INSTITUTE OF ACCOUNTACY ARUSHA
TUTORIAL QUESTIONS
TOPIC: DEMAND AND SUPPLY
1. A newspaper article points out that the price of Micro Economics textbooks is up 10
percent this year over last year, and yet the number of textbooks sold is higher this year.
This article claims that these figures show that the law of demand does not apply to
textbook. Is this argument true? (Hint: A textbook is not a Giffen good.)
2. Suppose that drug addicts pay for their addiction by stealing: So the higher the total
revenue of the illegal drug industry, the higher the amount of theft. If a government
crackdown on drug suppliers leads to a higher price of drugs, what will happen to the
amount of stealing if the demand for drugs is elastic?
3. If the demand for the product is price inelastic, the firm will lower or rise its price?
Explain your answer with examples
4. If everyone thinks that the price of tomatoes will go up next week, what is likely to
happen to demand for tomatoes today?
5. Explain what price elasticity of demand is
6. With examples, state how you would advise the business firm to increase revenue if the
demand is (i) Elastic (ii) Unitary (iii) Inelastic
7. Explain the concept of equilibrium price
8. In April 1999, Pepsi Cola, Tanzania reduced the price of all its products from TZS 2000
to TZS 1500 per bottle.
(i) What do you think this price reduction had on the demand for Coca-Cola? In June,
1999, Coca-Cola also reduced the price of its price by exactly the same amount as that of
Pepsi-cola. (ii) What do you think is the effect of this on the demand for Pepsi-Cola and
Coca-Cola?
9. Suppose demand for good A is given by QdA = 500−10PA + 2PB + 0.70I where PA is
the price of good A, PB is the price of some other good B, and I is income. Assume that
PA is currently $10, PB is currently $5, and I is currently $100.
(a) What is the elasticity of demand for good A with respect to the price of good A at the
current situation?
(b) What is the cross-price elasticity of the demand for good A with respect to the price
of good B at the current situation?
(c) What is the income elasticity of demand for good A at the current situation?
10. When the price of Apple computers goes down, what probably happens to the demand for
Windows-based computers?
11. Explain factors affecting demand and supply of goods and services in the economy.
12. Explain the Determinants of Price Elasticity of Demand
13. The following is the cross-price elasticities of demand for several goods, where the
percent quantity change is measured for the first good of the pair, and the percent price
change is measured for the second good.
Air-conditioning units and kilowatts of electricity = -0.34
Coke and Pepsi = 0.63
High-fuel-consuming sport-utility vehicles (SUVs) and gasoline = -0.28
McDonald’s burgers and Burger King burgers = 0.82
Butter and margarine =1.54
(a) Explain the sign of each of the cross-price elasticities. What does it imply about
the relationship between the two goods in question?
(b) Compare the absolute values of the cross-price elasticities and explain their
magnitudes. For example, why is the cross-price elasticity of McDonald’s burgers
and Burger King burgers less than the cross-price elasticity of butter and margarine?
(c) Use the information above to calculate how a 5 percent increase in the price of
Pepsi affects the quantity of Coke demanded.
(d) Use the information above to calculate how a 10 percent decrease in the price of
gasoline affects the quantity of SUVs demanded.
14. If the demand and supply curve for computers is:
D = 100 - 6P, S = 28 + 3P Where P is the price of computers, D is demand and S is
supply of computer, what is the quantity of computers bought and sold at equilibrium?
15. The quantity demanded of Good Z depends upon the price of Z (Pz), monthly income
(Y), and the price of a related Good W (Pw). Demand for Good Z (Qz) is given by
equation 1 below: Qz = 150 - 8Pz + 2Y - 15Pw Find the demand equation for Good Z in
terms of the price for Z (Pz), when Y is $50 and Pw = $6.
16. Beef supplies are sharply reduced because of drought in the beef-raising states, and
consumers turn to pork as a substitute for beef. How would you illustrate this change in
the beef market in supply-and-demand terms?
17. December, the price of Christmas trees rises and the number of trees sold also rises. Is
this a violation of the law of demand?
18. A firm charges $800 for its unique word processor. If total revenue is $56,000 in July,
how many word processors were sold that month?
19. A survey indicated that chocolate is Tanzanians’ favorite ice cream flavor. For each of
the following, indicate the possible effects on demand, supply, or both as well as
equilibrium price and quantity of chocolate ice cream.
a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-
producing cattle in their herds by a third. These dairy farmers supply cream that is used to
manufacture chocolate ice cream.
b. A new report by the Tanzanian Medical Association reveals that chocolate does, in
fact, have significant health benefits.
c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice
cream. d. New technology for mixing and freezing ice cream lowers manufacturers’ costs
of producing chocolate ice cream.
24. Question: Use a diagram to illustrate how each of the following events affects the
equilibrium price and quantity of pizza.
a. The price of mozzarella cheese rises. (This is an input to pizza)
b. The price of tomato sauce falls.
C. The incomes of consumers rise and pizza is an inferior good.
e. Consumers expect the price of pizza to fall next week.
d. The health hazards of hamburgers are widely publicized.
