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By | September 2009
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AGW614

Managerial Economics

Lecturer : Dr. Lai Yew Wah

Tutorial 3 solutions

Group 5

Chan Wooi Wang ( S-GSM0028/09 )

Chu Wee Liang ( S-GSM0039/09 )

Lee Yee Ling ( S-GSM0087/09 )

Questions

Q 5. What would you expect to happen to spending on food at home and spending on food restaurants during a decline a decline in economic activity ? How would income elasticity of demand help explain these things ?

Q ( Demand )

QS0 Superior

QI1

QI0Inferior

QS1

Y1Y0Y ( Income )

During the decline in economy activity, the spending power will decrease which is similar as the decline in income. Home food which is economical are inferior goods while restaurant food which is much more costly are superior goods. Therefore from the income elasticity of demand curve, the demand for home food will increase from QI0 to QI1 while the demand for restaurant food will decrease from QS0 to QS1 when the income decreases from Y0 to Y1.

Q9.The immediate effect of gasoline price increases in the aftermath of the Persian Gulf crisis in August 1990 on gasoline consumption was not very significant. Would you expect the consumption of gasoline to be more severely affected if these higher prices remained in effect for a year or more ? Why or why not ?

Based on the law of demand define the typical relationship between the price and quantity demands.

Consumer would tend to purchase more when the price is low and lesser when the price of gasoline is high. When the price of gasoline is increases consumers would find their way to adjust to the price.

A factor to determine the demand elasticity is ease to find the substitution. As for this case there is only little substitution for the gasoline in the short run. Since there is less substitution for gasoline hence it would be considered is inelastic elasticity in short run

As for the long run, when the price of gasoline increase the demand of elasticity...

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