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2020 Quiz - Solution

This document contains solutions to multiple choice and computational questions related to managerial economics. Some key details: 1) For a market of bananas, the subsidy of 2 rupees per kilogram leads to a new equilibrium quantity of 3.5 and price of 9.5 rupees, with the price change being -16.67%. This would decrease the quantity of apples demanded by 8.33%. 2) For the market of data analysts, the equilibrium wage is 80 and quantity employed is 1200. A license restriction of 600 leads to a wage of 140 and employment of 600, with a deadweight loss of 27,000. 3) A decrease in income of 2% leads to

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58 views4 pages

2020 Quiz - Solution

This document contains solutions to multiple choice and computational questions related to managerial economics. Some key details: 1) For a market of bananas, the subsidy of 2 rupees per kilogram leads to a new equilibrium quantity of 3.5 and price of 9.5 rupees, with the price change being -16.67%. This would decrease the quantity of apples demanded by 8.33%. 2) For the market of data analysts, the equilibrium wage is 80 and quantity employed is 1200. A license restriction of 600 leads to a wage of 140 and employment of 600, with a deadweight loss of 27,000. 3) A decrease in income of 2% leads to

Uploaded by

qwery
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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XLRI - Xavier School of Management

Quiz (Solution)
Managerial Economics (MGE(BJ20-1)

Multiple Choice Questions


1. a.

2. a.

3. b.

4. d.

5. b.

6. c.

7. a.

8. c.

9. c.

10. b.

11. a.

12. d.

Computational Questions

13. The inverse demand function for bananas is Pd = 18 − 3Qd and the inverse supply
function is Ps = 6 + Qs , where prices are measured in rupees.

(a) What is the market equilibrium quantity and price?

Solution:

Q∗ = 3, P∗ = 9

1
(b) If a subsidy of 2 rupees per kilogram is paid to banana growers, then in equilibrium
it still must be that the quantity demanded equals the quantity supplied. What
is the new equilibrium quantity and price?

Solution:

Pd = 18 − 3Qd and Ps = 6 + Q s
P d = Ps − 2

Solving this get,


Q∗q = 3.5, Ps∗ = 9.5, Pd∗ = 7.5

(c) Express the change in price as a percentage of the original price. If the cross-
elasticity of demand between bananas and apples is +.5, what will happen to the
quantity of apples demanded as a consequence of the banana subsidy, if the price
of apples stays constant? State your answer in terms of percentage change.

Solution:
Percentage change of price is -16.67%.

Note: We are looking the cross price elsaticity of demand, this provides the hint
that we rae talking about the change in consumer’s price not producer’s price.

%∆Qa
Eqa ,pb =
%∆Pb
%∆Qa
0.5 =
−16.67%
%∆Qa = 0.5 × 16.67% = −8.33%

where Qa is the quantity demanded of apples and Pb is the price of banana.

14. Consider the market for data analysts. The demand and supply for data analyst is
given by P = 200 − Q/10 and P = 20 + Q/20, where P is hourly wage and Q is data
analysts employed.

(a) Find the equilibrium wage (price) and data analysts employed (quantity).

2
Solution:

Q∗ = 1200 P ∗ = 80

Suppose the Society of Highly Trained Data Analysts persuades the government
that data analysts must be licensed. The Society lets the government oversees the
limited 600 licenses available.
(b) What is the wage that data analyst receive? How many are employed?

Solution:
At 600 restriction, P = 140. It is the wage rate and 600 will be employed.
(c) What is the deadweight loss caused by this policy?

Solution:
P

200 S

140

80

50

600 1200 20 Q

Red Triangle is the deadweight loss.


1
DL = (1200 − 600)(140 − 50) = 27, 000
2

15. In a year number of cars sold decreased by 20% during the year, prices of cars increased
by 5%, per capita income declined by 2% and price of petrol increased by 10%, income
elasticity of demand for cars is estimated to be +1.5 and cross price elasticity of petrol
and cars is estimated to be −0.30. Find:

3
(a) The impact of decline in per capita income on demand for cars.

%∆Qc %∆Qc
EQc ,m = ⇒ 1.5 =
%∆m −0.02
%∆Qc = 1.5 × −0.02 = −0.03

Therefore, decrease in percapita income caused the sales of cars to decline by 3%.

(b) The impact of increase in price of petrol on demand for cars

Solution:
Solution:

%∆Qc %∆Qc
EQc ,pet = ⇒ −0.3 =
%∆Ppet 0.10
%∆Qc = −0.3 × 0.1 = −0.03

Therefore, increase in price of petrol caused the sales of car to decline by 3%.

(c) If sales decline because of increase in petrol and decrease in income are 3% and
3% respectively, what is the price elasticity of demand for cars?

Solution:
Total decline in sales of cars= 20%

Decline caused by decrease in per capita income and increase in price of petrol=
3%+3%= 6%

Therefore, 20 - 6= 14% decline in car sales is caused by increase in price of cars

%∆Qc
EQc ,Pc =
%∆Pc
−0.14
= = −2.8
0.05

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