Assessment 3:

1. Complete the chart below.

Demand Function for Good X: Qd = 200 – 5P

Price Quantity Demanded
10 (1) 150
(2) 14 130
22 (3) 90
32 (4) 40
(5) 36 20
6. Compute the Price Elasticity of Demand for Good X: Ed =0.42
7. Interpret the computed Price Elasticity of Demand for Good X:
0.42 < 1, Price Elasticity of Demand for Good X is inelastic which means that Good X is a Basic Good.
Demand Function for Good Y: Qd = 450 – 6P
Price Quantity Demanded
10 (8) 390
(9) 14 366
18 (10) 342
(11) 22 318
(12) 38 222
13. Compute the Price Elasticity of Demand for Good Y: Ed =0.18
14. Interpret the computed Price Elasticity of Demand for Good Y:
0.18 < 1, Price Elasticity of Demand for Good Y is inelastic which means that Good Y is a Basic Good.
15. Compute the Cross Elasticity of Demand for Good X to Y using the price of 18 and 22.
E xy=−2.55
16. Which type of good is Good Y to X? Complementary Goods
17. Compute the Income Elasticity of Demand for Good X when the income for the price of 18 is
18000 and for the price of 22 is 26000. E I =−1.27
18. What type of good is Good X? Inferior Good
19. Compute the Income Elasticity of Demand for Good Y when the income for the price of 18 is
18000 and for the price of 22 is 26000. E I =−0.16
20. What type of good is Good Y? Inferior Good

Solution:

1.Qd=200−5 P 2.Qd=200−5 P 3.Qd=200−5 P

Qd=200−5 ( 10 ) 130=200−5 P Qd=200−5 ( 22 )
5 P 200−130
Qd=150 = Qd=90
5 5
P=14

4. Qd=200−5 P 5.Qd=200−5 P
Qd=200−5 ( 32 ) 20=200−5 P
5 P 200−20
Qd=40 =
5 5
P=36

Q2 −Q1

||
6. E d =
Q1+Q2
2
P2 −P 1
P 1+ P 2
2

130−150

Ed =

| |
150+130
2
14−10
10+14
2

Ed = |−0.14
0.33 |

Ed =|−0.42|

Ed =0.42

∴0.42<1, The Price Elasticity of Demand for Good X is Relatively inelastic

8. Qd=450−6 P 9. Qd=450−6 P 10.Qd=450−6 P

Qd=450−6 ( 10 ) 366=450−6 P Qd=450−6 ( 18 )
6 P 450−366
Qd=390 = Qd=342
6 6

P=14
11. Qd=450−6 P 12.Qd=450−6 P
318=450−6 P 222=450−6 P
6 P 450−318 6 P 450−222
= =
6 6 6 6
 P=22 P=38

Q 2−Q 1

13. E d=

||
Q1 +Q2
2
P2−P1
P1 + P2
2

366−390

Ed =

| |
390+366
2
14−10
10+14
2

Ed = |−0.06
0.33 |

Ed =|−0.18|

Ed =0.18

∴0.18< 1,The Price Elasticity of Demand for Good Y is Relatively inelastic

∆ Qx
Qx
15. E xy =
∆ Py
Py

40−90
90
E xy=
22−18
18
−0.56
E xy=
0.22
E xy=−2.55
∴−2.55<0, the increase∈ price of Good Y will decrease the demand for Good X .
Thus , Complementary goods

∆Q y
Qy
17. E i=
∆I
I
40−90
90
E i=
26000−18000
18000
−0.56
Ei=
0.44
Ei=−1.27

∴−1.27< 0,Quantity demand for Good X is inversely proportional ¿income .

Thismeans that increase∈income will decrease the demand for Good X .Thus ,Good X is inferior Good

∆Q y
Q
19. E i= y
∆I
I
318−342
342
E i=
26000−18000
18000
−0.07
Ei=
0.44
 Ei=−0.16

∴−0.16< 0,Quantity demand for Good Y is inversely proportional ¿income .

This means that increase∈income will decrease the demand for Good Y . Thus , Good Y is inferior Good

2. You are given market data that says when the price of pesto bread is P4, the quantity demanded of
pesto bread is 60 pieces and the quantity demanded of cheese bread is 100 pieces. When the price of
pesto bread is P2, the quantity demanded of pesto bread is 80 pieces and the quantity demanded of
cheese bread is 70 pieces. Calculate the price elasticity of demand for pesto bread. If the producer of
pesto bread wants to increase its revenue, is it correct to increase to decrease the price? Why?

Q2−Q1

Ed =

||
Q 1+ Q 2
2
P2−P1
P 1 + P2
2

80−60

Ed =

||
60+80
2
2−4
4+ 2
2

0.29
Ed =|−0.67 |
Ed =|−0.43|

Ed =0.43
 ∴0.43< 1,The Price Elasticity of Demand for Pesto Bread is Relatively inelastic .
Simply , decreasing the price is not correct ¿raise therevenue of pesto bread producers .
Since , a decrease of P 2 ¿ the price of Pestobread leads ¿ a decline of 0.43∈quantity demand .
Decreasing the price would not be beneficial ¿ the pesto bread producers .

3. Gary operates an automobile detailing business in his town in Laguna. An automobile detailer restores
a car to the level of cleanliness and perfection that it had when it was new. His fastidious nature,
attention to detail, and ability to effectively manage employees have helped to make his business
profitable, but he believes that more information about the market would allow him to operate more
efficiently. He uses regression analysis to estimate the demand function for his business and gets the
following result:

Qx=235−3 PX+ 40 A−20U + 8 PW

The number of detailing jobs he gets per month (QX) depends on the price he charges per job (PX), his
monthly advertising expenditures (A) measured in $1,000s, the regional percentage unemployment rate
(U), and the average price charged by local car wash businesses (PW) for a standard wash and wax.

Use the estimated demand function given above to solve Problems 3.1 and 3.2.

3.1. Is a wash and wax at the local car wash a complement or a substitute for automobile
detailing? How can you tell?

Using the Cross-price elasticity, we can tell if wash and wax at the local car wash is a
complement or substitute for detailing. If the cross-price elasticity is negative, this means that
wash and wax at the local car wash is a complement for automobile detailing. While if the cross-
price elasticity is positive, this means that wash and wax at the local car wash is a substitute for
automobile detailing. As stated, an increase in PX will also increase Qx. This means that wash
and wax at a local car wash is a substitute for automobile detailing.
 3.2. Interpret the coefficients of the price he charges per job (PX), his monthly advertising
expenditures (A) measured in P1,000, the regional percentage unemployment rate (U), and the
average price charged by local car wash businesses (PW) for a standard wash and wax.

The price he charges per job (PX) has a thrice negative effect to the number of detailing
jobs he gets per month (QX). This means that Php 1 increase in the price he charges per job
would decrease PX by 3. Thus, PX and QX have a negative relationship. His advertisement
expenditures (A) have a 40 times positive effect to QX. This means that for every $1,000 he pays
for advertisement there would be 40 times increase in QX. Thus, QX and A have a positive
relationship. The regional percentage unemployment rate (U) has a 20 times negative effect to
the number of detailing jobs he gets per month (QX). This means that a unit increase in U will
decrease QX 20 times. Thus, QX and U have a negative relationship. The average price charged
by local car wash businesses (PW) for a standard wash and wax affects the number of detailing
jobs he gets per month (QX) 8 times. This means that an increase in the average price charged
by local car wash businesses would raise QX 8 times. Thus, QX and PW have a positive
relationship.

3.3. Gary is currently charging P650 per detailing job and spending P3,500 per month on
advertising. The regional unemployment rate is 7.5% and the average price of a wash and wax at
a local car wash is P150. How many detailing jobs per month can Gary expect under these
conditions?

Qx=235−3 PX+ 40 A−20U + 8 PW

Qx=235−3 ( 650 ) + 40 (3.5 )−20 ( 0.075 ) +8 (150)
Qx=235−1950+140−1.5+1200
Qx=−376.5
∴Qx=−376.5, this means that Gary would have a negative detailing job per month
at this condition .
4. CASE STUDY:

A. LalaFast 21

LalaFast 21 is a major carrier based in the Philippines and has made a strategy of cutting fares drastically
on certain routes with large effects on traffic in those markets. For example, on the Baguio-Cubao route
the entry of LalaFast into the market caused average fares to fall by 48 per cent and increased market
revenue from P21,327,008 to P47,064,782 annually. On the Tuguegarao-Caloocan route, however, the
average fare cut in the market when LalaFaST entered was 70 per cent and market revenue fell from an
annual P66,201,553 to P33,101,514.

Questions:

1. Calculate the PEDs for the Baguio-Cubao route and Tuguegarao-Caloocan route.

PED for Baguio-Cubao route:

∆ MR
Ed =| |
MR
∆P

47,064,782−21,327,008
Ed =| 21,327,008
−0.48 |
Ed =|−2.51|
 Ed =2.51

∴2.51>1, The Price Elasticity of Demand for Baguio−Cubaoroute is Relatively Elastic .

Thismeans that small change ∈fare leads ¿ highchange ∈demand .
PED for Tuguegarao-Caloocan route:

∆ MR
Ed =| |
MR
∆P

33,101,514−66,201,553
Ed =| 66,201,553
−0.70 |
Ed =|0.71|

Ed =0.71

∴0.71<1, The Price Elasticity of Demand for Tuguegarao−Caloocan route is

Relatively Inelastic .
Thismeans that the change∈fare leads¿ small change∈demand .

2. Explain why the above market elasticities might not apply specifically to Lalafast 21.

The market elasticities might not apply to Lalafast 21 because it is not specified. This means that
the market elasticity includes the whole market which Lalafast 21 is included.

3. If LalaFast 21 does experience a highly elastic demand on the Baguio-Cubao route, what is the profit
implication of this?

The Price Elasticity of Demand of Baguio-Cubao route is shown to have a highly elastic PED. This
means that the change in demand is higher than the change in price; cutting the fare would boost
market revenue since change in demand is higher than the change in fare. Thus, the decrease in fare
would reasonably increase market revenue for Baguio-Cubao route.

4. Explain why the fare reduction on the Tuguegarao-Caloocan route a profitable strategy for LalaFast
may still be.

The Tuguegarao-Caloocan route’s price elasticity of demand was relatively inelastic. The
reduction of fare would still be beneficial since the PED of Tuguegarao-Caloocan route was 0.71 which
means that the quantity demanded decrease was still tolerable and firms can still benefit from the
decrease in fare. Thus, it would not result in a higher percentage decrease in quantity sold which will not
reduce total revenue by a large percentage.
B. Nickey and Aididas

Nickey and Aididas produce trainers in the sports-shoe market. For one of their main products, they have
the following demand curves:

Nickey : Pn = 175 – 1.2Qn

Aididas = Pa = 125 – 0.8Qa

where P is in Pesos and Q is in pairs per week.

Questions:

The firms are currently selling 80 and 75 pairs of their products per week respectively.

1. What are the current price elasticities for the products?

Pn=175−1.2Qn Pn=175−1.2Qn

80=175−1.2 Qn 75=175−1.2Q n

80−175 −1.2Q n 75−175 −1.2Qn

= =
−1.2 −1.2 −1.2 −1.2
79.17=Q n 83.33=Q n

Price Elasticity of Demand for Nickey:

 Q2−Q1

Ed =

||
Q 1+ Q 2
2
P2−P1
P 1+ P2
2

83.33−79.17

Ed =

| |
79.17+83.33
2
75−80
80+75
2

0.05
Ed = |−0.06 |
Ed =|−0.83|

Ed =0.83

∴0.83< 1,The Price Elasticity of Demand for Nickey is Relatively inelastic .

Pa=125−0.8 Qa Pa=125−0.8 Qa

80=125−0.8 Qa 75=125−0.8 Qa

80−125 −0.8 Qa 75−125 −0.8 Qa

= =
−0.8 −0.8 −0.8 −0.8
56.25=Qa 62.5=Q a

Price Elasticity of Demand for Aididas:

 Q2−Q1

Ed =

||
Q 1+ Q 2
2
P2−P1
P 1+ P2
2

62.5−56.25

Ed =

| |
56.25+62.5
2
75−80
80+75

0.11
2

Ed =|−0.06 |
Ed =|−1.83|

Ed =1.83

∴1.83>1, The Price Elasticity of Demand for Aididas is Relatively elastic .

2. Assume that Nickey reduces its price and increases its sales to 90 pairs and that this also causes a fall
in Aididas’s sales to 70 pairs per week. What is the cross-elasticity between the two products?

Let x = Nickey, y = Aididas

∆Q x
Qx
E xy=
∆ Py
Py

90−79.17
79.17
E xy=
90−80
80
0.14
E xy =
0.13
E xy=1.08

∴1.08> 0,the increase∈ price of Aididas will increase the demand for Nickey .
Thus , Aididas∧Nickey are Substitutes .
3. Is the above price reduction by Nickey to be recommended? Explain your answer.

The price reduction by Nickey is not recommended with accordance to its price elasticity of
demand: 0.83 (relatively inelastic). This means that the quantity demanded decrease was not tolerable
and Nickey will not benefit from price reduction.