ACTIVITY3(KEYANSWERS)

ManagerialEconomics (PrelimPeriod)

ELASTICITYTHEORY.

1. Mangoes sell at P100 per kilo. An increase in the price by 10% causes the demand to
decrease from 10 to 8 kilos. Compute and identify the type of price demand elasticity. (20
pts.)

Answer: Priceincreases by 10% or 0.10

QD1 =10
QD2 =8

Pde = 8 – 10 / 10 = -0.20 / 0.10 = /-2/ = 2ElasticDemand

0.10

2. Mr. X’ s incomehas increased fromP 20,000 toP 30,000 per month. Because of this,his
consumption of fruits has increased by 20%. Compute the incomeelasticity and determine
thetype of good. (20pts.)

Answer: I1 = 20,000
I2 = 30,000
QDincreases by 20% or0.20

Ie = 0.20_____________ = 0.20 /0.50 = 0.40 NormalorSuperiorgood

30,000 – 20,000 /20,000

3. Adecrease in thepriceof good X from P150 to P135 increases Mr. A’ s demand for good
Y by 400 units to2000 units. Computethe cross-price elasticity and determine the typeof
good. (20pts.)

Answer:Px1 = 150
Px2 = 135

QDy1 = 1,600
QDy2 = 2,000 (Note: the demand increases by(ng) 400 to(naging) 2,000.

Cpe= 2,000 – 1,600 /1,600 = 0.25 /-0.10 = -2.5 Complimentarygood

135 – 150 / 150

4. Asoap manufacturing companyhas monthly sales of 1.2 million units. Theprice perbox
of 10 pieces isP200. ThePresidentof the company plans to increasethepriceperbox by ten
percent. Itis estimated that thedemand for itwill drop by 20,000 boxes. Compute the price
demand elasticity and identify its type. Whatwould you suggest to the President? Why? (40pts.
)

Answer:
 Price/unit Quantitydemand Totalrevenue

P 20 1.2 Mor1,200,000 P 24 Mor24,000,000

P 22 1.0 Mor1,000,000 P 22 Mor22,000,000

OR

Price/box Quantitydemand Totalrevenue

P 200 120,000 P24,000,000

P 220 100,000 P22,000,000

Pde = 1,000,000 – 1,200,000 /1,200,000 = -0.20 / 0.17 = /-1.18/ = 1.18 Elasticdemand

(20pts.)
22 – 20 / 20

OR

Pde = 100,000 – 120,000 / 120,000 = -0.20 / 0.17 = /-1.18/= 1.18 Elasticdemand

220 – 200 / 200

Therefore: Theplan is not good because totalrevenue decreases by P 2,000,000. (20pts.)