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Calculation on Managerial Economy
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MANAGERIAL ECONOMICS: TUTORIAL #1
Presenters:Mr. XMrs. Y
QUESTION 1
The X-Corporation produces a good (called X) that is a normal good. Its competitor, Y- Corporation, makes a substitute good that it markets under the name “Y”. Good Y is an inferior good.
Income
Quantity of Good X
D1 D2
P2
P1
D2D1
• When income increases, the demand curve for normal goods shifts outward as more will be demanded at all prices.
• Since X is a normal good; an increase in income, indicates a right shift from D1 to D2
(a). How will the demand for good X change if consumer income increase?
Income
Quantity of Good X
D1 D2
P1
P2
D2D1
(b). How will the demand for Good Y change if consumer income decrease?
• An inferior good increase in demand when consumer income decrease.
• Since Y is a inferior good; a decrease in income, indicates a right shift from D1 to D2
(c). How will the demand for good X change if the price of good Y decreases?
• When the price of a substitute good Y decreases, the quantity demanded for good X also decreases. Therefore the demand curve for good X will shift to the left.
Price of Good Y
Quantity of Good X
D2 D1
P1
P2
D1D2
(d). Is good Y a lower-quality product than good X? Explain
• No. The term inferior good does not mean a lower-quality. It basically means that both income and demand are inversely related.
• For example; Car
QUESTION 2The demand for good X is given by:
Q = 1200 – Px/2 + Py/4 – 8Pz + M/10
Research shows that the prices of related goods are given by Py= $5,900 and Pz= $90, while the average income of individuals consuming this product is M= $55,000.
(a). Indicate whether goods Y and Z are substitutes or complements for good X.
Good Y is a substitute for X, while good Z are complement for X.
(b). Is X an inferior or a normal good?
X is a normal good.
(c). How many units of good X will be purchased when Px= $4,910??
Q = 1,200 – $4,910/2 + $5,900/4 – 8 x $90 + $55,000/10 = 5000 units
(d). Determine the demand function and inverse demand function for good X. Graph the demand curve for good X.
Q = 1200 – 0.5 Px = 1475 - 720+ 5,500 = 7455 – ½ Px
½ Px = 7466-QxPx = 14,910-2Qx
Price
14,910
7455
Question 3(Refer to question 2 of page 66 from ME textbook)
• Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations:A) The price of input A increasesB) An excise tax of $1 is imposed on good XC) An ad valorem tax of 5% is imposed on good XD) A technological change reduces the cost of producing
additional units of good X.
Question 3(Refer to question 2 of page 66 from me textbook)
A) The price of input A increases
Price
Quantity of Good X
S0
S1
Cost of producing good X increases
Supplier is less willing to produce more.
Therefore, supply of good X will decrease.
Supply curve of good X will shift to the left.
Question 3(Refer to question 2 of page 66 from me textbook)
B) An excise tax of $1 is imposed on good X
Supplier is willing to supply the same quantity of good X when he receives additional $1 per unit of good X.
Price
Quantity of Good X
S0
S0 + t
$1
Selling price per unit + $1 excise tax.
Supply curve will shift vertically up by exactly $1 for each output level.
Question 3(Refer to question 2 of page 66 from me textbook)
C) An ad valorem tax of 5% is imposed on good X
Supplier is willing to supply
the same quantity of good X when the unit price of production goes up by 5%.
Price
Quantity of Good X
S0
S0 x 1.05 t
Selling price per unit x 5% ad valorem tax.
Supply curve will rotate counterclockwise. The new curve will shift farther away from original curve when the price increases.
Question 3(Refer to question 2 of page 66 from me textbook)
D) A technological change reduces the cost of producing additional units of good X
Supplier is willing to produce more.
Price
Quantity of Good X
S0
S1
Supply of good X will increase.
Supply curve will shift to the right.
QUESTION 4(Refer to question 7 of page 67 from me textbook)
• Suppose demand and supply are given by
QDX = 7 – ½ PX and QS
X = ¼ PX – ½
A) Determine the equilibrium price and quantity. Show the equilibrium graphically.
B) Suppose a $6 excise tax is imposed on the good. Determine the new equilibrium price and quantity.
C) How much tax revenue does the government earn with the $6 tax?
QUESTION 4(Refer to question 7 of page 67 from me textbook)
Market equilibrium occurs when market supply intersects with market demand
QDX = QS
X
7 – ½ PX = ¼ PX – ½
¾ PX = 7 ½
PX = $10
Determine the equilibrium price and quantity. Show the equilibrium graphically.
QUESTION 4(Refer to question 7 of page 67 from me textbook)
Using demand equation:
QDX = 7 – ½ PX
QDX = 7 – ½ (10)
QDX = 7 – 5
QDX = 2 units
Equilibrium price = $10Equilibrium quantity = 2 units
Question 4(Refer to question 2 of page 67 from me textbook)
Price
Quantity of Good X1 2 3 4 5 6 7
2
4
6
8
10
12
14
16
18
20
0
Supply
Demand
PX = 2 + 4Qs
Equilibrium
QUESTION 4(Refer to question 7 of page 67 from me textbook)
B) Suppose a $6 excise tax is imposed on the good. Determine the new equilibrium price and quantity.
Price
Quantity of Good X
1 2 3 4 5 6 7
2
4
6
8
10
12
14
16
18
20
0
So PX = 2 + 4Qs
So + t PX = 8 + 4Qs
Supply equation without tax:PX = 2 + 4QS
Supply equation with tax:PX = 2 + 4QS + 6PX = 8 + 4QS
So, QS = ¼ PX - 2
QUESTION 4(Refer to question 7 of page 67 from me textbook)
• To calculate new equilibrium price and quantity:QD
X = 7 – ½ PX
QSX = ¼ PX – 2
7 – ½ PX = ¼ PX – 2
¾ PX = 7 + 2
PX = $12
QDX = 7 – ½ (12)
QDX = 1 unit
New equilibrium price = $12New equilibrium quantity = 1 unit
QUESTION 4(Refer to question 7 of page 67 from me textbook)
C) How much tax revenue does the government earn with the $6 tax?
Unit sold after tax = 1Tax
= $6Therefore, Tax revenue =
1 x $6 Tax revenue =
$6