UNIVERSITY OF GHANA BUSINESS SCHOOL

DEPARTMENT OF FINANCE UGBS 201- MICROECONOMICS AND

BUSINESS

TUTORIAL SET 3

Question 1
Interpret the following elasticity of demand:

a. 𝑃𝐸𝐷 = 0 b. 𝑃𝐸𝐷 = 1 c. 𝑃𝐸𝐷 = ∞ d. 0 < 𝑃𝐸𝐷 < 1 e. 𝑃𝐸𝐷 > 1

Question 2
Use the table below to calculate the Price elasticity of demand between the following points and
interpret your results.

a. A and B

b. B and C

c. C and D

d. D and E

Price (GH) Quantity Demanded

A 8 3000

B 15 2000

C 25 1000

D 18 500

E 5 400

Question 3
Biibi's, a restaurant consulting firm estimates that in Accra a 10% reduction in the price
of roasted groundnut will increase kelewele by 20%. But they further estimate that a
10% reduction in the price of roasted plantain will decrease kelewele sales by 15%.

TAs: Richard Akomatey and Chris.

 (a) What is the implied cross price elasticity of kelewele with respect to changes in
the price of roasted groundnuts?

(b) What is the implied cross price elasticity of kelewele with respect to changes in the
price of roasted plantain?

(c) From your cross price elasticity estimates, what can you say about the relationship
between roasted groundnut and kelewele, and between roasted plantain and kelewele in
Accra? Why?
Question 4
A. A phone company operates two markets. In market one, research suggests that the price
elasticity is -0.5 and on the other market -1.4. The company has decided to revise prices
upwards on both markets by 10% this year. Comment on the decision. What alternative
pricing strategy would you suggest?
B. The owner of Goil oil, small chain of fuel filling stations read an article in a trade
publication stating that the own-price elasticity of demand for diesel in Ghana is -0.3.
Because of this occurrence in Ghana, he is thinking about decreasing prices at his stations to
increase revenue and profits. Do you recommend this strategy based on the information he
has obtained? Explain.

Question 5
The weekly demand for sobolo among the 2016 cohort of BSc Admin students at the UGBS is

Qdx =50-4PX +0.5I +10Py -2Pz

Where Qdx is the quantity demanded for sobolo

PX is the price of sobolo per 1bottle

I is the income of consumers in Ghana cedis

Py and Pz are the prices of two goods that are related to sobolo

a. Based on the demand function above, is sobolo a normal good or inferior good? Explain your
answer.
b. Based on the demand function above , what is the relationship between sobolo and good Y
c. Based on the demand function above , what is the relationship between sobolo and good Z
d. What is the equation of the demand for sobolo if consumer incomes areGHS30, the price of
good Y is GHS 10 and the price of good Z is GHS 20?
e. Graph the demand function for sobolo from d)

TAs: Richard Akomatey and Chris.

Now suppose the weekly supply function for sobolo at the UGBS is

Qsx = -210 +20Px -5PI

Qsx is the quantity supplied of sobolo and PI is the price of inputs used in the preparing sobolo.
a.What is the supply function if inputs prices are GHS20?

b. Graph the supply curve from f)

Question 6
a) Suppose Dorcas , the CEO of a company that produces wine, decides to increase the price of
a bottle of wine from GHC 8 to GHC 11 per bottle and quantity demanded change from 50
to15 per day. Using the Arc elasticity of demand find the price elasticity of demand of the
wine?
b) Based on your answer in a) above, how will you advise the CEO of the company?

Question 7
Answer the following
1) The price elasticity of demand is always positive, as is the price elasticity of supply. Is the cross
elasticity of demand always positive? Explain your answer.

2) Explain why the cross elasticity of demand for substitute goods is positive and the cross elasticity of
demand for complements is negative.
3) If the cross elasticity of demand between two goods is negative, are the goods substitutes or
complements?

4) If the cross elasticity of demand between peanut butter and milk is -1.11, then are peanut butter and
milk substitutes or complements?

5) How are the cross elasticity of demand and income elasticity of demand similar and how are they
different from the price elasticity of demand?

6) If the income elasticity of demand for a Miami Dolphin season ticket is 2.34, then are Dolphin season
tickets a normal or an inferior good?

7) The income elasticity of demand for store brands of soda (that is, non-name brands) is negative. What
does this fact indicate about consumers' perceptions about the store brands?

8) When the price of Ford pickup trucks rises from $18,000 to $19,000, the quantity of Chevy trucks
demanded increases from 112,000 to 144,000. What does the cross elasticity of demand between Ford and
Chevy trucks equal?

TAs: Richard Akomatey and Chris.

9) When the price of bananas rises 2 percent, the quantity demanded of peanut butter falls 4 percent.
a. What is the cross elasticity of demand between these two goods?
b. How are these goods related?
c. If the price of bananas rises, how will that affect the demand curve for peanut butter?

10) Consider two goods: peanut butter and jelly. If the price of jelly increases from $2 a jar to $3 per jar
and the quantity demanded of peanut butter decreases from 50 jars to 45 jars, what is the cross elasticity
of demand? Are the goods substitutes or complements?

11) A 10 percent increase in income brings about a 15 percent decrease in the demand for a good. What is
the income elasticity of demand and is the good a normal good or an inferior good?

12) If income increases from $50,000 to $60,000 while the demand for a good increases from 100 units to
125 units, what is the income elasticity of demand? Is the good a normal good or an inferior good?

13) The income elasticity of demand for movies in the United States is 3.41. If people's incomes decrease
by 1 percent, what is the decrease in the quantity of movies demanded?

14) The table above gives Sharon's demand for ground beef at two different income levels. Use the
midpoint method in this problem.
a. What is the percentage change in Sharon's income?
b. What is the percentage change in the quantity demanded?
c. What is Sharon's income elasticity of demand for ground beef?
d. Is ground beef a normal or an inferior good for Sharon?

TAs: Richard Akomatey and Chris.