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    The Copperbelt University

    School of Humanities and Social Sciences


    Department of Economics

    BS 110: Principles of Economics


    Friday, October 14, 2022

    1. The price of apples in Shoprite rises from K2,950 per kg to K3,050 per kg and, as a result,
    the quantity of apples that households purchase decreases from 5,100 kg to 4,900 kg per
    week. Consequently, the quantity of oranges that households purchase increases from 3,950
    kg to 4,050kg per week.
    a) Based on the above data, calculate the price elasticity of demand for apples over
    the said price interval.
    b) Calculate the cross-price elasticity for oranges over the same price interval.
    c) Would you say the demand for apples is elastic? What should Shoprite do about
    the price of apples in order to increase sales revenue from apples?
    d) Using the answer to (b) above, show whether oranges are substitutes or compliments
    to apples

    2. Isaac advertises to sell fritters for K4 a unit. He sells 50 dozen and decided that he can
    charge more. He raises the price to K6 a dozen and sells 40 dozen. Calculate the
    elasticity of demand and comment on the nature of the elasticity you observe.

    3. Suppose that the market demand for good is given by where is


    the market quantity demand and is the market price measured in kwacha. a) Derive
    the price elasticity of demand for good .
    a) What is the price elasticity of demand when the price of good is K30?
    b) Interpret the coefficient of the elasticity of demand calculated in (b) above.
    c) If you were a manager of the store where good is sold, what pricing strategy
    would you implement to raise revenue?
    d) What is the percentage change in quantity demanded if the price increases by
    4.5%?
    e) As a manager of the store selling good , what would you inform your boss about
    the price change.

    4. The general linear demand for good is estimated to be:


    ,
    where is the price of good , is average income of consumers who buy good
    and is the price of the related good . The values of and are expected to be
    K200, K45,000 and K120 respectively.
    a) Compute the price elasticity of demand for good and it.

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    b) Briefly explain how decreasing the price of good would affect total revenue.
    c) Calculate the income elasticity of demand and interpret it.
    d) What is the nature of good ? Briefly explain.
    e) Show and explain how a 3.5% decrease income would affect the demand for good
    , all else equal.
    f) Calculate the cross-price elasticity of demand between goods and .
    g) How are the two goods related? How closely related are the two goods?
    h) Show and explain how a 6% increase in the price of the related good would affect
    the demand for good , all else equal.

    5. Suppose a coffee shop faces the following linear daily demand curve for cups of coffee:
    . In an appropriate and well labelled diagram, show how price elasticity,
    total revenue, average revenue and marginal revenue are related.

    6. A farmer supplies 20 bags of maize per month at a price of K24. If the price elasticity
    of supply of maize is 4, then how many bags of maize would the farmer supply at a
    price of K30?

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