ASSIGNMENT
ECON 304: MANAGERIAL ECONOMICS
Answer all questions
1. If a good's demand function is Q = 30 - 3P, then calculate the price elasticity of demand when
i.
ii.
iii.
iv.
v.
good price is $3 using the point elasticity formula
good price is $4 using the point elasticity formula
good price decreases from $4 to $3, using the arc elasticity formula
good price is $5, using the point elasticity formula
good price increases from $4 to $5, using the arc elasticity formula
(2 marks)
(2 marks)
(2 marks)
(2 marks)
(2 marks)
2. Annual demand and supply for the Electronics Company is given by:
QD = 5,000 + 0.5 I + 0.2 A - 100P, and QS = -5000 + 100P
where Q is the quantity per year, P is price, I is income per household, and A is advertising
expenditure.
i. If A = $10,000 and I = $25,000, what is the demand curve?
(2 mark)
ii. Given the demand curve in part i., what is equilibrium price and quantity? (6 marks)
iii. If consumer incomes increase to $30,000, what will be the impact on equilibrium price
and quantity?
(2 marks)
3. Based on the relationship between supply, demand elasticity and total revenue, why does
governments impose excise taxes on goods that have inelastic demand, such as cigarettes?
(5 marks)
4. Water is an essential good for life. In contrast, diamonds are luxurious and non-essential for
life. Using the concepts of (i) availability of resources and (ii) the elasticity of demand, explain
why the price of water is low and the price of diamonds is high.
(5 marks)
Best wishes!!!
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