UNIVERSITY OF CAPE COAST

COLLEGE OF HUMANITIES AND LEGAL STUDIES

FACULTY OF SOCIAL SCIENCES
SCHOOL OF ECONOMICS
DEPARTMENT OF ECONOMIC STUDIES
ECO 103: PRINCIPLES OF MICROECONOMICS
GROUPS 4, 17, 22 & 24
TUTORIAL SET IV

Question One
Suppose the demand and supply curves for goose-down winter jackets in 2014 were as given
below: Demand: P = 2000 - 50Q Supply: P = 500 + 50Q
a. Find the market clearing price and quantity.
b. Calculate the consumer surplus and producer surplus. What is the total surplus? Provide a
graph of this market and show these areas on the graph.
c. Compute the price elasticity of demand and supply at the equilibrium price. Use the point
elasticity formula for the computation. At the equilibrium point, is demand elastic, unit
elastic, or inelastic? Explain your answer.
d. Obtain an expression for the total revenue function. Hence or otherwise find the total
revenue at the market equilibrium.
e. With your knowledge on elasticity, how will the total revenue for this firm be affected if
it increases the selling price?
f. Obtain an expression for the marginal revenue function. Hence or otherwise find the
marginal revenue at the market equilibrium.
g. Derive the relationship between marginal revenue and price elasticity of demand.

Question Two
Suppose that the demand equation for good X is
𝑸𝒙 = 𝟏𝟎𝟎 − 𝟏𝟎𝑷𝒙 − 𝟐𝑷𝒚 + 𝟎. 𝟏𝑰 + 𝟎. 𝟐𝑨
where Qx represents sales of good X in units of output, Px is the price of good X, Py is the
price of related good Y, I is per-capita income, and A is the level of advertising expenditures.
Suppose that Px = $2, Py = $3, I = 10, and A = 20.
a. Find the quantity demanded of good X.
b. Calculate the price elasticity of demand. What does your result mean? What effect will an
increase in the price of good X have on the firm’s total revenues?
c. Calculate the income elasticity of demand. What type of good is good X?
d. Calculate the cross-price elasticity of demand. What is the relationship between good X
and Y?
e. Calculate the advertising elasticity of demand. What does your result mean?

1
Question Three
Use the information in the table below to answer the questions that follow;
Point Price Of Good Quantity Quantity Income of the Price Of a
X (£) Demanded of X Supplied of X Consumer (£) Related
good Y (£)
A 10 1000 100 3500 15
B 20 800 500 2000 12
C 30 600 900 1500 9

a. Calculate the point-price elasticity of demand and supply at points B and C

b. Calculate the arc-price elasticity of demand and supply from point A to B
c. Calculate the income elasticity of demand at point B. What type of good is good X?
d. Calculate the cross-price elasticity of demand at point C. What is the relationship
between good X and Y?

Question Four
Consider the demand equation Q = 80 - 10P. Calculate the point-price elasticity of demand
(ep) and total revenue (TR) for P = 0 to P = 8. At what point is TR maximized?

Question Five

a. Why does a decrease in a good’s price increase the consumer surplus from consumption
of that good?
b. Why does total revenue vary inversely with price if demand is relatively price elastic?
c. Why does total revenue vary directly with price, if demand is relatively price inelastic?
d. Why is a linear demand curve more price elastic at higher price ranges and more price
inelastic at lower price ranges?
e. If demand for some good was perfectly price inelastic, how would total revenue from its
sales change as its price changed?
f. If the cross elasticity of demand between potato chips and popcorn was positive and
large, would popcorn makers benefit from a tax imposed on potato chips?
g. As people’s incomes rise, why will they spend an increasing portion of their incomes on
goods with income elasticities greater than 1 (DVDs) and a decreasing portion of their
incomes on goods with income elasticities less than 1 (food)?
h. Why does total revenue vary directly with price, if demand is relatively price inelastic?