Subject: Managerial Economics

1. The initial price of a cup of coffee is Php1, and at the price, 400 cups are demanded. If the price falls to Php0.9, the quantity demanded will increase to 500 a. Calculate the (arc) price elasticity of demand for coffee. Show the solution. (5 points) b. Based on your answer to question 1.a., is the demand for coffee elastic or inelastic? (2 points) C. Based on your answer to question 1.a., if the price of coffee is increased by 10%, what will happen to the revenues from coffee? Carefully explain how you know. (3 points) 2. The demand curve is: QD = 500 - SP. a. Calculate the (point) price elasticity of demand when price is Php100. Show the solution (5 points). Is demand elastic or inelastic? (2 points) b. Calculate the (point) price elasticity of demand when price is Php700. Show the solution (5 points). Is demand elastic or inelastic? (2 points) c. Find the point at which point elasticity is equal to -1. (3 points) 3. Demand and supply in the wheat market are given by: QD=2000 - 1000P and QS = - 500 + 1000P, where Q is millions of bushels and P is price per bushel. Show the solution. a. Find the equilibrium price (4 points) and quantity (4 points). b. Suppose the government wishes to support farm income and thus sets a price floor of Php1.50/bushel. Find the size of the farm surplus (8 points). Is there a surplus or a shortage? How much? (2 points) c. What is the cost of this program to the government? (4 points) 4. If a price of corn is Php3.00 a bushel, 5,000 bushels would be demanded. If the price rises to Php4.00 a bushel, 4,000 bushels would be demanded. a. What is the (arc) price elasticity of demand? Show the solution. (5 points) b. Based on this answer, if the price of corn rose to Php5.00 a bushel, what would be the demand for corn? (3 points) If the price of corn decreased from Php4.00 to Php3.00 a bushel, what would be the change in total revenue for sellers of corn? Show the solution (5 points). d. If the price of corn increased from Php4.00 to Php5.00 a bushel, what would be the change in total revenue for sellers of corn? Show the solution (5 points)