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Business Finance 2 Tutorial Set 2

Practical

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16 views3 pages

Business Finance 2 Tutorial Set 2

Practical

Uploaded by

calebantwi657
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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University of Ghana Business School

FINC 304: Managerial Economics-2021/2022


Tutorial set 2

QUESTION 1

For this problem, refer to the article from the Economist attached to the problem set.

a) The article states that "the cheaper the liguor, the more people drink". Can you infer the
nature of the price elasticity of demand from this statement? Why or why not?

b) "A 2009 paper in Addiction, a public health journal, reviewed 112 distinct studies of
changes in alcohol taxes and found an unambiguous link. This suggested that a 10% price
rise in prices would cut consumption by around 5%". Calculate the price elasticity of demand
for alcohol. Is the demand for alcohol price elastic or price inelastic?

c) In spite of your answer in part (b) the author of the article believes that imposition of tax
on alcohol would significantly reduce alcohol consumption. Why? What information is
provided to support this belief?

QUESTION 2

Suppose the demand function for a firm's product is given by


𝑙𝑛𝑄x = 3 − 0.5 ln 𝑃x − 2.5 ln 𝑃y + ln 𝑀 + 2 ln 𝐴
Where Px is the price of the product = GHS 10
Py is the price of another product produced by the firm = GHS4
M is the income of consumers = GHS 20,000 and
A is the expenditure on advertising for the product = GHS 250

a) Determine the own price elasticity of demand, and state whether the demand is elastic,
inelastic or unitary elastic.
b) Determine the cross-price elasticity of demand between good X and Y, and state whether the
two goods are substitutes or complements.
c) Determine the income elasticity of demand, and state whether the good X is a normal or an
inferior good.
d) Determine the own advertising elasticity of demand.

Teaching Assistant: GABRIEL AZU


QUESTION 3
Suppose the demand function for a firm's product is given by
𝑄x = 3 − 0.5𝑃x − 2.5𝑃y + 𝑀 + 2𝐴
Where Px is the price of the product = GHS 10
Py is the price of another product produced by the firm = GHS4
M is the income of consumers = GHS 20,000 and
A is the expenditure on advertising for the product = GHS 250

e) Determine the own price elasticity of demand, and state whether the demand is elastic,
inelastic or unitary elastic.
f) Determine the cross-price elasticity of demand between good X and Y, and state whether
the two goods are substitutes or complements.
g) Determine the income elasticity of demand, and state whether the good X is a normal or
an inferior good.
h) Determine the own advertising elasticity of demand.

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 increasing prices at his
stations to increase revenue and profits. Do you recommend this strategy based on the
information he has obtained? Explain.

c) You estimate that the income elasticity of demand for your brand of bottled mineral
water is 1.75. Economists are forecasting a recession next year where average incomes
are expected to fall by 4%. By how much and in what direction will the recession
impact your sales next year?

d) An international hotel chain calculates that this year the demand for its
accommodation in Kuala Lumpur will rise by 15%. The incomes of customers are
estimated by the hotel management to be rising by around 10%. Assuming all other
conditions of demand are unchanged, what do these figures suggest about the income
elasticity of demand for the hotel accommodation?

e) You are the manager of a firm that receives revenues of GHC 40,000 per year from
product X and GHC 90,000 per year from product Y. The own price elasticity of demand

Teaching Assistant: GABRIEL AZU


for product X is -1.5 and the cross prices elasticity of demand between product Y and X
is -1.8. How much will your firm’s total revenues (from both products) change if you
increase the price of good X by 2%.

Teaching Assistant: GABRIEL AZU

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