Test Paper ECO556 2

Assignment 2 : ECO 556

Notes  i. Due on 13th May 2012 (in class)
            ii. Handwritten or typed, your choice.
            iii. Total Marks = 15
Answer Only One Question (Question 1or Question 2):

1.       Suppose there are three buyers in the market with the following demand curve functions:

                        P1= 20 - 0.1Q1
                        P2= 20 - 0.2Q2
                        P3= 35 - 0.2Q3

          The market supply is given as:   Qs = 100 + 5P

a)    Determine the market demand function.
                                                                                                                                       (4 marks)
b)    Determine the market equilibrium price and quantity.
                                                                                                                                       (4 marks)
c)    Suppose that the price is fixed at RM18 per unit. What will happen in the market?
                                                                                                                                       (4 marks)
d)    Let demand rise to Q = 700 - 15P. What are the new equilibrium price and quantity?
                                                                                                                                      (3 marks)


2.       The Koperasi Buku is a publisher of adventure story books. The corporation hires an economist to determine the demand for its product. After a month of hard work, the analyst tells the company that the demand for the firm’s adventure story books (Qx) is given by the following equation:

            Qx = 12,000 - 5000Px + 5Y + 500Pc

          Where Px is the price charged for the Koperasi Buku story books, Y is income per capita, and Pc is the price of books from competing publishers. Assume that the initial values for Px, Y and PC are $5.00, $10,000 and $6.00 respectively. Using this information, the company managers want to:

a)     Derive an expression for the firm’s demand curve for the adventure story books.                                                                                                                          (3 marks)
b)     Calculate the adventure story books current sales (Qx).                                                                                                                                                                 (2 marks)
c)     Determine what effect a price increase would have on total revenues.                                                                                                                                           (2 marks)
d)     Calculate the income elasticity of demand and interpret.                                                                                                                                                                 (4 marks)
e)     Calculate the cross elasticity of demand and interpret.                                                                                                                                                                    (4 marks)

Asg2 Eco555 epjj May 2012/za

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