ME Tutorial 6
Q1. The demand equation for a popular brand of fruit
drink is given by the equation
Qx = 10 5Px + 0.001I + 10Py
where Qx = monthly consumption per family in gallons
Px = price per gallon of the fruit drink = $2.00
I = median annual family income = $20,000
Py = price per gallon of a competing brand = $2.50
i. Interpret the parameter estimates.
ii. At the stated values of explanatory variables, compute
the monthly consumption (in gallons) of fruit drink.
iii. Suppose median annual family income increased to
$30,000. What will be answer to part (ii) now?
Q2. Demand function for a variety of Bakeman biscuits is:
Q = 2.02P + 0.03A - 0.04Ac + 0.06Pc + 0.001I
where Q and P are quantity and price of the Bakeman
biscuits respectively; A and Ac are companys own and
competitors advertisement expenditures, Pc is price
of competitors and I is the average personal
disposable income. Given A = 50, Ac = 100, Pc = 5 and I
= 20,000
i. Write down the demand & inverse demand equation.
ii. Draw the demand curve and find Q for P = 10.
Q3. Consider the following data showing Bobs total utility
from the consumption of two goods: Winston Cup
Races and Broadway musicals. Assume the price of
races is $50.00, the price of Broadway musicals is
$100.00, and Bob has $300 to spend.
a. Assuming that he wishes to maximize his utility, what
combination of Winston Cup Races and Broadway
musicals will Bob purchase? Justify your answer.
b. If the price of musicals doubles, what will happen to
Bobs consumption of the two goods? Explain.
Q4. Consider the following data describing how total
benefits change with your consumption of SCUBA
diving trips in Key Largo per year. Assume the price of
each trip is $300.00 and this price accurately
represents the marginal cost to you
How many trips will you take per year? Explain.
Q5. What effect will each of the following have on the
demand for small automobiles such as Maruti Alto etc.?
a. Small automobiles become more fashionable.
b. The price of large automobiles rises (with the price of
small autos remaining the same).
c. Income declines and small autos are an inferior good.
d. Consumers anticipate the price of small autos will
greatly come down in the near future.
ME Tutorial 6
Q1. The demand equation for a popular brand of fruit
drink is given by the equation
Qx = 10 5Px + 0.001I + 10Py
where Qx = monthly consumption per family in gallons
Px = price per gallon of the fruit drink = $2.00
I = median annual family income = $20,000
Py = price per gallon of a competing brand = $2.50
i. Interpret the parameter estimates.
ii. At the stated values of explanatory variables, compute
the monthly consumption (in gallons) of fruit drink.
iii. Suppose median annual family income increased to
$30,000. What will be answer to part (ii) now?
Q2. Demand function for a variety of Bakeman biscuits is:
Q = 2.02P + 0.03A - 0.04Ac + 0.06Pc + 0.001I
where Q and P are quantity and price of the Bakeman
biscuits respectively; A and Ac are companys own and
competitors advertisement expenditures, Pc is price
of competitors and I is the average personal
disposable income. Given A = 50, Ac = 100, Pc = 5 and I
= 20,000
i. Write down the demand & inverse demand equation.
ii. Draw the demand curve and find Q for P = 10.
Q3. Consider the following data showing Bobs total utility
from the consumption of two goods: Winston Cup
Races and Broadway musicals. Assume the price of
races is $50.00, the price of Broadway musicals is
$100.00, and Bob has $300 to spend.
a. Assuming that he wishes to maximize his utility, what
combination of Winston Cup Races and Broadway
musicals will Bob purchase? Justify your answer.
b. If the price of musicals doubles, what will happen to
Bobs consumption of the two goods? Explain.
Q4. Consider the following data describing how total
benefits change with your consumption of SCUBA
diving trips in Key Largo per year. Assume the price of
each trip is $300.00 and this price accurately
represents the marginal cost to you
How many trips will you take per year? Explain.
Q5. What effect will each of the following have on the
demand for small automobiles such as Maruti Alto etc.?
a. Small automobiles become more fashionable.
b. The price of large automobiles rises (with the price of
small autos remaining the same).
c. Income declines and small autos are an inferior good.
d. Consumers anticipate the price of small autos will
greatly come down in the near future.
Solutions:

Q1.
i) Discuss the relationship of Px, I, Py with Qx in terms of positive and negative relationships.
ii) 45
iii) 55

Q2.
A) Q = 2.02P + 17.8, P = Q/2.02 8.8
B) Plot some points (Easy) with Price (P) as Y-axis and Quantity (Q) as X-axis

Q3.
(a)

(b)

Q4.

Q5.
Demand increases in (a), (b), and (c); decreases in (d).