Work sheet -3

ECONOMICS ASSIGNMENT
Q1. Demand Analysis. The demand for refrigerators is often described as cyclical, and very
sensitive to refrigerator prices and interest rates. Given these characteristics, describe the
effect of each of the following in terms of whether it would increase or decrease the quantity
demanded or the demand for refrigerators. Moreover, when price is expressed as a function of
quantity, indicate whether the effect of each of the following is an upward or downward
movement along a given demand curve or instead involves an outward or inward shift in the
relevant demand curve for refrigerators. Explain your answers.

A. An increase in refrigerator prices

ANS; - In this case Law of demand applies because, if there is an increase in prices of the
refrigerators, demand for refrigerator would fall and because, (ceteris paribus) & there is a
negative relationship in between price and quantity demanded for a commodity, the demand
curve also slopes downward from left to right.
B. A fall in interest rates
ANS: - If the interest rates will fall, the demand for refrigerators increases and consumers
are ready to buy the refrigerators as per their needs, preferences and choices, in this case,
demand curve slopes upward and there is a rightward shift in demand curve.
C. A rise in interest rates
ANS-: If the interest rates will high, it creates a negative impact on demand curve and
demand curve slopes downward, and therefore, demand of refrigerator decreases so it shifts
in the leftward direction.
D. A severe economic recession
ANS-: If there is a recession in the market, the demand curve slopes downward because
prices are very high and customers are not ready to buy the refrigerators. Therefore, demand
curve slopes downward and it shifts in the leftward direction.
E. A robust economic expansion
ANS: - In Expansion phase, the demand for all types of goods and services rises and the
Income of the consumers is also rising therefore the demand for refrigerators will increases
and customers are ready to spent so, the demand curve slopes upward and there is a
rightward shift in demand curve.

Q2 Demand and supply conditions in the market for unskilled labor are important concerns
to business and government decision makers. Consider the case of a federally mandated
minimum wage set above the equilibrium or market clearing wage level. Some of the
following factors have the potential to influence the demand or quantity demanded of
unskilled labor. Influences on the supply or quantity supplied may also result. Holding all
else equal, describe these influences as increasing or decreasing, and indicate the direction of
the resulting movement along or shift in the relevant curve(s).

A. An increase in the popularity of self-service gas stations, car washes, and so on

ANS: - In that case, If the demand of self – service gas station is high, demand for
unskilled labour automatically decreases, and the demand curve for unskilled labour
shifts to left it will indicate the fall of demand of unskilled labour.

B. A fall in welfare benefits.

 ANS: -If the welfare benefits will fall, the demand for unskilled labour increase, and it
indicates the right ward shift of supply curve of unskilled labour.
C. An increase in the minimum wage.
ANS: - If the minimum wage increases the quantity supplied for unskilled labour will also
increases and the supply curve shift upward.
D. A rise in interest rates
ANS: - Rise in interest rates will also affects the demand and supply of unskilled
labour, it means the demand for unskilled labour moves in the right direction.
E. A decrease in the quality of secondary education
ANS: -If the quality of secondary labour decreases, so the demand of unskilled labour
slopes downward and shifts to the left and supply curve of unskilled labour increase
and supply curve slopes upward to the right.

Q3 Coupon Promotions, Inc., is a coupon book publisher with markets in several sout
hwestern states. CPI coupon books are either sold directly to the public, sold through
religious and other charitable organizations, or given away as promotional items. Operating
experience during the past year suggests the following demand function for its coupon books

Q = 10,000 - 5,000P + 0.02Pop + 0.4I + 0.6A

Where Q is quantity, P is price ($), Pop is population, I is disposable income per capita ($),
and A is advertising expenditures ($).

A. Determine the demand curve faced by CPI in a typical market where P = $5, Pop =
1,000,000 persons, I = $35,000 and A = $10,000. Show the demand curve with
quantity expressed as a function of price, and price expressed as a function of quantity
ANS-: IN THIS CASE-: Q = 10000 – 5,000P+ 0.02POP + 0.41A + 0.6A
= 10,000 – 5,000P + 0.02(10,00,000) + 0.4(35,000) + 0.6(10000)
Q = 50,000- 5,000P
5,000P = 50,000 – Q
P = $10- $0.0002Q

B. Calculate the quantity demanded at prices of $5, $2.50, and $0.

ANS: -1. when price is $5 Quantity = 50000- 5,000(5) = 25,000

2. P= $2.50 Quantity =50,000 – 5000(2.50) = 37,500

3. When P = $0 so, Quantity = 50,000- 5,000(0) = 50,000
c. Calculate the prices necessary to sell 10,000, 25,000, and 50,000 units
ANS-: WHEN Q = 10000 IN THIS CASE, P = $ 10 - $0.0002(10000) = $8
Q = 25 SO IN THIS CASE, P = $ 10 - $0.0002(25000) = $5
Q = 50,000 IN THIS CASE, P = $ 10- $0.0002(50000) = $ 0.

Q4 Air California, Inc. is a regional airline providing service between Los Angeles,
California and Las Vegas, Nevada. An analysis of the monthly demand for service has
revealed the following demand relation:

Q = 45,000 - 250P - 300PC + 250BAI + 10,000S

Where Q is quantity measured by the number of passengers per month, P is the price ($), PC
is a price index for connecting flights (1982 = 100.), BAI is a business activity index (1982 =
100) and S, a binary or dummy variable, equals 1 in summer months, zero otherwise
.
A. Determine the demand curve facing the airline during the winter month of January
if P = $100, PC = 150, BAI = 200, and S = 0
ANS: - Quantity = 45,000- 250P – 300PC +250 BAI + 10,000S
= 45,000- 250P – 300(150) +250(200) + 10,000(0)
Q= 50,000 -250P.
250P = 50,000 -Q
P = $200- $ 0.004Q
B. Calculate the quantity demanded and total revenues during the summer month of
July if all price-related variables are as specified above related variables are as
specified above.
Ans-: According to me, in the month of July the variable is S= 1 Therefore, in this case,
Quantity = 45,000-250(100) – 300(150) + 250(200) + 10,000(1) = 35000
SO, TOTAL REVENUE = PRICE * QUANTITY
= $100(35000)
= $ 35,00,000 Ans.
Q5 Supply Curve Analysis. A review of industry-wide data for the domestic wine
manufacturing industry suggests the following industry supply function:

Q = -7,000,000 + 400,000P - 2,000,000PL - 1,500,000PK + 1,000,000W

where Q is cases supplied per year, P is the wholesale price per case (Rs), PL is the average
price paid for unskilled labor (Rs), PK is the average price of capital (in percent), and W is
weather measured by the average seasonal rainfall in growing areas (in inches).

A. Determine the industry supply curve for a recent year when P = Rs80, PL = Rs10, PK =
12%, and W= 25 inches of rainfall. Show the industry supply curve with quantity
expressed as a function of price and price expressed as a function of quantity.
ANS: -: - 7,000,000 +4,00,000 – 2,000,000 PL – 15,00,000 PK + 1,000,000W
= -7,000,000 + 4,00,000P – 2,000,000(10) – 15,00,000(12) + 1,000,000(25).
= - 20,000,000 + 4,00,000P
PRICE AS A FUNCTION OF QUANTITY SO: -
-20,000,000 + 4,00,000P
4,000,000P = 20,000,000+ Q
P = $50 + $0.0000025Q
B. Calculate the quantity supplied by the industry at prices of Rs50, Rs75 and Rs100 per
case
ANS: - WHEN, Price = 50rs so, Q = -20,000,000 + 4,00,000(50) = 0
When Price = 75rs. Q= -20,000,000 + 4,000,000(75) = 10,000,000
When Price = 100rs Q = -20,000,000 + 4,00,000(100) = 20,000,000

C. Calculate the prices necessary to sell 10,000, 25,000, and 50,000 units
ANS. Q = 10,000 so, P = $50 + 0.0000025(10,000) = 50.025
 When Q = 25,000 SO, P = $50 + 0.0000025(25,000) = 50.0625
When Q = 50,000 SO, P = = $50 + 0.0000025(50,000) = 50.125

Q6 Market Equilibrium. Florida Orange Juice is a product of Florida's Orange Growers'

Association. Demand and supply of the product are both highly sensitive to changes in the
weather. During hot summer months, demand for orange juice and other beverages grows
rapidly. On the other hand, hot dry weather has an adverse effect on supply by reducing the
size of the orange crop

Demand and supply functions for Florida orange juice are as follows

QD = 4,500,000 - 1,200,000P + 2,000,000PS + 1,500Y + 100,000T (Demand)

QS = 8,000,000 + 2,400,000P - 500,000PL - 80,000PK - 120,000T (Supply)

where P is the average price of Florida ($ per case), PS is the average retail price of canned
soda ($ per case), Y is income (GNP in $billions), T is the average daily high temperature
(degrees), PL is the average price of unskilled labor ($ per hour), and PK is the average cost
of capital (in percent).

A. When quantity is expressed as a function of price, what are the Florida demand and
supply curves if P = $11, PS = $5, Y = $12,000 billion, T = 75 degrees, PL = $6, and
PK = 12.5%.

ANS: - Quantity demanded = 45,00,000- 12,00,000P + 2,000,000PS +1500Y +

1,00,000T
= 45,00,000-12,00,000P + 2,000,000(5) + 15,00(12000) + 1,00,000(75)
Quantity demanded = 40,00,000-12,00,000p
2ND PART ANS: - Surplus or shortage of Florida orange juice calculated as follows: -
Quantity supply= 8,000,000 + 24,000,000p – 5,00,000PL – 80,000PK - 1,20,000T
= 8,000,000 + 24,000,000p – 5,00,000(6) – 80,000(12.5)- 1,20,000(75)
Quantity supply = -5,000,000 + 24,00,000P

B. Calculate the surplus or shortage of Florida orange juice when P = $5, $10, and $15

ANS: - When Price = $5 Quantity supplied = -5,000,000+2,400,000(5) = 7,000,000

When Price = $10 Quantity supplied = 5,000,000+2,400,000(10) = 19,000,000
When Price = $ 15 Quantity Supplied = - 5,000,000+ 24,00,000(15) = 31,000,000

When Price = $5 Quantity Demanded = 40,000,000- 1,200,000(5) = 34,000,000

When Price = $10 Quantity Demanded = 40,000,000-1,200,000(10) = 28,000,000
When Price = $ 15 Quantity Demanded = 40,000,000-1,200,000(15) = 22,000,000

For calculating the surplus and shortage we deduct Quantity Demanded from Quantity supplied (Qd – Qs):
NOTE: If the Quantity demanded is greater than quantity supplied so it’s a (shortage)
If Qu antity Supplied is greater than Quantity demanded its a(surplus)
In First Case it was, 34,000,000 – 7,000,000 = 27,000,000 (SHORTAGE)
In Second case: 19,000,000 - 28,000,000 = 9,000,000 (SHORTAGE)
In Third Case: = 31,000,000 - 22,000,000 = 9,000,000 (SURPLUS)

C. Calculate the market equilibrium price-output combination

ANS: - Market equilibrium price – output combination: -
40,000,000- 12,00,000p = -5,000,000+ 24,00,000P
36,00,000P= 45,000,000P = $12.50

Demand: QD = 40,000,000 - 1,200,000(12.50) = 25,000,000

Supply: QS = -5,000,000 + 2,400,000(12.50) = 25,000,000

Equilibrium= 25,000,000.