Question 1

The Sales Manager of FOOD ROCKERS, a restaurant opposite UPSA that sells pizza has estimated
linear specification demand function for his product to take decision. The manager has approached
you as a first-year graduate student of Economics for Managers course at UPSA to determine the
reliability of the results to enable him make effective managerial decision. Use the results of the
regression presented in the table below to answer the questions that follow.

Where quantity demanded of pizza is the dependent variable, Price is the average price of pizza sold
(GH¢100.00), Income is consumer’s income (GH¢14.00), Prelated is the price of related product
(GH¢110.00) and location is a dummy variable representing location in urban area (1),otherwise (0)

Requirements:
a. Write down the estimated demand equation and determine the quantity of pizza demanded
b. Interpret the estimated coefficients of the equation
c. Evaluate the statistical significance of the equation as a whole and each estimated coefficient
d. Is demand for pizza elastic or inelastic? Explain
e. Should the manager reduce price to make more revenue? Explain
f. Comment on how well the regression line best fits the data
g. If the restaurant raises price by 3% and consumer’s income rises by 2%, what will be the
effect on quantity of pizza sold?
h. If the competing firm decreases its price by 5%, what will be the effect on pizza sold?
i. If the firm wants to increases its sale of pizza by 50 units, by how much should it decrease
price?

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Question 2

You are the manager of a firm that produces vegetable cooking oil in Ghana. In order to make
informed decision, you engaged an economist to estimate the demand equation for your product.
Using data from 25 supermarkets around the country for the month of February 2021, the estimated
linear regression result for your product is shown in the table below:

Variable Parameter Estimates Standard error

Constant -164 20.24
Vegetable cooking oil -3.50 1.55
Price of palm oil 2.50 0.28
Per capita income 0.45 0.52

R-squared 0.8672
Adjusted R-square 0.8132
F-statistic 15.6893
a. Suppose that the price of vegetable cooking oil per gallon is ¢20, the price of palm oil per
gallon is ¢30 and per capita income is ¢420,
i. Write down the estimated demand equation of your firm’s product and interpret the
parameter estimates
ii. Determine the quantity of vegetable cooking oil sold
iii. Estimate the own price elasticity of demand and state the type of demand curve the firm
has
iv. What would be the effect of a price increase on the firm’s total revenue?
v. Assess the probable impact on your firm if the firm producing palm oil decrease their
price by 10%
vi. Explain the R-squared
vii. What does the adjusted R-square mean?
viii. What type of good is vegetable cooking oil to consumers?
ix. What is the relationship between vegetable cooking oil and palm oil?

b. Now suppose the economist estimated the supply curve of your product as
𝑄𝑥𝑠 = −47 + 2.5𝑃𝑥 − 1.5𝑃𝐿 + 0.75𝑅, where 𝑃𝑥 is the average price of vegetable cooking oil,
𝑃𝑦 is the average price of palm oil, 𝑃𝐿 is the average price of unskilled labour and R is the
average annual rainfall. In addition, suppose the equilibrium values of unskilled labour and
rainfall are ¢10 and 40 respectively,
i. Find the demand and supply curves for vegetable cooking oil
ii. Determine the equilibrium price and quantity of vegetable cooking oil and represent
them on a graph
iii. Suppose the government imposes a tax of GH¢4 on each gallon of vegetable cooking
oil sold, what will be the new equilibrium price and quantity?
iv. What is the total tax revenue?
v. How would the consumers and producers share the tax?
vi. Represent the demand, old and new supply curves on a single graph and find the
deadweight loss
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 vii. Suppose the government imposes a price ceiling of GH¢16 per gallon of vegetable
cooking oil, what will be the deadweight loss to the society?

Question 3
End Of Semester 2021 – (Distance)

Compulsory Question 1 (a)

AFB Company Ltd is a company that was set up in June 2020 that produces a fertilizer known as
BedRock Fertilizer. Among the competitors of your product are Asaase Wura fertiizer from YARA
Ghana Ltd. As an expert in the marketing of fertilizers, you have been poached from YARA Ghana
Ltd to oversee the marketing of this new product. For you to make informed decision and advise the
board appropriately, you engaged an economist who estimated the demand equation for your form’s
product. The economist used data from 549 cocoa farmers around the country for the month of
January, 2021 to estimate a linear regression for your product:

Variable Parameter Estimates Standard error

Intercept 204 20.2402
Price of BedRock Fertilizer per bag (𝑃𝑥 ) -2.50 1.5534
Price of Asaase Wura Fertilizer per bag(𝑃𝑦 ) 1.25 0.2829
Per capita income (I) -0.20 0.5212
Advertising (A) 0.06 0.0224

R-squared 0.9219
Adjusted R-squared 0.8947
F – statistic 7.8394
In addition, the economist also estimated the supply function for your product as:

𝑄𝑥𝑠 =-85 + 5.5𝑃𝑥 - 1.5𝑃𝐿 + 0.05𝑇𝑥

where 𝑃𝑥 is the price of BedRock Fertilizer per bag, 𝑃𝐿 is the pr unit price of unskilled labour, and 𝑇𝑥 is
the amount spent on technology. Now suppose 2 bags of Bed Rock Fertilizer is sold for GH₵60, a
bag of Asaase Wura Fertilizer is sold for GH₵30, the per capita income of cocoa farmers is GH₵800,
the company spends GH₵1,000 on advertising, the per unit price of unskilled labour is GH₵50, and a
total of GH₵1000 was used on technology for the production.

a) Write down the estimated demand equation for your firm’s product.
b) Interpret the coefficient of price of BedRock Fertilizer and price of Asaase Wura Fertilizer.
c) Determine the quantity of BedRock Fertilizer bought by consumers.
d) Estimate the own price elasticity of demand and state the type of demand curve.
e) What would be the firm’s price policy option?

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 f) Assess the probable impact on your firm if YARA Ghana decreases the price of Asaase Wura
Fertilizer by 15%
g) What type of good is BedRock Fertilizer?
h) Find the demand and supply curves for BedRock Fertilizer.
i) Determine the equilibrium price and quantity of BedRock Fertilizer
j) Suppose the government imposes a tax of GH₵8 on every BedRock Fertilizer sold, what will
be the new equilibrium price and quantity?
k) Represent the demand curve, old and new supply curves on a graph and find the deadweight
loss.
l) Suppose the government imposes a price ceiling of GH₵30 per bag, what will be the
deadweight loss?

SOLUTION TO QUESTION 3
2021 DISTANCE COMPULSORY Q1 (a)

a) 𝑄𝑥𝑑 = 204 – 2.5𝑃𝑥 + 1.25𝑃𝑦 - 0.20 I +0.06A

b) Interpretations:

Price of BedRock Fertilizer

When the price of BedRock Fertilizer increases by GH₵1, quantity demanded of BedRock Fertilizer
will decrease by -2.5 bags and vice versa all things being equal.

Price of Asaase Wura Fertilizer

When the price of Asaase Wura Fertilizer increases by GH₵1, demand for BedRock Fertilizer will
increase by 1.25 bags and vice versa all things being equal.
c) 𝑄𝑥𝑑 = 204 – 2.5𝑃𝑥 + 1.25𝑃𝑦 - 0.20 I +0.06A,
𝑃𝑥 =if the cost of 2 bags =60, then the cost of 1bag=60/2 = 𝑃𝑥 =30, 𝑃𝑦 = 30. I=800, A=1000
𝑄𝑥𝑑 = 204 – 2.5(30)+ 1.25(30) - 0.20(800) +0.06(1000)
𝑄=204 – 75 +37.5- 160 + 60
Q= 66.5
𝑑𝑄 𝑃
d) 𝑒𝑝 = 𝑑𝑃𝑥 × 𝑄𝑥
𝑥 𝑥
30
= -2.5 × 66.5
= -1.13
Since 𝑒𝑝 =|1.13| ˃1, elastic demand exists.
e) The firm should opt to reduce prices in order to increase total revenue.
𝑑𝑄 𝑃𝑦
f) 𝑒𝑋,𝑌 =𝑑𝑃𝑥 × 𝑄
𝑦 𝑥
30
= 1.25 × 66.5
=0.56
%∆𝑄
𝑒𝑋,𝑌 =%∆𝑃𝑥
𝑦

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 %∆𝑄𝑥
0.56= −15
0.56× -15 = %∆𝑄𝑥
%∆𝑄𝑥 = -8.4%

If YARA Ghana decreases the price of Asaase WuraFertilizer by 15%, demand for BedRock
Fertilizer will decrease by 8.4%.

g) Since the coefficient of income in the demand function is negative, BedRock Bitters is
inferior good.
h) 𝑄𝑥𝑑 = 204 – 2.5𝑃𝑥 + 1.25𝑃𝑦 - 0.20 I +0.06A,
𝑃𝑥 =if the cost of 2 bags =60, then the cost of 1bag = 60/2 = 𝑃𝑥 =30, 𝑃𝑦 = 30. I=800, A=1000
𝑄𝑥𝑑 = 204 – 2.5𝑃𝑥 + 1.25(30) - 0.20(800) +0.06(1000)
𝑄=204 – 2.5𝑃𝑥 +37.5- 160 + 60

Qd = 141.5 – 2.5P

𝑄𝑥𝑠 = -85 + 5.5𝑃𝑥 - 1.5(50)+ 0.05(1000)

Qs = -85 + 5.5𝑃𝑥 - 75 + 50
Qs = -110 + 5.5P
i)
At equilibrium, Qd=QS
141.5 – 2.5P = -110 + 5.5P
141.5 +110 = 5.5P+2.5P
251.5 = 8P
P=31.44

Put P=31.44 into Qd

Q = 141.5 – 2.5(31.44)
Q = 141.5 – 78.6
Q= 62.9
Q =63
At equilibrium, price is GH₵31.44 and quantity is 63 bags.

j) Tax imposition of GH₵8

Qs = -110 + 5.5P

Qs = -110 + 5.5(P- 8)

= -110 + 5.5P - 44

Qst= -154 + 5.5P

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 At equilibrium, Qd= Qs
141.5 – 2.5P = -154 + 5.5P
141.5+154 = 5.5P+2.5P
295.5 = 8P
295.5
P= 8

=36.94
P=37
Put P=37 into Qd
Q = 141.5 – 2.5(37)
Q =141.5 – 92.5
Q= 49
The new equilibrium price is GHȻ36.94 and quantity is 49 bags.
k) Representing the demand and supply curves and finding the deadweight loss

Qd = 141.5 – 2.5P …..(𝟏) Qs= -154 + 5.5P …….(𝟑)

For Q intercept, P=0 For Q intercept, P=0

Q = 141.5 – 2.5(0) Q = -154 + 5.5(0)

Q =141.5 (141.5, 0) Q = -154 (0, -154)

For P intercept, Q=0 For P intercept, Q=0

0 = 141.5 – 2.5P 0 = -154 + 5.5P

2.5P = 141.5 154 = 5.5P

P = 56.6 (0, 56.6) P = 28 (0, 28)

Qs = -110 + 5.5P ……(𝟐)

For Q intercept, P=0

Q= -110 + 5.5(0)

Q = -110 (-110, 0)

For P intercept, Q=0

0 = -110 + 5.5P

110 = 5.5P

P = 20 (0, 20)

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 Deadweight loss
1
A= 2bh
1
=2×(37 - 29) ×(63 - 49)
1
×8×14
2
= 56

l) Price ceiling of GH¢30

Put the price ceiling in the supply curve to determine the quantity that producers are
willing to supply to the market
Qs = -110 + 5.5P
Qs = -110 + 5.5(30)
= -110 +165
Qs = 55bags

Put Q=56 into the demand curve to determine the price that consumers are willing to pay
Qd = 141.5 – 2.5P
56 = 141.5 – 2.5P
2.5P = 141.5 – 56
2.5P = 85.5
P=34.2

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 Deadweight loss
1
A= 2bh
1
=2×(34.2 - 30) ×(63 - 55)
1
×4.2×8
2
= 16.8

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Question 4 PQ4
As the newly appointed energy minister, your goal is to reduce the total demand for residential
heating fuel in your region. You must choose one of three legislative proposals designed to
accomplish this goal:
a) a tax that would effectively increase the price of residential heating fuel by GH¢2.00
b) a subsidy that would effectively reduce the price of natural gas by GH¢ 1.00
c) a tax that would effectively increase the price of electricity (produced by hydroelectric
facilities) by GH¢5.00.
To assist you in your decision, an economist in your office has estimated the demand for
residential heating fuel using a linear demand specification. The regression results are
presented below:

Based on this information, which proposal would you favour?

Solution to Question 4
𝑑
𝑄𝑅𝐻𝐹 = 136.96 – 91.69𝑃𝑅𝐻𝐹 + 43.88𝑃𝑁 -11.92𝑃𝐸 – 0.050 I
𝑑
Where 𝑄𝑅𝐻𝐹 represents quantity demanded of residential heating fuel, 𝑃𝑅𝐻𝐹 represents price of
residential heating fuel, 𝑃𝑁 represents price of natural gas, 𝑃𝐸 represents price of electricity and
I is oncome.

To assist us choose the best legislation, the t-statistic values will help us know which of the
independent variable(s) among the three options is/are significant.

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Among the three variables of which a choice is to be made, price of electricity is not statistically
significant in reducing demand for residential heating fuel since the absolute value of its t-
statistic (1.42) is less than 2.

The significant variables in reducing the demand for residential heating fuel are price of
residential heating fuel and price of natural gas, hence, options a and b.

Option a- a tax that would effectively increase the price of residential heating fuel by
GH¢2.00
As said earlier, this variable is significant in reducing the demand for Residential heating
fuel since the absolute value of its t-statistic (3.15) is greater than or equal to 2.
From the above demand function, when price of residential heating fuel increases by
GH¢ 1, quantity demanded of the residential heating fuel by 91.69 units.
Therefore, if GH¢1 will reduce quantity demand of the residential heating fuel by 91.69
units, the when the tax leads to a price increase of GH¢2, quantity demanded of the
residential heating fuel will reduce by (2×91.69) 183.38 units.

Option b - a subsidy that would effectively reduce the price of natural gas by GH¢ 1.00

With a t-statistic value of 4.79(which is greater than or equal to 2), this legislation is
significant in reducing demand for residential heating fuel.

From the demand function, when the price of natural gas increases by GH¢1 demand for
residential heating fuel will increase by 43.88 units. The reverse is that if the price of natural gas
decreases by GH¢1, demand for the residential heating fuel will decrease by 43.88 units.

Therefore, a subsidy that will reduce the price of natural gas by GH¢1will only reduce demand
for the natural gas by 43.88 units.

In conclusion, demand for residential heating fuel will reduce by a higher unit (183.38 units)
when a tax that will increase the price of residential heating fuel by GH¢2 is imposed.

The best option I will favour will be option (a)

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Question 5 PQ 2

A linear demand function a Hostel, a fast-selling product around UPSA has been estimated and
the results obtained are

Requirements:

a. Write down the estimated demand function for the hostel

b. Discuss the results in terms of signs and values of the coefficients
c. Determined the statistical significance of the coefficients of the regression
d. What is the relationship between products X and Y? Explain
e. A colleague of yours claims that product X is an inferior good. Do you agree? Give
reasons
f. How does the political instability variable affect the demand for the hostel?
g. Explain the explanatory power of the result.

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