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Elasticity and Demand Exercise

1. The regression analysis estimates the demand equation for a good using price, income, and the price of a related good as independent variables. 2. The regression results show that price of the related good has a statistically significant effect on demand at the 5% level, but price and income do not. 3. A 10% increase in price is estimated to decrease quantity demanded by 3.3%, indicating inelastic demand.

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Khairul Bashar Bhuiyan 1635167090
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186 views

Elasticity and Demand Exercise

1. The regression analysis estimates the demand equation for a good using price, income, and the price of a related good as independent variables. 2. The regression results show that price of the related good has a statistically significant effect on demand at the 5% level, but price and income do not. 3. A 10% increase in price is estimated to decrease quantity demanded by 3.3%, indicating inelastic demand.

Uploaded by

Khairul Bashar Bhuiyan 1635167090
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Exercise: 1: Basics of Demand and Supply

1.Given the following demand schedule of a commodity show that by substituting the prices
given in the table into the following demand equation or function, you obtain the corresponding
quantities demanded given in the table:

Price Demand(millions)
(Taka)
6 0
5 10
4 20
3 30
2 40
1 50
0 60

QD = 60 – 10P

2. (a) Derive the demand schedule from the following demand function: Q D = 80 – 10P. (b)
On the same graph plot the demand schedule of problem 1 and level it D and the demand
curve of part (a) of this problem and label it D1. Does D1 represent an increase in
demand or an increase in the quantity demanded? Why?
New : QD = 80 – 10P; P = Taka 0 ; Qd = 80 ; P = Taka1 ; Qd = 70 [ shift of the demand
curve to the right; change of demand]
P = Taka 4; Qd = 80 – 10P = 40

3. (a) Derive the supply schedule from the following supply function: Qs = 10P. (b) Derive
the supply schedule from the following supply function: Qs’ = 20+ 10P. On the same
graph plot the supply of part (a) and label is S and the supply curve of part (b) and label it
S1. Does S1 represent an increase in supply or an increase in the quantity supplied? Why?

Qs = 10P ; let P = Taka 3; Q s = 30


New Qs = 20+ 10P; p= Taka 3 ; Qs = 20+10*3 = 50 [ shifts (rightward) of the supply
curve]
4. Demand, Supply and Elasticity

Price Demand(millions) Supply (millions)


(Taka)
60 22 14
80 20 16
100 18 18
120 16 20

a. Calculate the price elasticity of demand when the price is Taka 80 and Taka 100.

b. Calculate the price elasticity of supply when the price is Taka 80 and Taka 100.

c. What are the equilibrium price and quantity?

d. Suppose the government sets a price ceiling (Maximum Price supplier may charge to the
buyers) of Taka 80. Will there be shortage, and if so, how large will it be? Suppose the
government sets a floor price (minimum price supplier should charge to the buyers) of
Taka 120

Find Demand Equation = 28 - 0.1P

Supply Equation = 8 +0.1P

Elasticity of demand = -0.1*80/20 = Slope*P/Q

Supply Equation = Qs = f(P) = a+ bP = a+ 0.1P;

b = 16-14/80 -60 = 2/20 = 0.1

price = Taka 60, Qs = 14 = a+ 0.1P a+ 0.1*60;

a = 8; Qs = 8 +0.1P

5. The for mobile homes have been estimated as : d Q =250 , 000−35 P . If this
relationship remains approximately valid in the future:

(i) How many homes would be demanded at a price of $2,000 and $4,000?

(ii) What is the arc elasticity of demand between $2,000 and $4,000? [

Arc elasticity= Slope*Average price/Average Qd


= -35*(2000+4000)/2/(180000+110000)/2 =

-35*6000/290000 = - 0.72 [ product is normal; absolute value is less than 1; Inelastic


demand]

(iii) What is the point elasticity of demand at $2,000 and $4,000?

(iv) If 25,000 homes were sold last year, would you expect the average price to have
been?

6. In the year 2014-15, the demand function for rice in Dhaka is: P = 12.4 - 4Qd and the
supply function is P = -2.6 +2Qs. Work out the equilibrium quantity of Rice sold in
Dhaka in 2014-15.

7. Qd = 10 -4P and Qs = -2+8P. Solve for equilibrium price and quantity demand and
supplied at equilibrium price. Now assume that after imposition of excise tax (collected
from sellers) now supply curve appears as Qs = -8+8P. Find solve for equilibrium price
and quantity demand and supplied at new equilibrium price.

Exercise: 2 [ELASTICITY]

1. Using the following figure calculate the point elasticity at points A and B. What would be
the arc elasticity in this case? Show your computations.

Slope = 11/22 = ½; Take its inverse = 2; Take negative sign [ law of demand; price
and quantity negatively related]; slope = -2

2. Using the following table calculate price point price elasticity of demand (PED), income
elasticity (EM), and cross elasticity (EXY).

PX Py M (= Income) QX
10 9 350 5
9 12 300 6

PED = Slope *P/Q = Change of Qx/Change of Px* Px/Qx = (6-5)/(9 -10) *


EM = Slope *M/Q= Change of Qx/Change of M* M/Qx = (6-5)/(300350) * 350/5
EXY = Slope *Py/Q= (6-5)/(12-9) *9/5 = Change of Qx/Change of Py * Py/Qx

3. The R.J. Smith Corporation is a publisher of romance novels-nothing exotic or erotic –


just stories of common people falling in and out of fascination. The corporation hires you
as an economist to determine the demand of its product. After months of hard work and
submission of an exorbitant bill,, you suggest the company that the demand for the firm’s
novels (Qx) is given by the following equation:
Q x =12,000−5,000 Px +5 M +500 P Y

Assume that the initial values of Px, M, and Py are Taka 5, Taka 10,000 and Taka 1
respectively. Determine the effect of a price increase would have on total revenue (TR).

Qx = 12000 – 5000*5+ 5*10,000+ 500*1 = 37500 [ Forecasted demand]

Ed = Elasticity of demand = Slope *P/Q = -5000*5/37500 = - 0.67 [ Ed<1, if we increase


price revenue should go up]

Exy = Cross elasticity = 500*1/37500 = + [ substitute product]


EI = EM = Income elasticity = 5*10,00/37500 = 1.33 [ + and greater than 1, luxury
product]

4. The following log-linear demand curve for a price-setting firm is estimated using the ordinary least-squares method:
Q= aPb M c P dR

lnQ = lna + blnP + cLnM + dlnPr

Following are the results of this estimation:

DEPENDENT R-SQAURE F-RATIO P-VALUE ON F


VARIABLE: LNQ
OBSERVATIONS 25 0.8587 89.165 0.0001
PARAMETER STANDARD T-RATIO P-VALUE
ESTIMATE ERROR
INTERCEPT 6.77 4.01 1.69 0.0984
LNP -1.68 (b) 0.7 -2.40 0.0207
LNM -0.82 (c) 0.22 -3.73 0.0005
LNPR 1.35 (d) 0.75 1.80 0.0787

The estimated demand equation can be expressed in natural logarithms as LnQ


=---------------------------------
Does the parameter estimate for b have the expected sign? Explain. Given these parameter
estimates, is the good normal or inferior good? Explain.
Which of the parameter estimates are statistically significant at 5 percent level of significance?
A 20 percent decrease in household income, holding all other things constant, will cause quantity
demand to change by what percentage and in which direction?
All else constant, a 10 percent increase in price causes quantity demanded to change by what
percentage and in what direction?

The price Elasticity of demand ----------------The cross-price elasticity of demand-----------The


income elasticity of demand-------------. A 10 percent decrease in household income, holding all
other factors constant, will cause quantity demand to-----------(increase, decrease ) by-------------
percent. A 5 percent decrease in the price of related good, R, household income, holding
all other factors constant, will cause quantity demand to-----------(increase, decrease )
by-------------percent.
————— 11/8/2020 6:38:57 PM ————————————————————

Welcome to Minitab, press F1 for help.

Regression Analysis: LNQX versus LNPX, LNM, LNPR

Analysis of Variance

Source DF Adj SS Adj MS F-Value P-Value


Regression 3 0.614417 0.204806 64.05 0.000
LNPX 1 0.007830 0.007830 2.45 0.156
LNM 1 0.001109 0.001109 0.35 0.572
LNPR 1 0.052218 0.052218 16.33 0.004
Error 8 0.025582 0.003198
Total 11 0.639999

Model Summary

S R-sq R-sq(adj) R-sq(pred)


0.0565486 96.00% 94.50% 90.21%

Coefficients

Term Coef SE Coef T-Value P-Value VIF


Constant 7.07 2.63 2.69 0.028
LNPX -0.326 0.208 -1.56 0.156 1.47
LNM -0.513 0.871 -0.59 0.572 16.41
LNPR -2.958 0.732 -4.04 0.004 15.06

Regression Equation

LNQX = 7.07 - 0.326 LNPX - 0.513 LNM - 2.958 LNPR

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