is
immediate and does not have to be discounted for the current year in which the TV is bought.
4. China Mobile, the largest telecom operator in China offers two types of mobile services: pre-
paid (with top up options) and post-paid (typically with a long term contract). Between 2001 and
2003, China Mobile’s number of subscribers grew from 90.6 to 141.6 million as the company
added subscribers and acquired service providers in the poorer inland regions of China.
However, over the same period, its average revenue per user (ARPU) fell from 141 to 102 yuan
per month and its proportion of subscribers using pre-paid service rose from 48% to 64%.
a. How would China Mobile’s provision of pre-paid service affect the demand for its post-paid
(contract) service?
There would be substitution away from post-paid towards pre-paid by poorer individuals.
This would cause a decrease in demand.
b. Compare the demand for pre-paid service in the inland regions with that in the wealthier
coastal regions.
The poorer regions would likely use pre-paid to manage their calls because it is cheaper
and easier to monitor spending. The wealthier would likely use the post-paid so they do not have
to regularly top up.
c. Relate your discussion in (a) and (b) to China Mobile’s decline in ARPU.
The pre-paid service is cheaper and thus with more users switching to pre-paid and away
from the more expensive post-paid service, the ARPU declined.

5. Comment on the following statement whether True, False or Uncertain.

(a) The demand for bread significantly increased when all bakeries in the town increased
their prices.
Uncertain: The quantity demanded for a good depends upon its price. Here the key word
is demand and that means other factors are also at work.
If bakeries only increase the price of bread, all else equal, then the quantity
demanded of bread would decrease. In this case, the statement would be untrue.
However, if bakeries increased the prices of their other products, such as cakes &
pastries, then because these are regarded as substitutes to bread, the demand for bread
will increase. In this case, then, the statement would be true.

(b) A bicycle costs you $500, and gives you $100 of benefit this year. You should not buy it.
Uncertain: Need to know the NPV of the bicycle