GSFM7223
ECONOMICS FOR MANAGERS
TOPIC REVIEW 1
Question 1
Draw a demand curve or supply curve and label it D1 or S1. On the graph, illustrate an
increase in demand or supply and a decrease in demand or supply, and label the curve D2
or S2 and D3 or S3, respectively. Starting on demand curve or supply curve D1 or S1,
explain the shift that would result from each of the following events:
a) Technological advancements have led to lower prices and an increase in the sale of
digital cameras. How does this affect the digital photo printing paper market?
P
The demand for digital
S1 photo printing paper will
increase and the demand
curve will shift to the right.
E2
The equilibrium price and
E1 quantity will increase from
E1 to E2 and Q1 to Q2
respectively.
D2
D1
Q
Q1 Q2
b) Technological advances have resulted in lower prices for digital cameras. What is the
impact of this on the market for traditional (non-digital) cameras?
P
S1 The demand for non-digital
camera will decrease and
the demand curve will shift
E1 to the left.
The equilibrium price
E2 decrease from E1 to E2 and
equilibrium quantity will
decrease from Q1 to Q2.
D2
D1
Q
Q2 Q1
1
c) The popularity of digital cameras has enticed large discount stores like Wal-Mart and
Costco to offer digital photo printing services. How does this affect the digital photo
printing market?
P
S1 S2 The supply for digital photo
printing service will
increase and the supply
curve will shift to right.
E1 The equilibrium price will
decrease from E1 to E2 and
E2 equilibrium quantity
increases from Q1 to Q2.
D1
Q
Q1 Q2
d) What will happen in the lemonade market if a new technology is introduced in the
production of lemonade?
P The supply for lemonade
S1 S2 will increase and the supply
curve will shift to right.
The equilibrium price will
decrease from E1 to E2 and
equilibrium quantity
E1 increases from Q1 to Q2.
E2
D1
Q
Q1 Q2
e) Assume books and magazines are substitutes. What will happen in the book market if
the price of magazines decreases?
2
P The demand for book will
S1 decrease and the demand
curve will shift to the left.
The equilibrium price
E1 decrease from E1 to E2 and
equilibrium quantity will
E2 decrease from Q1 to Q2.
D2
D1
Q
Q2 Q1
f) What will happen in the market for cats if the income of the population who buy cats
increase?
P The demand for cats will
S1 increase and the demand
curve will shift to the right.
The equilibrium price and
E2 quantity will increase from
E1 to E2 and Q1 to Q2
E1 respectively.
D2
D1
Q
Q1 Q2
Question 2
3
Draw a supply and demand graph showing an equilibrium price of $50 and an equilibrium
quantity of 200 units. Explain what would happen if the selling price was $75 and illustrate
this on the graph. Explain what would happen if the selling price was $25 and illustrate this
on the graph. Be sure to label each axis and curve on the graph.
P($) When the price is $75, the quantity
S1 supply exceeds quantity demand. The
market is experiencing surplus.
75 Naturally, the invisible hand in the
market will reduce the price until
equilibrium point.
50 When the price is $25, the quantity
supply less quantity demand. The
market is experiencing shortage.
Naturally, the invisible hand in the
25 market will increase the price until
equilibrium point.
D1
Q
200
Question 3
Given:
Qd = 400 – 0.5P and Qs = – 200 + 1P
a) Solve for P*
b) Solve for Q*
Answer:
a) 400 – 0.5P = -200 + 1P
400 + 200 = 1P + 0.5P
600 = 1.5P
P = 600/1.5
P = 400
b) Qd = 400 – 0.5(400)
Qd = 200
Qs = -200 + 1(400)
Qs = 200
Question 4
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The demand and supply schedules for gum are:
a) Draw a graph of the gum markets, Price Qd Qs
label the axes and the curves and (cents (millions of (millions of
mark in the equilibrium price and per packs a week) packs a
quantity. pack) week)
b) Suppose the price of gum is 80 cents
a pack. Describe the situation in the 20 180 60
gum market.
40 140 80
c) A fire destroys some factories that
produce gum and the quantity of gum 60 100 100
supplied decreases by 40 million
packs a week at each price. Explain 80 80 120
what happens in the market for gum
and illustrate the changes on your 100 40 140
graph in Part (a).
Answer:
a)
D
Supply
S1
E1
DemandS2
E2
b) When the price is 80 cent, the quantity supply exceeds quantity demand by 40 units.
The market is experiencing surplus. Naturally, the invisible hand in the market will
reduce the price until equilibrium point.
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c) Price Qd Qs NEW
(cents (millions of (millions of
per packs a week) packs a
pack) week)
20 180 20
40 140 40
60 100 60
80 80 80
100 40 100
The supply for gums will decrease and the supply curve will shift to left.
The equilibrium quantity will decrease from 100 to 80 and equilibrium price increases from
60 to 80.
Question 5
Suppose the demand schedule for compact discs is as follows:
Price Quantity Demanded Quantity Supplied
$8 40 20
$10 35 30
$12 24 45
$14 16 50
a) If price increase from $8 to $10, calculate the price elasticity of demand compact discs.
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b) If price increase from $8 to $10, calculate the price elasticity of supply compact discs.
Question 6
Yesterday, the price of envelopes was $3 a box, and Qaira was willing to buy 10 boxes.
Today, the price has gone up to $3.75 a box, and Qaira is now willing to buy 8 boxes.
a) What is Qaira's elasticity of demand?
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b) Is Qaira's demand for envelopes elastic or inelastic?
c) To have total revenue increases, should she decrease the price of the envelopes? Why
or why not?
Question 7
Use the following information to compute own-price, income, and cross-price elasticity of
demand for propane heaters.
Price Quantity Demanded Income ($000) Heat Pump Price
$100 1000 20 $4000
$200 2000 30 $2000
$300 1500 30 $4000
$400 2500 30 $5000
a) Calculate price elasticity of demand for propane heaters when price decrease from
$300 to $200.
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b) Calculate income elasticity of demand for propane heaters when income increases from
$20,000 to $30,000.
c) Calculate cross elasticity of demand for propane heaters when price decrease from
$300 to $200.
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Annual Quantity Quantity
output of of fish
options potatoes (pounds)
(pounds)
A 1000 0
B 800 300
C 600 500
D 400 600
E 200 650
Question 8
F 0 675
Atlantis is a small, isolated island in the South
Atlantic. The inhabitants grow potatoes and catch fish. The accompanying table shows the
maximum annual output combinations of potatoes and fish that can be produced. Obviously,
given their limited resources and available technology, as they use more of their resources
for potato production, there are fewer resources available for catching fish.
a) Draw a production possibility frontier.
b) Can Atlantis produce 500 pounds of fish and 800 pounds of potatoes? Explain. Where
would this point lie relative to the production possibility frontier?
No, because it is at the unattainable point.
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***End of Topic Review Questions**
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