UGBS 201

UNIVERSITY OF GHANA BUSINESS SCHOOL

UGBS 201: MICROECONOMICS AND BUSINESS
TUTORIAL SET
DEMAND, SUPPLY AND ELASTICITY
True or False Questions
1. There is a decrease in the demand for a commodity when the price of a
substitute commodity increase.

2. When the supply curve is positively sloped, an increase in demand will

result in a larger quantity supplied.

3. A surplus exists when the market price is above the equilibrium price.

Government subsidization of firms producing Good A increases the demand

4.
for Good A.

Demand is inelastic if the percentage increase in quantity exceeds the

5.
percentage decrease in price.

6. It is impossible to have an upward sloping demand curve.

7. Explain what happens to the demand curve for air transportation between New
York City and Washington, D.C., as a result of the following events:
a. The income of households in metropolitan New York and Washington, D.C.,
increases by 20%.

b. The cost of a train ticket between New York City and Washington, D.C., is
reduced 50%.

c. The price of an airline ticket decreases 20%.

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8. Suppose the market supply and demand curves for cigarette are initially S and
D, respectively, in Figure 2-3; the equilibrium price is $3 and the equilibrium

quantity is 280 units. Figure 2-3

a. Suppose improved technology in the production of Good A shifts the market
supply curve from S to S', ceteris paribus. After the initial supply shift, what is
the relationship between the quantity demanded and quantity supplied at the initial
$3 equilibrium price?
b. If the Government were to insist that suppliers maintain their price at 3
because cigarette is harmful, how many units of the good should the government
buy to help suppliers? how much will the government spend to help suppliers
continue production?
c. What is the new equilibrium price and quantity after the technological
advance has increased the supply of Good A?

9. Why have the federal government and governments of many developed

countries place price floors on some agricultural goods?

10. The demand and supply equations of a good are given by

4P = −Qd +240,
5P = Qs + 30.

a) Determine the equilibrium price and quantity.

b) Graph your results

11. The demand and supply functions of good are given by

P = −Qd + 125, 2P = 3Qs +
30.
Determine the equilibrium price and quantity. Determine also the effect on the market
equilibrium if the government decides to impose a fixed tax of £5 on each good. Who
pays the tax?
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12. Suppose the demand and supply functions for Gob3 Special are given as;
3P = 100 – Qx
-2p = 20 – Qx
a) Represent the functions above graphically
b) At what price is the quantity consumer wish to buy equal to the quantity
producers wish to suppy
c) Find the equilibrium quantity
d) If a price ceiling of Ghs12.00 is imposed, what will be the shortage in the
market? Graph your answer.
e) If minimum price of Ghs20.00 is set, what would you expect to happen in
the market? Graph your answer.

13. If the demand for Banku and Okro is given by Qd = 236 – 20P and the supply
function is Qs = 88 + 40P. If the government impose a per unit tax of 1.05, what is the
a) Old and New equilibrium price and quantity
b) The tax revenue to the government after imposing the tax

14. The demand and supply function for Agbli Kaaklo are as follows
Qs = 500P – 1000, Qd = 11000 – 1000P.
a) What will be the consumer surplus and producer surplus?
b) Now suppose a price ceiling of Ghs4.00 is imposed, what will be the new
consumer and producer surplus?
c) Calculate the deadweight loss.

15. 15.

No An A
Change in Increase In Decrease In
Supply Supply Supply
No A B C
Change in
Demand
An D E F
Increase In
Demand
A G H I
Decrease In
Demand

With the aid of an appropriate diagram, explain what happens to the

equilibrium price and quantity in each scenario, from A to I.

16. a) In the summer of 2000, weather conditions were excellent for commercial
salmon fishing off the California coast. Heavy rains meant higher than normal
levels of water in the rivers, which helped the salmon to breed. Slightly cooler
ocean temperatures stimulated the growth of plankton the microscopic
organisms at the bottom of the ocean food chain—providing everything in the
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ocean with a hearty food supply. The ocean stayed calm during fishing season,
so commercial fishing operations did not lose many days to bad weather.
How did these climate conditions affect the quantity and price of salmon?

b) From August 2014 to January 2015, the price of jet fuel decreased roughly
47%. How do you think this fuel price decrease affected the equilibrium price and
quantity of air travel?

17. a) Innovation has led to the advent of the iPod and other portable digital music
players. At the same time there is a reduction in tariffs on imports of Sony
Walkman-type products.
Graphically analyze the impact of the situation above on the equilibrium price
and quantity of Sony Walkman-type products.

c) A tariff is a tax on imported goods. Suppose the US government increases

the tariff on imported flatscreen televisions. How do you think the tariff
reductionwill affect the equilibrium price and quantity of flatscreen TVs?

18. What is elasticity of Demand. State and explain the types of Elasticity of
Demand.

19. What is elasticity of Supply. State and explain the types of Elasticity of Supply.

20. Consider the following facts about mobile money transactions. Currently, MTN and
AirtelTigo charge 1% on mobile money transactions up to a total charge of GHS 10
per transaction while Vodafone charges 0%. The E-levy which is currently being
discussed is intending to impose an additional 1.5% charge on most electronic
transactions. a) In ordinary language, explain what it means to say the demand for
mobile money transactions is price elastic.

21. The demand function for a good Y is Q= 12-4Py + 0.04M – 0.5Px. Find the expression
for the own price elasticity of demand, the cross elasticity of demand and the income
elasticity of demand. Evaluate the elasticities if Py= 15, Px= 10 and M= 2000.

22. For each of the following pair of goods, which good would you expect to have more
price elastic demand and why?

(i) Handouts recommended by lecturers or mystery novels.

(ii) Downloads of tracks by Stonebwoy or downloads of afro-dancehall music in
general.
(iii) Heating oil during the next three months or heating oil during the next three years.
(iv) Lemonade and water.

23. The quantity of a good demanded rises from 1000 to 1500 units when the price
falls from $1.50 to $1.00 per unit. Calculate the price elasticity of demand for
this product.

24. Supposed Kassim reduces his consumption of maize by 2 percent due to the
chemicals in it.
(i) If the price elasticity of demand for maize is 0.5, by how much will the
price of maize rise?
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(ii) If kenkey sellers estimate that this change in the price of maize will
increase the price of kenkey by 25 percent and decrease the quantity
demanded of kenkey by 8 percent, what is the kenkey seller’s estimate
of the price elasticity of demand for kenkey?
(iii) If fried fish sellers estimate that, with the change in the price of kenkey,
the quantity of fried fish demanded will decrease by 5 percent, what is
the fried fish seller’s estimate of the cross elasticity of demand for fried
fish with respect to the price of kenkey?

25. Supposed the market demand of chicken is given by Qd = 200-6P+2Y, where P

is the price of chicken per kg and Y is the consumers’ income. Suppose that
consumers’ income is GHS 1000,
(i) If the price of chicken decreases from GHS100 to GHS80 per kg. Find
the corresponding elasticity of demand.
(ii) Now supposed that the price is fixed at GHS100 while the consumer
income increases from GHS1000 to GHS1500. Find the corresponding
income elasticity of demand
(iii) Is chicken a normal good? Why or why not?

26. Consider the market for good X

(i) Supposed the consumers do not buy any of good X at the price of
GHS120, and for every GHS10 decrease in price, the quantity consumed
increases by 20. Write the equation for the demand curve of good X.
(ii) Supposed the producers do not produce any of good X at the price of
GHS50, and for every GHS10 increase in price, the producers increase
the quantity produced by 30. Write the equation for the supply curve of
good X.
(iii) Find the equilibrium price and quantity using equation (i) and (ii)
(iv) At what price does the market have a shortage of 40?
(v) At what price does the market have a surplus of 60?