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Economics Revision Questions Question Paper
Economics Revision Questions
Course:Cpa Part I
Institution: Strathmore Business School question papers
Exam Year:2004
3.3 ELASTICITY OF DEMAND AND SUPPLY
QUESTION SEVEN
a) Distinguish between own-price elasticity of demand and cross- elasticity of demand (10 marks)
b) Briefly discuss the factors which affect the own price elasticity of demand (4 marks)
c) Discuss the usefulness of these parameters in management and economic policy decision-making. (6 marks) (Total: 20 marks)
QUESTION EIGHT
a) Define elasticity of supply and briefly explain any five factors that influence the elasticity of supply. (10 marks)
b) Explain why elasticity of supply for agricultural commodities is low. (6 marks)
c) The demand for a commodity is twenty units when the prevailing market price equals eighty shillings per unit. However, when the price per unit rises to one hundred shillings, the quantity demanded rises to thirty units.
Required:
Calculate both arc and point elasticities of this commodity (4 marks)
(Total: 20 marks)
QUESTION NINE
(a) (i) Define the term cross price elasticity of demand and clearly explain its value for substitutes and
complementary commodities (5 marks)
(ii) Use the data in the table below to compute income elasticity of demand through the arc elasticity
method:
Quantity
(Units) Income
(Shs) Price
(Shs)
100 5000 16
120 6000 16
(2 marks)
(b) Discuss any three practical applications of the concept of elasticity of demand in management and economic policy decision making (6 marks)
(c) (i) The demand for a commodity is five units when the price is sh. 1,000 per unit. When price per unit falls to Sh. 600 the demand rises to six units.
Compute the point and arc elasticity of demand (4 marks)
(ii) State the main determinants of elasticity of demand (3 marks)
(Total: 20 marks)
QUESTION TEN
a) Given that:
QX = 9 – ½ P2
QY = 8P + ½ P2
Required:
i) Identify which of the two functions is a demand and a supply function. (4 marks)
ii) Compute the point elasticity of demand and the point elasticity of supply at the equilibrium position. (6 marks)
b) With the aid of diagrams, explain the importance of the concept of elasticity of supply. (10 marks)
(Total: 20 marks)
QUESTION ELEVEN
Given the following table:
PX PY PZ PW QX QY QZ QW Y
10 8 12 10 30 15 20 20 10000
12 8 12 10 26 15 20 20 10000
14 8 12 10 22 15 20 20 10000
16 8 12 10 24 15 20 20 10000
16 8 12 10 26 18 18 18 12000
16 10 12 10 28 16 16 18 12000
16 12 12 10 30 14 16 18 12000
16 12 12 12 30 14 14 21 12000
Where:
PX: Price of good X QX: Quantity demanded of X
PY: Price of good Y QY: Quantity demanded of Y
PW: Price of good W QZ: Quantity demanded of Z
PZ: Price of good Z QW: Quantity demanded of W
Y: Consumer’s income
Required:
(a) What type of goods are X, Y, Z & W and why? (8 marks)
(b) Identify substitutes and complements and justify your answer. (4 marks)
(c) If there is a successful advertising campaign that convinces consumers to buy more of
commodity Y, what would the effect of this be on consumption of commodities X and Z?
(8 marks)
(Total: 20 marks)
QUESTION TWELVE
The managing director of My Kori-Lima Movie Theatre Ltd has hired you as a consultant to advise
on the ticket – pricing strategy. As a basis for your recommendations you consider historical ticket
sales data which seems to suggest the following ticket – sales elasticities:
Own – price elasticity = -0.05
Refreshment price elasticity = -0.12
Nairobi Population elasticity = +0.65
Advertising elasticity = +0.70
(a) The managing director is contemplating a moderate increase in ticket prices in order to increase revenue. Explain whether this is a good idea. (5 marks)
(b) The managing director is also contemplating a moderate increase in the advertising budget in order to increase revenue. Is this a good idea? Explain. (5 marks)
(c) How would you characterize the relationship between tickets and refreshments? (5 marks)
(d) If the population of Nairobi increased from 120,000 to 122,400 people in the next year, what would be the resulting impact on ticket demand? Assume all other factors are held constant.
(5 marks)
(Total: 20 marks)
QUESTION THIRTEEN
Given the following demand function
QX = 100 – 2P2
(a) Calculate the price elasticity of demand when price is Ksh. 2 and when price is Ksh. 6 (8 marks)
(b) Calculate the price elasticity of demand in the price range Ksh. 3 and Ksh. 5 (5marks)
(c) If the current prevailing price is Ksh. 5 what advice would you give to the producer in order to increase his revenue, and why
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