ME Tutorial 3

Q1. Suppose a consumer has a disposable income of $10 and he has to spend it on two products,
i.e. Product A = $1 (price per unit) & Product B = $2 (price per unit). Total utility schedule of
both products is mentioned below:

Using law of equi-marginal utility, calculate the number of items of each product purchased by
the consumer so that the total utility of the consumer is maximized.
Q2. Midwest Cable TV has estimated the demand for its service to be given by the following
function:
where
Q = monthly sales in units; P = price of the service in $; A = promotional expenditure in $000
Y = average income of the market in $000; P0 = price of home movies in $
The current price of Midwest is $60, promotional expenditure is $120,000, average income is
$28,000, and the price of home movies is $45.
Indicate whether the following statements are true or false, giving your reasons and making the
necessary corrections.
a. If Midwest increases its price this will reduce the number of its customers.
b. If Midwest increases its price this will reduce its revenues.
c. Peoples expenditure on the cable TV service as a proportion of their income will increase
when their income increases.
d. If Midwest increases its price this will increase the sales of home movies.
e. Home movies are a substitute for cable TV.
f. A 5 per cent increase in income will increase demand by 16 per cent.
g. A 10 per cent increase in price will reduce demand by 12 per cent.
h. Current sales are over a million units a month.
Q3. JMC, a company dealing in audio systems, has been selling 500 audio systems per month on
average at a price of Rs. 1,000. Its main competitor, Kilachand Sounds, plans to reduce price of
its audio system from Rs. 1,050 to Rs. 900. JMC has come to know of this move and wants to
know impact of this change on its own sales. It has calculated a cross-elasticity of demand
between the two products as 0.7. Calculate the loss in rupees that JMC will suffer.
Q4. Nitya Foods has observed that the demand for his lunch package has been significantly
affected by the income level of residents in the neighbourhood. Its demand equation is:

Q = 500 + 0.002I
i) How many additional lunch packages can Nitya Foods sell per month if the average monthly
income of residents goes from Rs. 10,000 to Rs. 20,000?
ii) If present average income of the residents is Rs. 15,000 per month, which increases at the rate
of Rs. 2,500 each year, by which year Nitya Foods should expect to sell 1000 lunch packages?