1 BM/OCT 2016/ECO555/556

TEST 1 (SET 1)
Answer scheme

QUESTION 1
The demand of a firm selling artificial flowers are given as below
P1 = 42 – 8Q1
P2 = 40 – 4Q2
P3 = 45 – 5Q3

a) Determine the market demand function. (4 marks)

Q1 = 5.25 – 0.125P1 (1m)
Q2 = 10 – 0.25P2 (1m)
Q3 = 9 – 0.2P3 (1m)
Qm = 24.25 – 0.575Pm (1m)

b) If P is given as RM6, calculate flowers demanded by each customer and flowers sold by
the firm. (2 marks)
Q1 = 5.25 – 0.125(6) = 4.5 (0.5m)
Q2 = 10 – 0.25(6) = 8.5 (0.5m)
Q3 = 9 – 0.2(6) = 7.8 (0.5m)
Qm = 24.25 – 0.575 (6) =20.8 (0.5m)

c) Explain any two (2) determinants of demand. (4 marks)

 P of related good – complement or substitute
 Y : +vely related
 A : +vely related
 Population : +vely related
(any 2 with explanation: 1m main point + 1m explain x 2)

d) Determine the total revenue maximizing price and quantity? (3 marks)

Qm = 24.25 – 0.575 Pm
Pm = 42.174 – 1.739Qm (0.5m)
MR = 42.174 – 3.478Q (0.5m)
Qm = 42.174/3.478 = 12.126 (1m)
Pm = 42.174 – 1.739(12.126) = 21.087 (1m)

e) If the market supply is given as Q = 18 + 4.425P, find the market equilibrium price and
quantity. (3 marks)
24.25 – 0.575Pm = 18 + 4.425P (1m)
6.25 = 5P
P = 1.25 (1m)
Q = 18 + 4.425(1.25) = 23.53125 (1m)

QUESTION 2
a) Cyber Corporation Sdn. Bhd. has estimated the demand function for its 'Banana'
computer using regression analysis to be:-
QB = 251 – 20.3PB + 24.1PC + 1.3Y
Given the current values of independent variables are
PB = RM2,500 PC = RM2,200 Y = RM4,500

i) Calculate the quantity of 'Banana' computer which can be sold based on the initial
values given above. (2 marks)
QB = 251 – 20.3PB + 24.1PC + 1.3Y
QB = 251 – 20.3(2500) + 24.1(2200) + 1.3(4500) = 8371 (2m)

ii) Determine the type of price elasticity of demand and discuss what effect a price
increase would have on total revenue. (4 marks)
PED = 20.3 X 2500/8371 = 6.0626 (2m)
Elastic (1m)
If P ↑, TR ↓ (1m)
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iii) Evaluate the impact of 5% increase in competitor's price on the quantity demanded of
‘Banana’ computer. (3 marks)
CE = 24.1 X 2200 /8371 = 6.334 (1m)
6.334 X 5 = 31.67 (1m)
If Pc ↑ 5%, Qb ↑ 31.67% (1m)

b) Kamkam & Co is a producer of thermos flasks. The research department has estimated
the following demand for thermos flask (TF)
QTF = 20 – 0.5PTF + 2.3A + 0.7Y + 0.5PC
(0.8) (2.5) (1.65) (2.2) (1.35)

R2 = 0.65 SEE = 5.84

The current values of the independent variables are

PTF = 25 A = 5,000 Y = 2,500 PC = 24

i) Test its significance (tabled t-value = 1.96). (2 marks)

IV t-value Significant Marks
Ptf > 1.96 √ 0.5m
A < 1.96 X 0.5m
Y > 1.96 √ 0.5m
Pc < 1.96 X 0.5m

ii) Interpret the coefficient of determination R 2. (2 marks)

R2 = 0.65
65% changes in DV is explained by changes in IV (1m)
Another 35% cannot be explained (1m)

iii) Determine the demand curve and marginal revenue functions. (2 marks)
QTF = 20 – 0.5PTF + 2.3A + 0.7Y + 0.5PC
QTF = 20 – 0.5PTF + 2.3(5000) + 0.7(2500) + 0.5(24)
QTF = 13282 – 0.5PTF (1m)
PTF = 26564 – 2QTF
MR = 26564 – 4QTF (1m)

iv) Assume marginal cost is RM40, calculate the quantity demanded if the producer
wishes to maximise his total profit? (2 marks)
MR = MC
26564 – 4QTF = 40 (1m)
4QTF = 26564 – 40 = 26524
QTF = 26524/4 = 6631 (1m)

v) At the profit maximizing price, calculate the range in which the quantity would fall at
95% confidence interval. (3 marks)
Q + - (t-value)(SEE)
6631 + - (1.96)(5.84) (1m)
6619.5536 < Q < 6642.4464 (2m)
 3 BM/OCT 2016/ECO555/556

TEST 1 (SET 2)
Answer scheme
QUESTION 1
Dr. William, a well-known plastic surgeon, has estimated demand for his three types of
surgery to be as follow:
P1 = 1,500 – 4Q1
P2 = 1,600 – 5Q2
P3 = 1,200 – 8Q3
where
Q is the number of operations performed monthly
P is the price of a operation.
a) Determine the market demand function. (4 marks)
Q1 = 375 – 0.25P1 (1m)
Q2 = 320 – 0.2P2 (1m)
Q3 = 150 – 0.125P3 (1m)
QM = 845 – 0.575PM (1m)

b) If P is given as RM1,000, calculate operation demanded by each customer and operation

performed by Dr. Willian. (2 marks)
Q1 = 375 – 0.25 (1000) = 125 (0.5m)
Q2 = 320 – 0.2 (1000) = 120 (0.5m)
Q3 = 150 – 0.125 (1000) = 25 (0.5m)
QM = 845 – 0.575 (1000) = 270 (0.5m)

c) Differentiate between individual demand and market demand. (4 marks)

Indv dd : dd by one person (2m)
Market demand : total of demand by all consumers (2m)

d) If the doctor wishes to maximize his total revenue, how many operations should he
perform each month and how much should he charge his patient per operation?
(3 marks)
QM = 845 – 0.575PM
PM = 1469.565 – 1.739QM (0.5m)
MR = 1469.565 – 3.478QM (0.5m)
QM = 1469.565/3.478 = 422.532 (1m)
PM = 1469.565 – 1.739 (422.532) = 734.781852 (1m)

e) If the market supply is given as Q = 645 + 0.05P, find the market equilibrium price and
quantity. (3 marks)
845 – 0.575PM = 645 + 0.05P (1m)
200 = 0.625P
P = 200/0.625 = 320 (1m)
Q = 645 + 0.05(320) = 661 (1m)

QUESTION 2
a) The research department of Pentax Video Camera Company has done a study on its new
video camera, "Stylo I". The company has estimated the following linear regression line
for its new product;
Qs = –24.86 – 2.1Ps + 1.2Y + 1.6A
The current values of the other variables are
Ps = RM400 Y = RM4,500 A = RM2,000

i) Calculate the quantity of "Stylo I" which can be sold based on the initial values given
above. (2 marks)
Qs = –24.86 – 2.1Ps + 1.2Y + 1.6A
Qs = –24.86 – 2.1(400) + 1.2(4500) + 1.6(2000) = 7735.14 (2m)

ii) Determine the type of price elasticity of demand and discuss what effect a price
decrease would have on total revenue. (4 marks)
PED = 2.1 X 400/7735.14 = 0.1086 (2m)
Inelastic (1m)
If P ↓, TR ↓ (1m)
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iii) Evaluate the impact of 8% increase in income on the quantity demanded of “Stylo I”.
(3 marks)
YE = 1.2 X 4500/7735.14 = 0.6981 (1m)
0.6981 X 8 = 5.585 (1m)
If Y ↑ 8%, Qs ↑ 5.585% (1m)

b) Sony has developed a new camera. The product was introduced last year and a follow-up
survey has just been completed giving rise to the following regression equation:
Qs = –190.14 – 1.05 Ps + 3.98 A + 3.61 Y + 1.88 Pc
(5.92) (3.75) (2.75) (3.92) (2.27)

The figures in parentheses represent the t-statistics.

The coefficient of determination was 0.822
The standard error of estimate was 0.48.

Sony's current price is RM48.88 while the current values of the other variables are as
follows:
Ax = RM3,600 Y = RM1,580 Pc = RM46.86

i) State variables that are statistically significant at 95% confidence interval? (Given the
tabled t-value is 2.06) (2 marks)
IV t-value Significant Marks
Ps > 2.06 √ 0.5m
A > 2.06 √ 0.5m
Y > 2.06 √ 0.5m
Pc > 2.06 √ 0.5m

ii) Interpret the coefficient of determination R 2. (2 marks)

R2 = 0.822
82.2% changes in DV is explained by changes in IV (1m)
Another 17.8% cannot be explained (1m)

iii) Derive expressions for the firm's demand and marginal revenue equation. (2 marks)
Qs = –190.14 – 1.05 Ps + 3.98 A + 3.61 Y + 1.88 Pc
Qs = –190.14 – 1.05Ps + 3.98(3600) + 3.61(1580) + 1.88(46.86)
Qs = 19929.7568 – 1.05Ps (1m)
Ps = 18980.72 – 0.95Qs
MRs = 18980.72 – 1.9Qs (1m)

iv) Assume marginal cost is RM80, calculate the quantity demanded if the producer
wishes to maximise his total profit. (2 marks)
MR = MC= 18980.72 – 1.9Qs = 80 (1m)
Qs = 18900.72/1.9 = 9947.747 (1m)

v) Based on answer in iv), calculate the range of expected sales volume at 95%
confidence limits? (3 marks)
Q + - (t-value)(SEE)
9947.747 + - (2.06)(0.48) (1m)
9946.7582 < Q < 9948.7358 (2m)
 5 BM/OCT 2016/ECO555/556

TEST 1 (SET 3)
Answer scheme
QUESTION 1
A fashion designer faces the following demand curve function
P1 = 120 – 0.25Q1
P2 = 150 – 0.4Q2
P3 = 100 – 0.5Q3
a) Define demand and supply. (4 marks)
Dd : willing and able to buy (2m)
Ss : willing to produce (2m)

b) Determine the market demand function. (4 marks)

Q1 = 480 – 4P1 (1m)
Q2 = 375 – 2.5P2 (1m)
Q3 = 200 – 2P3 (1m)
QM = 1055 – 8.5PM (1m)

c) If P is given as RM90, calculate quantity demanded by each customer and designs sold
by the fashion designer. (2 marks)
Q1 = 480 – 4 (90) = 120 (0.5m)
Q2 = 375 – 2.5 (90) = 150 (0.5m)
Q3 = 200 – 2 (90) = 20 (0.5m)
QM = 1055 – 8.5 (90) = 290 (0.5m)

d) Calculate the total revenue maximizing output and price? (3 marks)

QM = 1055 – 8.5PM
PM = 124.118 – 0.118QM (0.5m)
MR = 124.118 – 0.236QM (0.5m)
Q = 124.118/0.236 = 525.924 (1m)
PM = 124.118 – 0.118 (525.924) = 62.059 (1m)

e) If the market supply is given as Q = 245 + 3.5P, find the market equilibrium price and
quantity. (3 marks)
1055 – 8.5PM = 245 + 3.5P (1m)
810 = 12P
P = 810/12 = 67.5 (1m)
Q = 245 + 3.5(67.5) = 481.25 (1m)

QUESTION 2
a) TMT Bhd, has estimated the following monthly demand for the its new brand of Mobile
Phone, "Starlite".
QS = 1000 – 45PS + 48PC + 30A
Assume that the initial values PS, PC, A are RM480, RM500 and RM1,000 respectively.

i) Calculate the quantity of "Starlite" mobile phone which can be sold based on the
initial values given above. (2 marks)
QS = 1000 – 45PS + 48PC + 30A
QS = 1000 – 45(480) + 48(500) + 30(1000) = 33400 (2m)

ii) Determine the type of price elasticity of demand and discuss what effect a price
increase would have on total revenue. (4 marks)
PED = 45 X 480/33400 = 0.6467 (2m)
Inelastic (1m)
If P ↑, TR ↑ (1m)

iii) Evaluate the of 7% increase in advertising on the quantity demanded of “Starlite”

mobile phone. (3 marks)
AE = 30 X 1000/33400 = 0.8982 (1m)
0.8982 X 7 = 6.2874 (1m)
If A↑ 7%, Qs↑ 6.2974% (1m)
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b) Azman and Sons travel company has hired a management consultant firm to analyze
demand in 26 regional markets for one of its major products. A preliminary report from the
consultant contained the following regression results
Q = 360 – 4P + 4Pc + 4A + 22Y
(2.4) (2.3) (1.5) (1.6) (4.0)

R2= 0.85 SEE = 8.73

The values in parentheses are t-statistics.

The current values of the independent variables are

P= RM400 Pc =RM500 A= RM20,000 Y = RM4,000

i) State variables which are statistically significant at 95% confidence interval. (2 marks)
IV t-value Significant Marks
P >2 √ 0.5m
Pc <2 X 0.5m
A <2 X 0.5m
Y >2 √ 0.5m

ii) Would you consider the regression equation acceptable? Explain. (2 marks)
Yes, since R2 is high ie 0.85. (2m)

iii) Determine the demand function and marginal revenue function. (2 marks)
Q = 360 – 4P + 4Pc + 4A + 22Y
Q = 360 – 4P + 4(500) + 4(20000) + 22(4000)
Q = 170360 – 4P (1m)
P = 42590 – 0.25Q
MR = 42590 – 0.5Q (1m)

iv) Assume marginal cost is RM60, calculate the quantity demanded if the producer
wishes to maximise his total profit. (2 marks)
MR = MC = 42590 – 0.5Q = 60 (1m)
Q = 42530/0.5 = 85060 (1m)

v) At profit maximization quantity, determine the range of quantity demanded to fall at

the 95% confidence interval if t-values = 2. (3 marks)
Q + - (t-value)(SEE)
85060 + - (2)(8.73) (1m)
65042.54 < Q < 85077.46 (2m)