Mapua Institute of Technology Intramuros

School of Language, Humanities and Social

Sciences
Muralla St, Intramuros, Manila, Metro Manila

Problem Sets
SS12/A3

Submitted by:
Carreon, Juan Miguel M.
Submitted to:
Prof. Gil Astrophel B. Orcena

PS1
DISCUSSION OUTLINE: DS PROBLEMS
1. What are the determinants of demand/supply?
Supply is the amount of goods or services that a supplier is willing to provide to the
market. Its determinants include the cost of production, technology, the number of sellers and
expectation for future prices. Furthermore, any factor that increases the cost of production
decreases supply and any factor that decreases the cost of production increases supply.
On the other hand, demand is an economic principle that describes a consumers desire
and willingness to pay a price for a specific good or service. The determinants of demand
consist of income, consumer preferences, number of buyers, price of related goods, and
expectation of future.
2. What does a change in demand/supply suggest?
An increase in demand suggests an increase in the price of the goods (shift up) and an
increase in the number of goods that must be produced. Consequently, a decrease in demand
decreases both the price of the goods (shift down) and the number of goods to be produced.
Then again, an increase in the supply suggests a lower the price and an increase in the
number of goods to be produced. While a decrease in supply increases the price and
decreases the quantity of goods to be produced.
3.

Show graphically how surplus/shortage is created?

Viewing points on the demand curve as points of buyer equilibrium and points on the
supply curve as points of seller equilibrium helps explain how an adjustment process takes
place in the supply and demand model. If price is originally P1 in the graph below,
only Q1 will be sold even though buyers would like to buy Q2. The difference Q2 Q1 represents a shortage. The sellers are in equilibrium in this situation because they can sell
everything they want to sell at this price, but buyers are not. Some buyers who cannot obtain
the product are willing to offer more, and sellers are always willing to accept a higher price.
Therefore, the actions of the buyers, as they compete with each other to obtain the amount
that is available, drive the price upward in this model toward market equilibrium.

If price is originally at P1 in the picture below, only Q1 will be sold because this is all
that buyers will purchase, even though sellers are willing to sell more, Q2. The difference Q2
- Q1 is called a surplus. In this situation the buyers are in equilibrium because they can buy
all they want to buy at the going price. However, the sellers are not in equilibrium and will
compete among themselves to get rid of the surplus. Some sellers will be willing to offer
their product at a lower price. Buyers are always willing to move down the demand curve, so
there is a tendency to move downward toward market equilibrium in the picture below.

4. State the law of demand/law of supply.

The law of demand states that as the price of a good increases, the quantity of the good
falls, and as the price of a good decreases, the quantity demanded of the good rises. This
means that there is an inverse relationship between the price and the quantity demanded.
While the law of supply states that as the price of a good increases, the quantity supplied
of the good rises, and as the price of a good decreases, the quantity supplied of the good falls.
This means there is a direct relationship between the price and the quantity supplied.

5. State the law of supply & demand. Illustrate.

The law of supply and demand defines the effect that the availability of a particular
product and the desire (or demand) for that product has on price. Generally, if there is a low
supply and a high demand, the price will be high. In contrast, the greater the supply and the
lower
the
demand,
the
lower
the
price
will
be.
6. What is a demand schedule? Cite examples.
A demand schedule is a table that lists down the quantity demanded for a good that
people are willing and able to buy at all possible prices. The demand schedule shows you
how the demand changes when you increase or decrease the price. For example in a grocery
store, the following shows the demand schedule for a pack of sliced bread:
Cost
50 pesos
60 pesos
70 pesos
80 pesos

Supply
500 packs per week
487 packs per week
382 packs per week
240 packs per week

As the price of the bread goes up, the amount of bread demanded goes down.
7. What about a supply schedule? Cite examples.
A supply schedule is a table that illustrates how much of a good or service suppliers are
willing and able to supply at many different prices. The supply schedule shows you how the
supply changes when you increase or decrease the price.

8. What do shifts of the demand curve suggest?

Shifts in the demand curve are related to non-price events that include income,
preferences and the price of substitutes and complements. An increase in income will cause
an outward shift in demand (to the right) if the good or service assessed is a normal good or a
good that is desirable and is therefore positively correlated with income. Alternatively, an

increase in income could result in an inward shift of demand (to the left) if the good or
service assessed is an inferior good or a good that is not desirable but is acceptable when the
consumer
is
constrained
by
income.

9. What about shifts of the supply curve?

If production costs increase, the supplier will face increasing costs for each quantity
level. Holding all else the same, the supply curve would shift inward (to the left), reflecting
the increased cost of production. The supplier will supply less at each quantity level.
If production costs declined, the opposite would be true. Lower costs would result in an
increase in output, shifting the supply curve outward (to the right) and the supplier will be
willing sell a larger quantity at each price level. The supply curve will shift in relation to
technological improvements and expectations of market behavior in very much the same way
described for production costs.
Technological improvements that result in an increase in production for a set amount of
inputs would result in an outward shift in supply.
Supply will shift outward in response to indications of heightened consumer enthusiasm
or preference and will respond by shifting inward if there is an assessment of a negative
impact to production costs or demand.

10. Illustrate in matrix and graphically varying market demand levels for prepaid
communication services (Globe, Smart & Suncel): types of demand curves
800
723
700
600

584

500
367
400
300
200
100
0
Sun Cellular

Smart

Globe

Number of Users

11. a. Illustrate in matrix and graphically an equilibrium situation for LRT/MRT prepaid
services. Show in the graph specific values of the prepaid tickets.

1400
1300

1267

1200
1100
1000

956

900
800
700

Quantity Demanded for Tickets

600
500
500
400
300
200
100
0
12

15

20

Ticket Prices
Quantity of tickets demanded

b. What about a graph showing a market equilibrium per station? (Consider Santolan-Recto
Line)
600
509

500
400

375

360

325

300 300

250
207

200
135
50

Quantity of tickets demanded

c. Contain now a time element: peak and non-peak hours.

to
Re
c

ar
da
Le
g

Pu
re
za

a
V.
M
ap

J.
Ru
iz

G
ilm
or
e

ty

ao
Cu
b

s
na
An
o

n
na
ip
u
Ka
t

ol
an
nt

G
o

15

Be
t

100

Sa

197

700
609
600
500

460

400
400

360

375
325

297
250

235

200

450

425
307

300
300

509

475

207
150

135

100

197

115

50

15

Non-peak hours

Re
c

to

ar
da
Le
g

Pu
re
za

a
V.
M
ap

J.
Ru
iz

G
ilm
or
e

G
o

Cu
b

Be
t

Ka
t

ty

ao

s
na

ip
u

nt
Sa

An
o

na

ol
an

Peak hours

12. Show graphically varying demand levels for TV network services on a primetime viewing
(Kapamilya, Kapuso, & Others). Be sure to specify the programs.

Number of viewers (in %)

45
38.6
40
35
30
25
20
15
10
5
0

23.4

12.9

TV
)

s)
m

rd
ro
o
Bo
a
Th
e

N
ew
s
M
ar
s

N
(C
N

pe
Su

Number of viewers (in %)

(G
M
A

ili
pp
Ph

ra
tu
rn
a

St
Lo
ve
py
ap

H
n
Ju
a

in
e

TV
-5
)
l(

(G
M
A)
or
y

(A
BS
-C
BN

3.4

o
ya
n
in
s
Pr
ob
An
g

21.6

Prof. Gil Astrophel B. Orcena

MA Sociology, Phd., Development Studies

Graphically show the relationship between the demand curve and the supply curve in the
following economic scenarios
1. A hoarding of goods due to a rising market demand resulting to higher prices of the
hoarded goods in the succeeding months.
7
6
5
4

Price 3
2
1
0
0.5

1.5

2.5

3.5

4.5

5.5

Market Quantities

Hoarding of goods results in inflation

2. A rumored coup detat against the Pinoy administration causing panic buying of the basic
commodities over the weekend.
7
6
5
4

Price

3
2
1
0
0.5

1.5

2.5

3.5

Market Quantities

4.5

5.5

Panic buying results in the increase in demand, yielding inflation.

3. A decrease in the purchasing power of the peso due to inflation that results in a decrease
in the demand for entertainment services
6
5
4

Price 3
2
1
0
0.5

1.5

2.5

3.5

4.5

5.5

Market Quantities

A drop in income results in the decrease in the demand, yielding deflation.

4. A hypothetical equal demand for news program services between GMA-7 & ABS-CBN
2.
6

0
0.5

1.5

2.5

3.5

4.5

5.5

5. A sustained importation of meat from China (at lower prices) despite a stable market
situation.

Y-Values
3.5
3
2.5
2
1.5
1
0.5
0
0.5

1.5

2.5

6. Impacts of the freeze in Bohol on the market equilibrium for basic commodities
7
6
5
4

Price 3
2
1
0
0.5

1.5

2.5

3.5

4.5

5.5

Market Quantities

The freeze in Bohol caused a decrease in supply and an increase in demand, causing inflation.

Problem Set 3: Additional Exrecises on Graphing

PART 1. Graphically show the relationship between the demand curve and the supply
curve in the following economic scenarios:
1. A hoarding of goods due to a rising market demand resulting to higher prices of the
hoarded goods in three (3) succeeding months.
8
7
6
5

Price 4
3
2
1
0
0.5

1.5

2.5

3.5

4.5

5.5

Market Quantities

2. A 1-unit increase per month in the EP of Good X for 5 consecutive months resulting to no
change in the QD for Good X
6
5
4

Price 3
2
1
0

Market Quantities

PART II. Below is a hypothetical schedule of price, demand, and supply for the flesh trade
industry planet Mars:
Price/transaction
(in dollars)
$ 75
$ 50
$ 35
$ 25
$ 15
$ 10

Quantity Demanded
Per Year
3 million
6 million
9 million
12 million
15 million
18 million

Quantity Supplied
Per Year
18 million
15 million
12 million
9 million
6 million
3 million

Problem: Is there a possible equilibrium for the flesh trade industry in Mars?
Prove your answer mathematically or graphically.
80

75

75

70
60
50

50

Axis Title

50

40

35

35

30

25

25

20

15

10
0

15

10

10

5000000

10000000

15000000

Axis Title

Yes, there is a possible equilibrium for the flesh trade industry in Mars

20000000

Problem Set 4: Demand Elasticity

Prove or disprove the following:
1. A price drop on a good with inelastic demand results to an increase in profits
on the assumption that PC < R.
32
|24
|100 =50

E=

R0=42=8

R1=23=6

Proo =RPC

Pro1=RPC

Price

83

1
0

=63
=3

Pro=Pro 1Pro0
1

Quantity Demanded

=35
= -2
Statement is false

2. A 50% cut in the price of a good with unitary demand pulls down its
revenue.
42
|24
|100 =100

E=

R0=42=8

R1=24=8

R=R 1R0

=8 8
=0

Statement is false, revenue will

stay the same

5
4
3

Price
2
1
0

Quantity Demanded

3. If PC = R, change in profit is zero for any good regardless of its demand

elasticity.
PC = R

PC = R

Pro0 =R0PC 0

Pro1=R 1PC 1

Pro0 =0

Pro1=0
Pro=Pro 1Pro0
Pro=0

Statement is true
4. A 75% off in the price of a good with elastic demand necessarily pulls up its
revenues and profits.
41
|34
|100 =300

E=

R0=41

=3

R1=34
R=123

=9

= 12

5
4

Pro0 =32

Pro1=122

=1

= 10
Pro=101

=9
Statement is true

Price
2
1
0

Quantity Demanded

5. Market inflation always pulls down market revenues.

There are different kinds of
inflation, and they can all pull down
market revenues.

5
4
3

Price
2
1
0

Quantity Demanded

6. Goods on sale with elastic demand create a positive impact on revenues but
do not necessarily mean a profit gain.
This implies that changes in the
price have no effects on the quantity
of a good.

5
4
3

Price
2
1
0

Quantity Demanded

7. The demand elasticity for any good whose price and quantities demanded do
not change is perfectly inelastic.
Statement is false. If a change in
price produces no change in the
quantity demanded of a commodity,
then the price elasticity of Good X
is perfectly inelastic.

5
4
3

Price
2
1
0

Quantity Demanded

8. Goods with perfectly inelastic demand create negative slopes (when

graphed.)
100 =0
| 22
41|

E=

Statement is false, slope is equal to

0.

Price
2
1
0

Quantity Demanded

9. Revenues are always positive for any goods regardless of elasticity.

The revenue can either be positive

or negative, but since it includes
substitutes, the price of elasticity is
generally positive.

10. Change in revenue always results to a positive or pure profit regardless of

elasticity.
Statement is false. In an inelastic
demand, if the price of a good is
decreased, the revenue will also
decrease. This means that R0 > R1. If
we use the formula:

5
4
3

R=R 1Ro

Price
2

the change in revenue will be

negative, since Ro is greater than R1.

1
0

Quantity Demanded

QUANTITIES/OUTPUTS (QTY)
1
2
3
4
5

VARIABLE COST (VC)

10
15
20
30
50

Problem Set 5: Production Costs

GIVEN: PRICE (P) of Good X = 15/UNIT; FIXED COST (FC) = 10 and the variable costs
(VC) indicated in the matrix, work on the following problems:
1. Expand the matrix & show all types of production costs for Good X
QTY
1
2
3
4
5

VC
10
15
20
30
50

FC
10
10
10
10
10

PC
20
25
30
40
60

AC
20
12.5
10
10
12

MC
0
5
5
10
20

R
15
30
45
60
75

MR
0
15
15
15
15

Pro
-5
5
15
20
15

2. Would/should you produce each output level? Why?

No, we should not produce all levels of production because at level 1, we get negative
profit.
3. What rules of production are applicable in making decisions?
When PC > R, we do not produce because it doesnt give profit
PC = R, we may produce because it gives normal profit
PC < R, we should produce because it gives profit
4. What is the most efficient level of production?
The most efficient level of production is at level 4.
5. What law is applicable in solving these problems?
The law of diminishing marginal returns
6. What does the law state?
When successive units of variable input work with a fixed input beyond a certain point
the additional product produced by each unit of a variable, input decreases.
7. What cost approach helps you decide on the most efficient production level?
When profit is most optimized.
8. Is the price of good X right? Why?
Yes, as the quantity demanded increases, the production cost also increases.
9. What pricing strategy does the problem depict?
The variable price is not linear but exponential: the more products produced, the pricier it
is.
10. Does the strategy pay? Why?
Yes, besides level 1, all other levels produce a positive profit.

Problem Set 6: A Basic Production Problem

1. Given the following factors/economies of scale for Business X in its 1st year of
operation:
Project Cost = 100k payable to BPI w/ 10% interest rate in one year on a monthly
installment basis;
1-month advance of 15k, a 2-month deposit of 30k & a Meralco deposit of 2k;
BIR tax: 15% of the total annual profit, payable on January in the succeeding year;
Price of Good X = Php 14.00
Production Cost = 2k/day (inclusive of Meralco consumption cost)
Quantities produced & sold/ day = 300; and
Business contract is to be renewed after a year
Problems:
1. At the earliest, in what month will the business gain pure profit? Show answers in
a summary matrix and solutions below the matrix with labels.
(5 points)
2. What is the total net profit for Business X in its first year of operation? Show
solutions (2 points).
3. What is the opportunity cost of borrowing from BPI? (1 point)
4. What is the average cost for good X? (1 point)
5. What is the productions pricing strategy? Show mathematically.
(1 point)
M
1
2
3
4
5
6
7
8
9
10
11
12

R
P 126,000
P 126,000
P 126,000
P 126,000
P 126,000
P 126,000
P 126,000
P 126,000
P 126,000
P 126,000
P 126,000
P 126,000

PCo
P 60,000
P 60,000
P 60,000
P 60,000
P 60,000
P 60,000
P 60,000
P 60,000
P 60,000
P 60,000
P 60,000
P 60,000

PC1
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67

PC2
P 54166.67
P 69166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67
P 69,166.67

Proo
P 71833.33
P 56833.33
P 56833.33
P 56833.33
P 56833.33
P 56833.33
P 56833.33
P 56833.33
P 56833.33
P 56833.33
P 56833.33
P 56833.33

PC=(P 2000)(30 days )

Pro=P 696999.96

PC=P 60000

Tax=696999.96 ( 0.15 )

R=( P 14 )( 300 ) ( 30 )=P 126000

Tax=P 104549.97

( P 110000
)
12

Net Profit = ProTax

PC 1=( P 60000 ) +

Net Profit =P 592449.99

PC 2=PC 1 P 15000=P54166.67
(Month 1)
P 110000
PC 2=( P 60000 ) +
12

(Month 2 onwards)
Proo =RPC 2=P71833.33
(Month 1)
Proo =( RPC 2 )P 15000=P 56833.33
(Month 2 onwards)

At the earliest, in what month will the business gain pure profit?
o The 13th month
What is the total net profit for Business X in its first year of operation?
o P 592,449.99
What is the opportunity cost of borrowing from BPI?
o P 10,000
What is the average cost for good X?
o Cannot be determined (>P 6.67)
What is the productions pricing strategy?
o Cost Absorption Approach

Problem Set 7:
BASIC PROBLEMS ON THE COMPUTATION OF ANNUAL INCOME TAX
1.

Engr Gilbert Gonzales, single in status, earns a monthly income of Php 80,000 as a
professor of MIT. His monthly payments include SSS Php 1800, Philhealth Php 1200
& Pag-ibig Php 1000. What is his income tax due?
Income:
P 80,00012=P 960,000

Since taxable income is above P500,000

P125,000+ 0.32 ( 862,000500,000 )

Deduction:
( P50,000 )+ [( 1,800+1,200+1,000 )12 ] =P 98,000
Taxable Income:
P 960,000P 98,000=P 862,000

P125,000+ P 115,840
Income tax due:
P 240,840

2. Nestor, a Muslim with two wives with 5 children each - all below 18 years of age, earns a
monthly income of Php 60,000 for his professional services at Company X. However,
due to a severe political conflict in Mindanao, he filed a leave of absence for the last two
months of year 2014. How much did he pay at BIR for his tax due for 2014?
Income:
P 60,00010=P600,000
Deductions:
P50,000+P 100,000=P 150,000
Taxable Income:
P 600,000P 150,000=P 450,000

Since taxable income is between P250,000

and P500,000
P50,000+ 0.30 ( P 450,000P 250,000 )
P50,000+ P 60,000

Income tax due:

P 110,000

3. Prof. Bartolome, married without any child, earns Php 60,000 per pay day at Mapua
Institute of Technology. His withholding tax per month is Php 6500. He also earns Php
6000 per month as the extension coordinator the School of Languages, Humanities and
Social Sciences (SLHS), and Php 10,000 per month for his consultancy services at the
UST-Center of Innovation and International Development (UST-CIID). What is his tax
due, and net tax due, if any?
Income:
MIT = P120,000
SLHS = P6,000
UST = P10,000

Deductions:
P50,000
Taxable Income:
P1,632,000 - P50,000 = P1,582,000

Total Income = (P 136,000)*12 = P 1,632,000

Since taxable income is above P500,000
P125,000+ 0.32 ( 1,582,000500,000 )
P125,000 + 346,240
Income Tax Due:
P 471,240

Tax withheld:
P 6,500 * 12
P 78,000
Net tax due:
P471,240 P78,000
P392,240

4. Ms. Michelle Perez, legally separated with one legally adopted child whose age is 15, has
a monthly income of Php 50,000. Other than her regular compensation, she receives a
13th month pay of Php 85,000 and a summer bonus of 50,000. Compute for the tax due.
Income:
P50,000 * 12 = P600,000
13th month pay = P85,000
P85,000 P82,000 = P3,000
Total income = P603,000
Deductions:
P50,000 + P25,000
P75,000
Taxable income:
P603,000 P75,000
P528,000

Since taxable income is more than P500,000

P125,000 + 0.32(P528,000 P500,000)
P125,000 + P8,960
Income tax due:
P133,960

5. Mrs. Ramos earns Php 30,000 per month as a public elementary school teacher. Her
husband works in Dubai as a mechanical engineer sending a regular monthly remittance
of PHp 30,000. She has a child with exceptionality whose age is already 25 years old, and
three (3) other children as qualified dependents. What is her gross compensation
income? What about her total exemptions? What is her tax due?
Income:
P30,000 * 12 = P360,000
Deductions:
P50,000 + (4 * P25,000) = P150,000
Taxable income:
P360,000 P150,000 = P210,000

Since taxable income is between P140,000

and P250,000
P22,500 + 0.25(P210,000 P140,000)
P22,500 + P17,500
Income tax due:
P40,000