Question

The general demand function for Sobolo on campus is where QD is quantity demanded of good Sobolo each month, PA is price of Sobolo, M is students income, PB is price of related good Brukina, T is students taste index, PE is price students expect to pay next month for good A, and N is number of buyers in the market for Sobolo. i. Interpret the intercept parameter in the general demand function. ii. What is the value of the slope parameter for the price of Sobolo? Does it have the correct algebraic sign? Why? iii. Interpret the slope parameter for income. Is Sobolo normal or inferior? Explain. iv. Are Sobolo and Brukina substitutes or complements? Explain. Interpret the slope parameter for the price of Brukina. v. Are the algebraic signs on the slope parameters for T, PE, and N correct? Explain. vi. Calculate the quantity demanded of Sobolo when PA = ¢5, M = ¢25,000, PB = ¢40, T = 6.5, PE = ¢5.25, and N = 2,000. vii. Calculate the income elasticity of demand from (vi) above and interpret your results. B. In an article about the financial problems of Daily Graphic, an economists at Valley View University indicated that the company was losing about GH¢20 million a year. The economist suggest that, the paper should raise its price from GH¢2.5 to GH¢3.5 which he estimated would bring in an additional GH¢65 million a year. The paper’s publisher rejected the idea, saying that the circulation could drop sharply after a price increase, citing The Ghanaian Times experience after it increase its price to GH¢3. What implicit assumption are the publisher and the economist making about demand elasticity? 200 QD = P 30 5 = −QS + P QD = 600 − 4PA − 0.03M − 12PB + 15T + 6PE + 1.5N

Answer 1

Question A

PArt (i)

Part (ii)

sign is correct because price of a product and quantity demanded for a product is inversely related

Part (iii)

when average income increases, quantity demanded of sobolo falls , so they are inversely related. Sobolo is an inferior good

Part (iv)

when price of burkina increases, the quantity demanded of sobolo falls. Burkina and sobolo are complements

Part (V)

all the 3 variables are positively related t o quantity demanded of Sobolo

If a buyer expects the price of a good to go down in the future, they hold off buying it today, so the demand for that good today decreases. On the other hand, if a buyer expects the price to go up in the future, the demand for the good today increases.

positive change in student's taste index leads to increase in quantity demanded of sobolo

Part (vi)

Part (vii)

1% increase in income leads to 0.302% fall in demand for sobolo

Question B

Economists of valley view university are of the view that increasing the price form 2.5 dollar to 3.5 dollar will bring an additional revenue of 65 million dollars. They are making an assumption that elasticity of demand is inelastic . This means that increase in price will have less effect on quantity demanded. Thus, increase in price is greater than decrease in quantity demanded. Therefore, total revenue increases

However, publishers believe that readers of their newspapers (consumers) are price sensitive. This means that increase in price will not only decrease the quantity demanded to a large extent but also reduce the total revenue by a large amount. They assume demand is price elastic