Q3. The following sets of statements contain common errors.

Identify and explain each error:

a. Demand increases, causing prices to rise. Higher prices cause demand to fall. Therefore,
prices fall back to their original levels.

Answer: An increases in demand cause a shortage at the current price. Price will rise
until quantity demanded once again equals quantity supplied at the new equilibrium
price, Ceteries paribus, prices are constant at the new equilibrium.

b. The supply of chicken meat in Pakistan increases, causing meat prices to fall. Lower
prices always mean that Pakistani households spend more on meat.

Answer: It is not true, spending on meat could decrease if the percentage change in
quantity demanded was less than the percentage change.

Q.5
I. Fill in the missing amounts in the following table:

Answer:

% Change in Price % Change in Quantity Elasticity

Demand for Walls Ice Cream +10% -12% 1.2
Demand for soft drinks in Stadium -20% 10% -0.5
Demand for Cineplex tickets 15% -15% -1.0
Supply of Chicken +10% 12% +1.2
Supply of Beef -15% -10% 0.67

II. Use the table in the preceding problem to defend your answers to the following
questions:

a. Would you recommend that Walls move forward with a plan to raise prices if the
company’s only goal is to increase revenues?

No I will recommend Walls to move dorward with a plan to raise prices to increase
revenue. As we know revenue also depend on quantity of sales. As we see with the price
 raise of 10% has great impact on quantity demanded which is -12%. SO we can see
%change in quantity demand decline with more than the % change in price. So this way
in raise in price will decrease the revenue of walls

b. Would you recommend that soft drink stands cut prices to increase revenues at Stadium
next year?

No I will not recommend that soft drink stands cut prices to increase revenues at
Stadium next year as we see the table that % change in price is higher than the %
change in quantity so there is no such impact of price cut on increase of demand. So
there no recommendation from side to cut in price.

Q7. (i) Describe what will happen to total revenue in the following situations.
a. Price decreases and demand is elastic.
Answer: Total revenue Increases
b. Price decreases and demand is inelastic.
Answer: Total Revenue decreases
c. Price increases and demand is elastic.
Answer: Total Revenue decreases
d. Price increases and demand is inelastic.
Answer: Total Revenue Increases
e. Price increases and demand is unitary elastic.
Answer: Total revenues remain the same
f. Price decreases and demand is perfectly inelastic.
Answer: Total Revenue decreases
g. Price increases and demand is perfectly elastic.
Answer: Total Revenue decreases

(ii) The cross-price elasticity values for three sets of products are listed in the table below.
What can you conclude about the relationships between each of these sets of products?

Products A and B Products C and D Products E and F

Cross-Price Elasticity -8.7 +5.5 0.0

Answer:
Product A and B: The cross elastic of product A and B is - 8.7. A negative cross
elasticity denotes products A and B are complements each other.
Product C and D: The cross price elasticity between C and D is 5.5 which is positive it means C
and D are substitute to each other.
Product E and F: Here Cross Price elasticity is zero which mean E and F are independent goods
mean  change in the price of one good with not be reflected in the quantity demanded of the
other.