WORK ON THESE QUESTIONS INDIVIDUALLY AND SUBMIT ON
THURSDAY 8TH APRIL IN CLASS (NB: no two individuals should submit
“same” answers as it will attract serious sanctions).
QUESTION ONE
The only source of income available to Doreen, a level 200 student of VVU is
her monthly stipend (M) from her parents. She neither saves nor borrows.
Assuming she spends all her income on only two goods food (F) and Clothes
(C), with PF and PC being the prices of the two goods respectively and having
a utility function of the form:
i. Write an expression for Doreen’s budget constraint.
ii. Assuming good F is on the vertical axis, produce a sketch of her budget
constraint and determine the slope.
iii. Find Doreen’s monthly equilibrium demand functions for both goods.
iv. With PF and PC given as ¢12 and ¢15 respectively and income of ¢300,
calculate the equilibrium quantities of both goods.
v. Compute the price elasticity of demand for both goods and interpret
your results.
vi. If income and prices of the two goods increase by 50%, calculate the
equilibrium quantities of Food and Clothing.
QUESTION TWO
A. Empirical estimates suggest the following price elasticity of demand: 0.6
for Coca Cola; 4.0 for foreign vacation travel; and 0.2 for food. Using the
determinants of price elasticity of demand, explain why each of these
commodities would have these coefficients elasticity.
B.
LisaGee Ghana Ltd., is the main sales agent of Infinix phones in Ghana.
The economist of this enterprise has estimated the demand function for
the firm's products per week to be of the form:
QI = 445 – 2.5PI – 8I + 2.5PT
where; QI is the quantity demanded of Infinix phones, PI is its own-price,
PT is the price of a related good (Tecno Phones) and I is income.
Given that PI = 10, PT = 5 and I = 40, use the above information to:
i. Determine the quantity demanded of Infinix phones per week and
compute the own-price elasticity of demand for Infinix phones and
interpret your results.
ii. Based on your answer in (i), what pricing policy would you
recommend for the firm in order to maximize its total revenue?
iii. Calculate the cross-price elasticity of demand between Infinix and
Tecno phones, interpret your results and determine the kind of
relationship that exists between the two.
iv. Compute the income elasticity of demand and determine if Infinix
phones are normal goods or not. Explain your results.
QUESTION THREE
The management of Valley View University is contemplating increasing
tuition fees for the 2020/2021 academic year. As the Chief Economist of the
University you are presented with the following to advice management. In
the first semester of the 2019/2020 academic year, fees were pegged at
¢2500 and enrolment was 3150. In the second semester the fees went up to
¢2700 and the enrolment dropped to 2950. You further observed that in the
2019/2020 academic year, Central University increased their fees from
¢2600 to ¢2900 and the enrolment at VVU went up from 2150 to 3005.
i. Calculate the arc price elasticity of demand, interpret your results and
advice management of VVU on pricing. [3 Marks]
ii. What explains this elasticity coefficient obtained in (i)? [2 Marks]
iii. Calculate the arc cross-price elasticity of demand, interpret your
results and determine the relationship between Central University and
Valley View University. [3 Marks]