Problem Sets in SS12

Problem Sets in SS12 Prepared by Prof. GAB Orcena

Problem Set 1: Law of Supply and Demand 1. What are the determinants of demand/supply?     

The following determinants cause shifts in the entire demand curve: change in consumer tastes change in the number of buyers change in consumer incomes change in the prices of complementary and substitute goods change in consumer expectations

       

The following determinants cause shifts in the entire supply curve: change in input prices change in technology change in taxes and subsidies change in the prices of other goods change in producer expectations change in the number of suppliers Any factor that increases the cost of production decreases supply. Any factor that decreases the cost of production increases supply.

2. What does a change in demand/supply suggest? Change in Demand A. Change in Demand 1. A change in demand will cause equilibrium price and output to change in the same direction. a. A decrease in demand will cause a reduction in the equilibrium price and quantity of a good. 1. The decrease in demand causes excess supply to develop at the initial price.  Excess supply will cause price to fall, and as price falls producers are willing to supply less of the good, thereby decreasing output. b. An increase in demand will cause an increase in the equilibrium price and quantity of a good. 1. The increase in demand causes excess demand to develop at the initial price.

Change in Supply 1. A change in supply will cause equilibrium price and output to change in opposite directions. a. An increase in supply will cause a reduction in the equilibrium price and incase in the equilibrium quantity of a good. 1. The increase in supply creates an excess supply at the initial price. 

Excess supply causes the price to fall and quantity demanded to increase. b. A decrease in supply will cause an increase in the equilibrium price and a decrease in the equilibrium quantity of a good. 1. The decrease in supply creates an excess demand at the initial price. 

Excess demand causes the price to rise and quantity demanded to



3.

Excess demand will cause the price to rise, and as price rises producers are willing to sell more, thereby increasing output.

decrease.

Show graphically how surplus/shortage is created? Shortage

Surplus

If price is originally P1 in the graph below, only Q1 will be sold even though buyers would like to buy Q2. The difference Q2 -Q1represents a shortage.

If price is originally at P1 in the picture below, only Q1 will be sold because this is all that buyers will purchase, even though sellers are willing to sell more, Q2. The difference Q2 Q1 is called a surplus.

4. State the law of demand/law of supply. Law of Demand

Law of Supply

The law of demand states that," all else being equal, as the price of a product increases (↑), quantity demanded falls (↓); likewise, as the price of a product decreases (↓), quantity demanded increases (↑)". In simple terms, the law of demand describes an inverse relationship, and an elasticity, between price and quantity of demand. There is a negative relationship between the quantity demanded of a good and its price. The factors held constant in this relationship are the prices of other goods and the consumer's income. There are, however, some possible exceptions to the law of demand.

The law of supply is a fundamental principle of economic theory which states that, all else equal, an increase in price results in an increase in quantity supplied. In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes. This means that producers are willing to offer more products for sale on the market at higher prices by increasing production as a way of increasing profits.In short, Law of Supply is a positive relationship between quantity supplied and price and is the reason for the upward slope of the supply curve.

5. State the law of supply & demand. Illustrate. The principle that defines the generally observed relationship between demand, supply, and prices: as demand increases the price goes up, which attracts new suppliers who increase the supply bringing the price back to normal. However, in the marketing of high price (prestige) goods, such as perfumes, jewelry, watches, cars, liquor, a low price may be associated with low quality, and may reduce demand.

6. What is a demand schedule? Cite examples. A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at every different price. A market demand schedule for a product indicates that there is an inverse relationship between price and quantity demanded. The graphical representation of a demand schedule is called a demand curve.

7. What about a supply schedule? Cite examples. Market supply is the summation of the individual supply curves within a specific market where the market is characterized as being perfectly competitive. A supply curve is the graphical representation of the supplier's positive correlation between the price and quantity of a good or service. The supply curve can only be attributed to a depiction of a perfectly competitive market due to the unique attributes of perfect competition: firms are price takers, no single firm's actions can influence the market price, and ease of exit and entry. The market supply curve is derived by summing the quantity for a given price across all market participants (suppliers). It depicts the price-to-quantity combinations available to consumers of the good or service.

8. What do shifts of the demand curve suggest? 

An increase in demand can be illustrated by a shift in the demand curve to the right.



A demand can decrease and cause a shift to the left of the demand curve for a number of reasons, including a fall in income, assuming a good is a normal good, a fall in the price of a substitute and a rise in the price of a complement.

9. What about shifts of the supply curve?  

If costs rise, less can be produced at any given price, and the supply curve will shift to the left. If costs fall, more can be produced, and the supply curve will shift to the right.

10. Illustrate in matrix and graphically varying market demand levels for prepaid communication services (Globe, Smart & Suncel): types of demand curves

11. a. Illustrate in matrix and graphically an equilibrium situation for LRT/MRT prepaid services. Show in the graph specific values of the prepaid tickets.

b. What about a graph showing a market equilibrium per station? (Consider Santolan-Recto Line)

c. Contain now a time element: peak and non-peak hours.

12. Show graphically varying demand levels for TV network services on a primetime viewing (Kapamilya, Kapuso, & Others). Be sure to specify the programs.

Problem Set S2: Graphing Exercises

Graphically show the relationship between the demand curve and the supply curve in the following economic scenarios 1. A hoarding of goods due to a rising market demand resulting to higher prices of the hoarded goods in the succeeding months.

2. A rumored coup d’etat against the Pinoy administration causing panic buying of the basic commodities over the weekend.

3. A decrease in the purchasing power of the peso due to inflation that results in a decrease in the demand for entertainment services

4. A hypothetical “equal demand” for news program services between GMA-7 & ABS-CBN 2.

5. A sustained importation of meat from China (at lower prices) despite a stable market situation.

6. Impacts of the freeze in Bohol on the market equilibrium for basic commodities

Problem Set 3: Additional Exrecises on Graphing

PART 1. Graphically show the relationship between the demand curve and the supply curve in the following economic scenarios:

1. A hoarding of goods due to a rising market demand resulting to higher prices of the hoarded goods in three (3) succeeding months. 2. A 1-unit increase per month in the EP of Good X for 5 consecutive months resulting to no change in the QD for Good X PART II. Below is a hypothetical schedule of price, demand, and supply for the flesh trade industry planet Mars: Price/transaction (in dollars) $ 75 $ 50 $ 35 $ 25 $ 15 $ 10

Quantity Demanded Per Year 3 million 6 million 9 million 12 million 15 million 18 million

Quantity Supplied Per Year 18 million 15 million 12 million 9 million 6 million 3 million

Problem: Is there a possible “equilibrium” for the flesh trade industry in Mars? Prove your answer mathematically or graphically.

Problem Set 4: Demand Elasticity Prove or disprove the following: 1. A price drop on a good with inelastic demand results to an increase in profits on the assumption that PC < R. 2. A 50% cut in the price of a good with unitary demand pulls down its revenue. 3. If PC = R, change in profit is zero for any good regardless of its demand elasticity. 4. A 75% off in the price of a good with elastic demand necessarily pulls up its revenues and profits. 5. Market inflation always pulls down market revenues. 6. Goods on sale with elastic demand create a positive impact on revenues but do not necessarily mean a profit gain. 7. The demand elasticity for any good whose price and quantities demanded do not change is perfectly inelastic. 8. Goods with perfectly inelastic demand create negative slopes (when graphed.)

9. Revenues are always positive for any goods regardless of elasticity. 10. Change in revenue always results to a positive or pure profit regardless of elasticity. Problem Set 5: Production Costs

QUANTITIES/OUTPUTS (QTY) 1 2 3 4 5

VARIABLE COST (VC) 10 15 20 30 50

GIVEN: PRICE (P) of Good X = 15/UNIT; FIXED COST (FC) = 10 and the variable costs (VC) indicated in the matrix, work on the following problems: 1. Expand the matrix & show all types of production costs for Good X 2. Would/should you produce each output level? Why? 3. What rules of production are applicable in making decisions? 4. What is the most efficient level of production? 5. What law is applicable in solving these problems? 6. What does the law state? 7. What cost approach helps you decide on the most efficient production level? 8. Is the price of good X right? Why? 9. What pricing strategy does the problem depict? 10. Does the strategy pay? Why?

Problem Set 6: A Basic Production Problem 1. Given the following factors/economies of scale for Business X in its 1st year of operation: Project Cost = 100k payable to BPI w/ 10% interest rate in one year on a monthly installment basis; 1-month advance of 15k, a 2-month deposit of 30k & a Meralco deposit of 2k; BIR tax: 15% of the total annual profit, payable on January in the succeeding year; Price of Good X = Php 14.00 Production Cost = 2k/day (inclusive of Meralco consumption cost) Quantities produced & sold/ day = 300; and Business contract is to be renewed after a year Problems: 1. At the earliest, in what month will the business gain pure profit? Show answers in a summary matrix and solutions below the matrix with labels. (5 points) 2. What is the total net profit for Business X in its first year of operation? Show solutions (2 points). 3. What is the opportunity cost of borrowing from BPI? (1 point) 4. What is the average cost for good X? (1 point) 5. What is the production’s pricing strategy? Show mathematically. (1 point)

Problem Set 7: BASIC PROBLEMS ON THE COMPUTATION OF ANNUAL INCOME TAX 1.

Eng’r Gilbert Gonzales, single in status, earns a monthly income of Php 80,000 as a professor of MIT. His monthly payments include SSS – Php 1800, Philhealth – Php 1200 & Pag-ibig – Php 1000. What is his income tax due? 2. Nestor, a Muslim with two wives with 5 children each - all below 18 years of age, earns a monthly income of Php 60,000 for his professional services at Company

X. However, due to a severe political conflict in Mindanao, he filed a leave of absence for the last two months of year 2014. How much did he pay at BIR for his tax due for 2014? 3. Prof. Bartolome, married without any child, earns Php 60,000 per pay day at Mapua Institute of Technology. His withholding tax per month is Php 6500. He also earns Php 6000 per month as the extension coordinator the School of Languages, Humanities and Social Sciences (SLHS), and Php 10,000 per month for his consultancy services at the UST-Center of Innovation and International Development (UST-CIID). What is his tax due, and net tax due, if any? 4. Ms. Michelle Perez, legally separated with one legally adopted child whose age is 15, has a monthly income of Php 50,000. Other than her regular compensation, she receives a 13th month pay of Php 85,000 and a summer bonus of 50,000. Compute for the tax due. 5. Mrs. Ramos earns Php 30,000 per month as a public elementary school teacher. Her husband works in Dubai as a mechanical engineer sending a regular monthly remittance of PHp 30,000. She has a child with exceptionality whose age is already 25 years old, and three (3) other children as qualified dependents. What is her gross compensation income? What about her total exemptions? What is her tax due?

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