ECO 201: ELEMENTS OF MICROECONOMICS

SAMPLE QUESTIONS AND ANSWERS

Demand, Supply and Elasticities

1) Consider the demand equation Q  25  3P, where Q represents quantity demanded and p the
selling price
a. calculate the arc – price elasticity of demand when P1  4 and P2  3
b. calculate the point price elasticity of demand at these prices. Is the demand for this good
elastic or inelastic at these prices?
c. what, if anything, can you say about the relationship between price elasticity of demand and
total revenue at these prices?
d. what is the price elasticity of demand at the price that maximizes total revenue?
Solution
a. the arc – price elasticity of demand is given by

Ed 
Q2 Q1 P1  P2  .
P2  P1 Q1  Q2 
Solving for Q1 and Q2 at the given prices yields

Q1  25  34  25  12  13
Q2  25  33  25  9  16
16  13 3  4
 Ed  .  -0.724
3  4 13  16
b. The point-price elasticity of demand is given by the expression
dQ P
Ed  
dP Q
Thus, at p  4 and p  3
4 12
Ed  3     0.923      ( p  4)
13 13
3 9
Ed  3    0.563        ( p  3)
16 16
At both prices demand is price inelastic

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c). total revenue is given by the expresses
TR  PQ  P25  3P   25P  3P 2
For P=4
TR=4(13) =$52
And for P=3
TR=3(16) =$48
These illustrates that total revenue will decline as the price falls in the inelastic region of the
linear demand function.
d) Maximizing the expression for total revenue yields
dTR
 25-6 P  0
dP
Solving for p, we write
25
P=  4.167
6

TR  254.167  34.167   104.175  52.092  $52.083

2

 34.167   12.5
Ed    1
25-34.167  12.5

Thus, total revenue is maximized where marginal revenue is equal to zero, where the point-price
elasticity of demand is equal to one.

2). If the market demand function is given by the function

Q1  20  2P1  0.5P2  0.01Y p1  5 , p2  10 and Y  2000
Where Q1 is the qty of good 1

P1 is the price of good 1

p 2 is the price of another commodity
Y is income
Calculate:
i) cross elasticity of demand at p1  5 , p2  10 and Y  2000 and indicate the type of
commodity

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ii. Income elasticity of demand for commodity 1 when p1  5, p2  10 and Y  1000 and
indicate the type of commodity
Solution
i) Q1  20  2P1  0.5P2  0.01Y

Substitute p1  5 , p2  10 and Y  2000

=> Q=25
dQ1 P2 10
Ec    0.5   0.2 Complement
dP2 Q1 25

ii. Substitute when P1  5 P2  10, Y  100

=> Q1  15,

dQ1 Y 1000
Ey    0.01   0.67 Normal good
dY Q1 15
3) Another commonly used demand curve is he constant elasticity demand curve given by this
general formula: Q  aP b where and b are positive constant. The corresponding inverse demand
1 1

curve is p  a Qb b

In Q=Ina-blnp
Because it is linear in the logs the constant elasticity demand curve is sometimes called a log
linear demand curve. For the constant elasticity demand curve the price elasticity is always
equal to the exponent –b
1

Eg. If Q  200 P what is the price elasticity of demand
2

Answer
This is a constant elasticity of demand curve, so the price elasticity of demand is equal to  1 2
everywhere along the demand curve.
Proof
Q  ap b For this demand curve
Q
 bap (b 1)
P
But

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 dQ P
Ed  .
dP Q

p
 bap b1
ap b
 b Hence proof.

4) Consider the following straight line demand and Supply equations

Qd  a  bp

Qs  c  dp

If a tax rate of t is imposed the post tax supply function will be Qs  c  d p  t 

Equilibrium before imposition of tax
Qd  Qs
a  bp  c  dp
a  c  dp  bp

a  c  pd  b
ac
 p* 
bd
ac
Q  a  b 
b  d 
Qb  d   ab  d   ba  c
Qb  d   ab  ad  ab  bc
Qb  d   ad  bc
ad  bc
Q* 
bd
Equilibrium after imposition of tax
Qd  a  bp

Qs  c  d p  t   Qs  c  dp  dt

Qd  Qs
a  bp  C  dp  dt

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 a  c  dp  bp  dt

a  c  dt  dp  bp

a  c  dt  p b  d 

a  c  dt
p
b  d 
ac dt
p*  
bd bd
 the post tax price will be higher than the pre-tax price.
Post tax equilibrium quantity
 
Q*  a  b p*

ac dt 
Q *  a  b  
b  d b  d 
Q * b  d   ab  d   ba  dt 

Q * b  d   ab  ad  ab  bc  bdt

Q  b  d   ad  bc  bdt
ad  bc  bdt
Q* 
bd
ad  bc bdt
Q*  
bd bd
This shows that the post tax equilibrium quantity is less than the pre tax equilibrium quantity.
Numerical example
Qd  220  5 p
Qs  20  3 p
Tax  ¢10.00
Post tax supply function is
QSt  20  3 p  10

 20  3 p  30
QSt  50  3 p

Equilibrium before tax

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 Qd  Qs

p *  30 , Q *  70

Equilibrium after tax

Qd  QSt

p *  33.75

Q *  51
Amount of tax borne by the consumer= ¢33.75  30  3.75
Amount of tax borne by the producer  ¢10  3.75  6.25
From the tax sharing the demand for the good is fairly elastic

TRY QUESTIONS
Practice questions: Attempt the following questions. You may find it interesting and helpful to
practice in groups of ten heads per group or smaller. Take note of any difficulties and report to
members of other groups or students of the class and seek help from friends. These practice
questions will not count towards your assessment for the semester, at least for now, but it is
recommended that you tackle them religiously.
1A).The following table shows the quantities of apples bought by Kojo, Ama and Benita.
Use the information to answer the questions that follow:
Price per Quantity bought Quantity Quantity
Apple by Kojo bought by bought by
Ama Benita
$0.5 9 7 3
$1.0 8 6 2
$1.5 7 5 1
$2.0 6 4 0
$2.5 5 3 0
$3.0 4 2 0
$3.5 3 1 0
$4.0 2 0 0

i. Calculate the market demand schedule given that Kojo, Ama and Benita are the only
consumers in the apples market
ii. Sketch the market demand curve
iii. Determine the market demand equation and hence or otherwise, find the slope of the
market demand curve

1B). You have the following individual demand tables for beer.

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 Price per John Lizzy Alex Karim
bottle($)
2 4 36 24 0
4 4 32 20 0
6 0 28 16 0
8 0 24 12 0
10 0 20 8 0
12 0 16 4 0
14 0 12 0 0
16 0 8 0 0

i. Determine the market demand table and expression

ii. Graph the individual and market demand curves on the same axes
iii. If the current market price is $4, what is the total market demand? What happens to total
market demand if the price rises to $8?
iv. Suppose an advertising campaign increases demand by 50 percent. Illustrate graphically
what will happen to the individual and market demand curves. Now obtain a new
expression for the market demand function, taking note of the effect of advertisement.

2A).Suppose the demand and supply for milk in kotokuraba market is described by the following
equations = and = , where are the quantity
demanded and quantity supplied respectively, and P is price.
i. Determine the equilibrium price and quantity
ii. Calculate the price elasticity of demand and supply at the equilibrium
iii. Would a government-set price of $4 per unit create a surplus or shortage of milk? How
much? Is $4 a price ceiling or a price floor?
iv. Suppose the government has a change of heart and imposes a tax of $1 per gallon of milk
on dairy products
a) What is the effect of the tax on the supply equation? On the demand equation
b) What is the new equilibrium price and quantity?
c) Determine the direction or burden of tax?

B).The following table gives the quantities of gasoline demanded and supplied in Los Angeles in
a recent month.

Price Per Quantity Demanded Quantity Supplied

gallon (Millions of gallons) (millions of gallons)
i. $1.20 170 80
ii. $1.30 156 105
iii. $1.40 140 140
iv. $1.50 123 175
v. $1.60 100 210
$1.70 95 238

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 i. Graph the demand and supply curves
ii. Find the equilibrium price and quantity
iii. Illustrate on your graph how a rise in the price of cars would affect the gasoline
market
iv. The California state governor, alarmed by the recent increases in gas prices,
imposes a price ceiling of $1.20 on gasoline products per gallon. How will this
affect the market? Specifically calculate the resulting shortage or surplus?

3A).The demand and supply equations for eggs in a local supermarket can be modelled as
follows:
a. Determine the equilibrium in this market
b. Investigate whether or not each of these prices is a price floor, price ceiling or neither
i. P=$3.00 ii. P=$1.50 iii. P=$2.00 iv. P=$2.25 v. P=$2.50

B). Using the principle of horizontal summation, show how one obtains the market demand from
three consumers of a product (kofi(K), Akosua(A) and Muoteng(M)) respectively of the form:
, and
Given that the market supply equation is
i. Sketch the market demand and supply curves on the same graph
ii. Calculate the equilibrium price and quantity.

4). Determine the equilibrium in a market in which demand and supply are defined by the
following equations:
i. ii.

iii.
v.
vii.
ix.
xi. –
xiii.

5A) .Suppose the demand and supply functions for sleek Nokia phones in Ghana can be
modelled by the following expressions .
i. Determine the equilibrium price and quantity
ii. Find the consumer and producer surpluses
iii. Estimate the price elasticity of demand and supply at the equilibrium.

B).Given the following demand function for product X: ,

Calculate the price elasticity of demand at the point
C).There are 10000 identical individual consumers in the market for commodity X, each of
whom has a demand function given by , ceteris paribus, and 1000 identical
producers of commodity X, each with a supply function given by . Determine the
equilibrium price and quantity?

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6A).The demand curve for a product is , where P is the product’s price (in
dollars per pound) and is the quantity demanded (in millions pounds per year). If the supply
curve for the product is where is the quantity supplied (in millions pounds per
year).
i. Calculate the equilibrium price and quantity
ii. Find the total surplus in the market(i.e. consumer’s surplus + producer’s surplus)
iii. If the actual price of the product is $70 per pound, would you expect the price to rise or
fall? If so, by how much?

B).Suppose the demand for product X has been estimated as

,where

.
i. Develop a demand schedule (table) for product X over the price range

(Hint use $50 changes in over the range)

ii. Assuming the above values for I and , write an equation for the demand curve of
product X.
iii. Sketch the demand curve for product X
iv. How will the demand curve for product X change if median family income rises?
v. What economic relationship exists between product X and product Y.

C).The demand and supply functions of pineapple juice in Apewosika is described by the
following equations respectively.
i. calculate the equilibrium price and quantity
ii. suppose a per unit tax of ten Ghana cedis is imposed on pineapple juice, determine the
new equilibrium price and quantity
iii. what will happen to equilibrium price? Equilibrium quantity?
iv. Determine how the tax is shared between demanders and sellers of pineapple juice?
v. How much tax revenue will the government raise?

7A).The demand schedule for oranges in a veteran city is as shown in the table:

PRICE QUANTITY
($)
A 80 20
i.
B 100 18
ii.
C 120 16
iii.
i. Calculate the price elasticity of demand between
a) A and B b) B and C
ii. Comment on the results above
iii. Derive an expression for the demand curve

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B). Simplify these expressions and find the equilibrium price and quantity;

C).The demand for beer in Japan is given by the following equation:

where p is the price of beer, is the price of nuts,
and I is average consumer income.
i. What happens to the demand for beer when the price of nuts goes up? Are beer and nuts
substitutes or complements?
ii. What happens to the demand of beer when average income rises? Is beer a normal good
or an inferior good?
iii. Graph the demand curve for beer when .

8A). A demand curve can be represented by an equation showing how quantity demanded
( ) depends on the good’s price (P). Calculate the price elasticity of demand when price goes
up from$12 to$16 for each of the following demand equations:
i. ii. iii.

B). Distinguish between the following: demand and quantity demanded, demand schedule
and demand curve, change in demand and change in quantity demanded.
C). List and explain any five factors which you think can influence an individual’s demand
for a commodity, say X.

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