TOPIC 1 EXERCISES

Exercise 1

The demand curve is given by

QM = 500 - 5PM + 0.5I + 10PY - 2PZ
where
QM = the quantity of mode M demanded
PM = PM is the price of mode M
I = consumer income, in thousands
PY = is the price of an alternative Y
PZ = is the price of an alternative Z

Where: QM is the quantity of mode M demanded, PM is the price of mode M. Y is income, and
Pv is the price of an alternative Y and PZ is the price of an alternative Z.

a) Based on the demand curve above, is M a normal or an inferior Mode?

b) Based on the demand curve above, what is the relationship between Mode M and
Mode Y and M and Mode Y?
c) Based on the demand curve above, what is the relationship between Mode M and
Mode Z?
d) What is the equation of the demand curve if consumer incomes are $30,000, the price
of Mode Y is $10, and the price of Mode Z is $20?
e) Graph the demand curve that you found in (d), showing intercepts and slope.
f) If the price of Mode M is $15, what is the quantity demanded? Show this point on
your demand curve.
g) Now suppose the price of Mode Y rises to $15. Graph the new demand curve.

Exercise 2

The general demand function for transport mode A is

Qd = 600 - 4PA - 0.03M - 12PB + 15I + 6PE + 1.5N
where Qd = quantity demanded of mode A each month, PA = price of mode A, M =
average household income, PB = price of related mode B, I = a consumer taste index
ranging in value from 0 to 10 (the highest rating), PE = price consumers expect to pay
next month for mode A, and N = number of travellers in the market for mode A.

a) Interpret the intercept parameter in the general demand function for transport mode A.
b) What is the value of the slope parameter for the price of mode A? Does it have the
correct algebraic sign? Why?
c) Interpret the slope parameter for income. Is mode A normal or inferior? Explain.
d) Are modes A and B substitutes or complements? Explain. Interpret the slope
parameter for the price of mode B.
e) Are the algebraic signs on the slope parameters for I, PE, and N correct? Explain.
f) Calculate the quantity demanded of mode A when PA = $5, M = $25,000, PB = $40,I
= 6.5, PE = $5.25, and N = 2,000.

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Exercise 3

Consider the general demand function for transport mode:

Qd = 8,000 - 16P + 0.75M + 30PR

a) Derive the equation for the demand function when M = $30,000 and PR = $50.
b) Interpret the intercept and slope parameters of the demand function derived in part a.
c) Sketch a graph of the demand function in part a. Where does the demand function
intersect the quantity-demanded axis? Where does it intersect the price axis?
d) Using the demand function from part a, calculate the quantity demanded when the
price of the mode is $1,000 and when the price is $1,500.
e) Derive the inverse of the demand function in part a. Using the inverse demand
function, calculate the demand price for 24,000 units of the mode. Give an
interpretation of this demand price.

Exercise 4

The demand curve for mode X passes through the point P = $2 and Qd = 35. Give two
interpretations of this point on the demand curve.

Exercise 5

Using a graph, explain carefully the difference between a movement along a demand
curve and a shift in the demand curve.

Exercise 6

What happens to demand when the following changes occur?

a) The price of the mode falls.
b) Income increases and the mode is normal.
c) Income increases and the mode is inferior.
d) The price of a substitute mode increases.
e) The price of a substitute mode decreases.
f) The price of a complement mode increases.
g) The price of a complement mode decreases.

Exercise 7
In the second half of 2002, several major U.S. airlines began running market tests to
determine if they could cut walk-up or unrestricted business fares and maintain or increase
revenues. Continental Airlines offered an unrestricted fare between Cleveland and Los
Angeles of $716, compared with its usual $2,000 fare, and found that it earned about the
same revenue as it would have collected with the higher fare. Making similar changes on its
routes from Cleveland to Houston, Continental found that the new fare structure yielded less
revenue, but greater market share. On the Houston–Oakland route, the new fare structure
resulted in higher revenue.

a) What did these test results imply about business traveler price elasticity of demand on
the Cleveland–Los Angeles, Cleveland–Houston, and Houston–Oakland routes for
Continental Airlines?

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 b) How did these results differ from the discussion of airline elasticity in this chapter?
c) What factors caused these differences?

Exercise 8
Table

Mode A Mode B

Price (FCFA) Qty demanded Price (FCFA) Qty demanded

(millions) per week (000m2) per day

0,50 1000 200 50

0,55 950 220 25

a) Calculate the price elasticity of demand for modes A and B following the rise shown in
their price.

Exercise 9

From the following equation for a demand curve

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Qd =50−20 P+2 P

(a) Fill the figures in the table hereafter

(b) Draw the demand curve
(c) Draw the tangent to the curve where P = 3 and Q = 8
What is its slope?

(d) Where P = 3 what is the price elasticity of demand?

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Table Demand schedule: Qd =50−20 P+2 P

P 5 4 3 2 1 0

Qd ? ? ? ? ? ?

Exercise 10

Find the elasticity of demand when the price decreases from 136 to 119, taking the following
demand function into consideration

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P=200−Q

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Exercise 11

Considering the demand function

P = 1000 – 2Q

Find the arc (Midpoint) elasticity as P drops from 210 to 200

Exercise 12

From the demand function

P = 50 – 2Q

Determine the elasticity when the price is 30. Is demand inelastic, unit elastic or elastic at this
price?

Exercise 13

Consider the demand function

P=−Q2 −4 Q+96

Determine the price elasticity of demand when P = 51. If this price rises by 2%, find the
subsequent percentage change in demand.

Exercise 14

Consider the demand function

Q=100−2 P+P A+0 .1 Y

in which P = 10, P A =12 and Y = 1000, determine the

(a) price elasticity of demand

(b) cross-price elasticity of demand
(c) income elasticity of demand

Is the alternative mode substitutable or complementary?

Exercise 15

Bamenda’s demand for private car road transport trips is Qd = 90 – 4P.

a) At price P = 20, what is the price elasticity of demand?
b) Calculate the price elasticity as the price moves from P0 = 20 to P1 = 15 by using the
mid-point price elasticity formula

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 c) The price of taxi trips decreased by 10%. As a result, private car road transport trips
decreases from 11 trips to 9 trips. What is the cross-price elasticity of demand for
these two modes? (Interpreted your result)
d) The price of motorbike mode increases by 20%. As a result, the demand for for
private car road transport trips decreases by 15%. What is the cross-price elasticity of
demand for these two modess? (Interpreted your result)
e) Passengers got a raise at work, and their income increases by 25%. As a result, their
demand for private car road transport trips increases by 15%. What is thethe income
elasticity of demand for private car road transport trips? (Interpreted your result)

Exercise 16
Given the demand function
Q=10−3 P A +PB +0 . 2Y , where P A is the price of mode A, PB is the price of modes B and Y
is the income level of the consumer, at P A = 2, PB = 6 and Y = 600 find the and interpret the
elasticity (Price elastic, Price inelastic, Inferior mode, Normal mode, Complements,
Substitutes)
(a) price elasticity of demand
(b) cross-price elasticity of demand
(c) income elasticity of demand

Is the alternative mode substitutable or complementary?

Exercise 17

Use an imaginary example to explain how econometricians proceed in their analysis of an

economic problem