1.

Let the demand function be

Q :::: 2,900 - 70P. Let P be Rs. 30. Thus,
Q = 2,900 - 70(30) :::: 800
Taking the deriv:Hivc o f Q wjth respect to P,

dQ = - 70
dP .
,- dQ p
Ihus, E p = dP . Q

=-7o(fio) =-2.62
2. Let P = 4 - 0.2 Q be the demand function.

Thus, g~. (i.e., slope of the demand function)

is -0.2. If P = 2 then
2 = 4 - 0.2 (10)
p 1
Thus, EP = dP/dQ'Q

= - 0~2 (it) = - l
3. Suppose P = 940 - 48Q + Q 2
If Q . 10 then P = 560

dP = -48+2Q
dQ
. dQ _ 1
.. dP - 48+2Q
AtQ = 10,

_dQ__ 1 =--1
dP 48 + 2(10) 28

. 1 560
.. Er =-2s·10=-2

4. LetQ = 100-25P. What is the price elasticity

of demand at P = 3?
At P = 3, Q = 100 - 25(3) = 25
dQ == -25
... dP :. Er== -25 ( is ) == -3
5, Suppm;c P ~ SO - 2Q
. We want to calculate
E , when P ::: 30 .
\ . .
Difftccnlia . .
unr; Q with respect to p w e get
o
d .s.. . Since we
__ have d-cman d funccion for p in
d\1
term of Q, we nee d transpose
to
p ::: 50 - 2Q for Q. Addi ZQ to bo th s1'des
ng
of the equation,
p + 2Q ::: SO . N ow su
btract P :
2Q == 50 - P
. Q = 50 - p == 25 -
.. 2 21 p

' ~dO 1
. · dP = - -
2
Since P = 30 , Q == 2 5 -* ( 30 ) = lO
. E _ dQ P _ _
. · " - dP . Q - 1 30 _ _ _1
2 . 10 2
Thus, deman d is clea
stic at. P = 30 .
6. Let the de m an d
fuo cl io n be
Q = 500 - 2P + 0.02 M
where P (price) = 25 an
d M (m co m c) = 5000
Since dcm :rn d is a m
ul&.·u-ititc fu nc tio n,
now consider p:ut.ial we
elasticities.. -n,e calC\
for price elasticity of 11.at io n
deman d i5 gi\'" t::n:
_aQ
Ep - ar ·qr
H e re ~ = -2

Q = 500 -2(25) + 0.
02 (5,000)
= 500 - so+ 100 = 55
0
. oQp
Thus, E r = BP . Q

= -2( 5~ 0 ) = -0 .09
T he calculat io n for
in co m e el as tic ity is
E " = ~ . ~ w he re
~ =0.02
E ,. = o. oi ( \ ~ ) = 0.
181
 ~ r~c o NOMI CS 1- -MIC AOECONOMICS
IJUSINI~S~ • - - - • ~-- ~

(b) 1.nk11 l111c 1\ic valu e of Q if p :;;; I{ ,

y . H11. 20,000 a1Jd A ::: Hs. 6 00f ~. )Ii
. , )
(c) ( ~1dculntr: price and in cornc ela •·
%u,
of dc1lla11d ( t)I' rcn ()f1 th e ln 111'0 f 1t1
, ,, ' > d·
givrn i,, (b) . ~ 1~
(a) The 11111111,cr 1Jf pcn Hpurr.h ~n<.: cl dtrli n .
. .r . . .
,IO 1111JtH t 11 H prtcc mcrca s<:H by l{t t ., f,'
( . 1. I},,
11umb(!t' o pcn 11 purchasc<l 1ncrc.:a ,. 1 .
, • 11 fl ri;ri
u111ts ancJ 0.8 umts for every in crc,, ~,, 1
J 1.._'\ • incom e by Re 1 and advertising c.~
. 1.pe.... 1 Ir,
_:_:::,. ·-- 'I , ,u11u 7,
~ff' - ~ (b) By substituting the value of Qin the.: d ·
. · <:rnar.;
.-\ t p ::: .\. Q = 75 - 5(3) = 60. funcuon, we get ·
Thus., rln~cicity of demand Q = 100 - 40( 50) + 0.1( 20,000) + 0.8( 6,(Y,JJ

-s(l60 )=-0.25
J
= 4,900
E = dQ R. =
r dP . Q
_dQ p
:\.t p = 5, Q = 75 - 5(5) = 50 (c) Er -dP . Q

··· Er = -s(i..50)= - 0. 5 !~ = -40, P = 50 and Q =4,900

~fr Adnn i's demand fun~tion for food is
8Q +2P =56 E" =-40.( 4.~~0) =-0.408
.·. Q - 7 - o__rp
)
_dQ M
E~ 1 - dM'Q
dQ
dP -_-0?,__..J

Ar P = 3, Q = 7-0.25(3) = 6.25
:. ~ =0.1, M =20,000, Q = 4,900

:, E =dQ .f._-o
r dP ·Q - .12 :. E" =0.1.( ~•iii)= 0.408
At P=5, Q=7- 0.25( 5)=5 .75 Thus, both Epand EM have the same values
and are relatively inelastic.
:. Er = -0.2s( S.~S) = -0.22

2. Let the deman d function for a ball paint
pen he
Q = 100 - 40 P + 0.1 Y + 0.8A
where Pis the price of pen, Y is the income
and A stands for adver tisem ent expen diture .
(a) We want to know the direc tion of
change in the quanti.ty of pen purchased
as a result of an increase of Re 1 in each
of the explanatory variables.
■ 3.4. INCOME ELASTICITY OF
DEMAND
The concept of elasticity of deman d can ~e
broad ened t:o measu re the respon se of quana~·
demanded to any of the factors aflectmc ·
g die
market demand for a commodity. Besides th e
. un d. er cons·1·deracion,
price of the comm o dtty .
also we have to know how do change~ .111
. the price
. o f otl1er com modiues
income and m
affect elasticity of demand.
 MATHEMATICAL EXAMPLES

1. A m a rk e ti n g manager o f a ta
lcum powder
h a s th e fa ll o w in g price-sales o
bservations
fo r p o w d e r so ld in 10 d e p a rt m
e n ta l stores
in a city.
,,..,
ELASTICITY OF DEMAND AND DEMAND ESTIMATION 77
~
price (Rs.) Sales ('000)
b= -4409
3148 = .:...o 114
.
~ 43 5
41 6 ; =Y-bX
39 8 = 12.2+0.714(3 2.9) = 12.2+ 23.5 = 35.7
36 10 Thus the estimated regression equation of
34 12 the coefficients of the function Y = a + bX is
32 13 A A

y =a+bX
A-

30 14
= 35.7 - 0.714X
27 16
(b) Thus, Y = 35.7 -0.714X is the line of
25 18
best fit to the data. The intercept is 35.7 and the
22 20
slope is -0 .714. This equation shows the
(a) Derive a simple linear regression equation dependence between quantities sold ~ ~nd
of demand, using the least squares formula. price (X) per unit Since the slope is negat:1ve,
(b) What is the sta~stical significance of such the demand function is negative.
demand equat:lon? (c) Converting the regression equation into .
(c) Find out the value of price and volume demand function,
of sales from the regression equation.
Y =a+ bX
(d) If the price of powder is reduced to
Rs. 10, what will be the predicted demand P =a+ bQ
for this powder? NO\v, P =35.7 - 0.714(32.9)
(a) = 35.7 - 23.5 = 12.2
Price Sales Thus, price per unit of talcum poweders is
Rs. ('000) Rs. 12.2

(X) (Y) x.2 y2 X.Y Q = a-bP

• I I I

= 35.7 + 0.714(12.2)
43 5 1,849 25 215
41 6 1,681 36 246 = 35.7 + 8.7
39 8 1,521 64 312 = 44.4 units
36 10 1,296 100 360
1·
144 408 (d) If price is reduced to Rs. 10 per unit then
34 12 1,156
32 169 416 Q would be 42.8 units.
13 1,024
30 14 900 196 420 2. After market experiment, a calculator manu-
27 729 256 432
16 facturing c;ompany obtained the following
25 625 324 450 results:
18
22 484 400 440
20 Price (Rs.) Sales ('000)
l329 Il,714 13,699
I122 Ill,265 12 80
- 329 - 12? 12? 9 100
X=-=3?9 Y=___:::.= ·-
10 -· ' 10 11 75
" nIX -Y-(1:X;)(l:2Y;) 13 60
b == I I
8
nIX / -(1:X;) 115
17 so
== 10(3,699)-(3 29)(1~2 ) 7 140
10(11, 265) - ( 329t 14 65

I
 I "'-

MICROECONOMICS
BUSINESS ECONOMICS I ,
78
. ar regression of 2 A nIXiYi -(IXJ(IYi)
(a) Calculate a simple line R ;:::: b nIY/-(IYJ 2
demand. . nd quantity
f price a . 8(7,125)-(91)(685) -
(b) Find the va 1ues O ion equation. 6
df the regress =-~- 8(65,175)-(685)2
demande . r~m e of the regression
(c) Test ~he s1gruficanc
equat.1on . - - 8 6 -5,335 = 0.88
- · 52 175
(a) '
Price Quantity This means that 88% of the variation
x.2 yz X.Y
(X) (Y) I I I J quantity sold is ~ttributed to variations in t
144 6,400 960 price of calculator machine. The remaining 1
12 80 2
100 81 10,000 900 may be due to other influences affecting quanb
9
75 121 5,625 825 demanded.
11
13 60 169 3,600 780
3. The Electrical Machinery Corporatio
8 115 64 13,225 920
using regression analysis, estimates the firrr
17 50 289 2,500 850
demand function. The result being
7 14D 49 19,600 980
Q d= 10,000- 200P + 0.03M +·0.60N + 0.2
14 65 196 4,225 910
(a) If P = 300, M = 1,000,000, N = 30,00(
I91 I685 It,113 I6,5175 I7,125
and Z = 1,5,000, what is EMC's demanc
x=.21=11.375 - Y = 685 =85.625 (b) If P = 305, 200, and 1SO, estimate th
8 ' 8
quantity demanded for the EMC'
b- nIXiYi -(IXi)(IYJ product.
- nIX/-IXi 2
(c) Calculate the price that will sell produc
= 8(7,125)-(91)(685) =-8.6 to the extent of 45,000.
8(1,113)-(91)2 (a) Qd= 10,000 + 0.03(1,000,000) +
a=Y-Gx 0.60(30,000) + 0.2(15,000)-
200P
= 85.625-(-8.6)11.375 = 183.34
= 61,000 - 200(300)
Regression equation is, thus,
= 1,000 units
Y = 183.34 - 8.6X
(b) If P = 305, then Qd = 0 units
(b) Assuming a linear demand equation
If P = 200, then Qd = 21,000 units
P = a + bQ, Q = 183.34 - 8.6P
If P = 150, then Qd = 31,000 units.
(c) Our task is now to find out how close
(c) Since Qd = 61,000 - 200P
the estimated regression line fits the data. For
this, we need to compute coefficient of _ 61,000-Qd
th en p - 200 .
determination or R2. It (R 2) measures the
proportion of variation of change in the Since the firm wants to sell 45 ,000 units, 1t
?ependent variable following changes in should charge price equal to
independent variable. R2 is calculated using the
following formula: p = 61,000-45,000 = Rs. 80
200