The Copperbelt University

School of Business
Department of Economics

ES 120: Introduction to Economics Monday, October 09, 2017

Problem Set Three

1. Suppose that the market demand for good is given by where is

the market quantity demand and is the market price measured in kwacha.
a) Derive the price elasticity of demand for good .
b) What is the price elasticity of demand when the price of good is K30?
c) Interpret the coefficient of the elasticity of demand calculated in (b) above.
d) If you were a manager of the store where good is sold, what pricing strategy
would you implement to raise revenue?
e) What is the percentage change in quantity demanded if the price increases by
5%?
f) As a manager of the store selling good , what would you inform your boss about
the price change.

2. The demand for good is given by the following function:

where is the quantity demanded of good , is the market price of good ,

is the price of a related good , is the price of a related good and is the
consumer’s income. You are told that the prices of the related goods are
and and the average income of the consumer purchasing the product is
.
i) Determine the number of units of good that the individual can purchase.
ii) Calculate good ’s price elasticity of demand and interpret it.
iii) What advice would you give to the firm if they wanted to increase revenue?
iv) By calculating the relevant elasticity of demand, determine the relationship
between good and .
v) By calculating the relevant elasticity of demand, determine the relationship
between good and .
vi) By calculating the relevant elasticity of demand, what type of good is .

3. Suppose a coffee shop faces the following linear daily demand curve for cups of
coffee: .

a) What price per cup should the coffee shop charge to maximise total revenue?
b) Showing all necessary working and an appropriate, well labelled diagram, show
how price elasticity, total revenue, average revenue and marginal revenue are
related using the given demand function.
4. A farmer supplies 20 bags of maize per month at a price of K24. If the price elasticity
of supply of maize is 4, then how many bags of maize would the farmer supply at a
price of K30?