DEPARTMENT OF POSTIGRADUATE STUDIES

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MASTERS OF SCIENCE IN PROJECT PLANNING AND MANAGEMENT

BAG 09203: PRINCIPLES OF ECONOMICS

PROGRESS TEST

DATE: June 24th, 2023 Submission: Sunday, 25th June, 2023 11:59pm

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GENERAL INSTRUCTIONS:

1. This examination consists of THREE printed pages with TWO questions.

2. Answer ALL questions.

QUESTION ONE (40 Marks)

XYZ, the online bookseller, wants to increase its total revenue. One strategy is to offer a
10% discount on every book it sells. XYZ knows that its customers can be divided into
two distinct groups according to their likely responses to the discount. The
accompanying table shows how the two groups respond to the discount.

Group Group
A (sales per B (sales
week) per week)
Volume of sales before 1.55 million 1.50 million
the 10% discount
Volume of sales after 1.65 million 1.70 million
the 10% discount

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a) Using the midpoint method, calculate the price elasticities of demand for group A
and group B. (10 Marks)
b) Explain how the discount will affect total revenue from each group. (10 Marks)
c) Suppose XYZ knows which group each customer belongs to when he logs on and can
choose whether or not to offer the 10% discount. If XYZ wants to increase its total
revenue, should discounts be offered to group A or to group B, to neither group, or to
both groups? (10 Marks)
d) You are a marketing manager with the Tanzania Breweries Ltd which has
four brands of beer. The elasticity of demand for the brands has been
estimated to be 1.25. Sales revenue has recently observed to slack. What
selling strategy (i.e Discount, Promotion, or others) would you advocate to sales
revenue increase? (10 Marks)

QUESTION TWO (30 Marks)

a) Distinguish between different classification of market structures and their
prevalence in Tanzania. (20 Marks)

b) In 2019, the sales and advertising expenditure of seven companies were given as
follows ;
Firm Advertising Sales ($
($ Billions) Billions)
Fiat 5.7 0.27
Honda 6.7 0.12
BP 0.2 0.01
Toyota 0.6 0.04
Apple 3.8 0.05
IBM 12.5 0.46
Phillips 0.5 0.02
The model can be estimated by the following regression equation;

Yi = α + βX i + εi ……………………………………………………………………Eqn.1
Where;

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 Y = Companies Sales
X = Advertising Expenditure
εi = Error term
α and β are parameters to be estimated in the model

Use the above information to answer the following questions;

(a) What does the error term in the model 1 above mean? (05 Marks)
(b) Calculate the sample regression line, where Sales is the dependent variable (Y)
and Advertising is the independent variable (X) (02 Marks)
(c) Interpret the Slope coefficient (01 Marks)
(d) Estimate the 2008 average profit of a firm with 2008 sales of $2 billion (02
Marks)

NB:

You can use; ^ Ȳ − β^ X̄

α=
and
n n

^
∑ i=1 ( Y i−Ȳ )( X i − X̄ ) ∑i=1 ( Y i X i ) −n Ȳ X̄
β= n
= n
∑ i=1 ( X i− X̄ )2 ∑i =1 ( X i 2 )−n X̄ 2

Or any other formula of your interest.

Question Three (30 Marks)

The following functions describe the demand and supply conditions in the
forest product industry.
Q=80,000−20,000 P
Q=−20,000+20,000 P
Where Q is the quantity measured in thousands of boards, and P is the
price. From the information provided;
a. Using clear explanations, determine which is the demand and
supply function (3 mark)

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b. Observing the demand function identified in (a) explain what is the
autonomous demand (i.e demand when prices equal zero) (2 mark)
c. Using clear guide, find the equilibrium price and quantity (5
marks)
d. Using the demand function attained in (a) find the elasticity of
demand if price changes from 3/= to 2.5/= (10 marks)
e. What is the nature of elasticity of demand attained in (d) (2 mark)
f. Suppose the market price equals 3, what is expected in terms of
quantity in the market. (3 mark)
g. Suppose the supply function identified in (a) doubles, what effect
will be witnessed on price and quantity (5 marks)

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