Tutorial Set one -13/02/17

Problem one
The weekly demand for Kelewele among the 2017 cohort of Weekend MBA
students at the UGBS is

Where is the quantity demanded of Kelewele

is the price of Kelewele per lb
I is consumer income in Ghana Cedis
and are the prices of two goods that are related to Kelewele.

a) Based on the demand function above, is Kelewele a normal good or an inferior

good? Explain your answer.

b) Based on the demand function above, what is the relationship between Kelewele
and good Y?

c) Based on the demand function above, what is the relationship between Kelewele
and good Z?

d) What is the equation of the demand curve if consumer incomes are GHS 30, the
price of good Y is GHS 10 and the price of good Z is GHS 20?

e) Graph the demand function for Kelewele from d) 2pts

Now suppose the weekly supply function of Kelewele at the UGBS graduate
campus is

Where the quantity is supplied of Kelewele and is the price of inputs used in
preparing Kelewele

f) What is the supply function if input prices are GHS 10?

g) ​Graph the supply curve from f).

h) Compute the equilibrium price and quantity of kelewele. 3pts

Suppose authorities at UGBS are concerned that Kelewele sellers at UGBS are
exploiting students by charging exorbitant price for their Kelelwele so they decree
that no one should seller Kelewele above GHS 20 per lb.

i) What type of price control measure is this? 2pts

j) Following this decree, will there be excess demand or excess supply of Kelewele
at UGBS? Calculate the excess demand or excess supply?

Problem Two
MK Corp estimates that its demand function is as follows:
Q = 400 – 12.5P + 25A + 14Y + 10P
Where Q is the quantity demanded per month, P is the product’s price (in $), A is the firm’s
advertising expenditure (in $’000 per month), Y is per capita disposable income (in $’000 per
month), and P* is the price of AJ Corp.
a. During the next five years, per capita disposable income is expected to increase by $
5,000 and AJ is expected to increase its price by $ 12. What effect will this have on the
firm’s sales volume?
b. If MK wants to change its price by enough to offset the above effects, by how much must
it do so?
c. Compare the profitability of maintaining sales volume by either changing price or
changing advertising spending.
d. If MK’s current price is $60 and it spends $10,000 per month on advertising, while per
capita income is $25,000 and AJ’s price is $70, calculate the price elasticity of demand
with the price change.
e. What can be said about the effect of the above price change on profit?
f. What can be said about the relationship between the products of MK and AJ.