Question

Question A

Part 1

Suppose there is a technological advance that reduces the cost of producing computer chips. Use supply and demand curves to analyse the effects in the following markets:

a.market for computers.[5marks]
b.market for computer software.[5marks]
c.market for typewriters.[5marks]

Part 2

Explain with the aid of an example, the law of demand and the law of supply[4 marks]

b.Outline four factors which affect price elasticity of demand[4marks]
c.The price elasticity of demand for coca cola has been calculated at -3.8. Using your knowledge of elasticity, explain the economic meaning of this figure.[2marks].

Part 3
The demand for pocket calculators is given by the function:P = 6 – 0.5Qd; and the supply is given by the function:6=Qs-P; where =Qd= quantity demanded,Qs=quantity supplied and P= price.

a.What is the equilibrium condition?[1mark]

b.Solve for the equilibrium price and quantity in this market.[5marks]
c.Calculate the demand and supply for calculators if the market price is $15per barrel. What problem exists in the economy? What would you expect to happento price?[4marks]

d.Calculate the demand and supply for calculators if the market price is $4per barrel. What problem exists in the economy? What would you expect to happen to price?[4marks]

Part 4
When the price of a plane ticket rises from $200 to $250, the number of business travellers per month falls from 2000 to 1900. At the same time, the number of vacationers per month falls from 800 to 600.

a.Calculate the price elasticity for (i) business travellers and (ii)vacationers.[6marks]

b.State whether the elasticities for (i) business travellers and (ii) vacationers are

elastic or inelastic.[2 marks]

c.Analyse why there is a difference between price elasticities for business

travellers and vacationers.[3marks]

Answer 1

A. 1) Technological advancement reduces the cost of producing computer chips. As this, an production input of the computer, making computer will be less costly, so the supply of computer will be increased. As a result, the price will be decreased for the computer. Supply curve shifts to the right from S1 to S2. at new equilibrium price will be P2 and quantity will be Q2.

Market for computer

The market for computer software- Demand for computer software will be increased. As people now will buy more computer at a low price and so demand for computer software which is complement good with the computer will be increased. Demand curve shifts to the right from D1 to D2 as a result price of software will be increased. New equilibrium price P2 and quantity Q2.

Market for computer software

The market for typewriters- As typewriter and computer are substitutes so the demand for typewriter will be decreased. People will prefer to use the computer as the price of the computer is decreased. Demand curve of typewriter will be shifted to the left from D1 to D2. As a result price of typewriter will be decreased and quantity will be decreased. New equilibrium price is P2 and quantity is Q2.