INTOECO Practice Exercise

Demand and Supply Analysis, Price Distortions and Elasticity, Utility and Demand
I.

Demand and Supply

A. Analyze each scenario. Fill in the table with the letter of the correct shift, effect, change in price and
change in quantity in order to reach the new market equilibrium. Choose one answer per column.
Scenario

1. My allowance
increased! I will go
to the mall on
Saturday.
2. Typhoon Ineng
greatly hit the farms
in Baguio, which are
sources of
vegetables and
fruits in Manila.
3. News circulated
about the
unprofessional
service of Cebu
Pac.
4. The hashtag #AlDub
hitting millions of
tweets sparks
curiosity to several
viewers. Even office
workers watch them
using their tablets or
smartphones.
5. A new and efficient
technology is
released for making
smartphones.
6. With the high crime
rate in the
Philippines, it
becomes a
necessity to have a
pepper spray.
7. The cost of sugar
increases. How will
Vittoria Pattisserie
react?
8. Knowing that many
individuals are lured
to be an Uber
partner because of
its incentives, what
will Toyota do?
9. They say that

Shift
A. Increase in Demand
B. Increase in Supply
C. Decrease in
Demand
D. Decrease in Supply
A

Effect
A. Shortage
B. Surplus

Equi Price
A. Increase
B. Decrease
C. Constant

Equi Quantity
A. Increase
B. Decrease
C. Constant

hotdogs are
cancerous.
10. Its summer! Im
craving for halohalo!

II. Price Distortions and Elasticity

Answer the following:
1. For each of the following pairs of goods, which good would you expect to have more elastic demand
and why?
a. required textbooks or mystery novels
Mystery novels have more elastic demand because you dont need them urgently and can forego
buying them if theyre too expensive. Since textbooks are required and cannot be replaced with
any other book, you have no choice but to buy them, regardless of their prices.
b. Beethoven recordings or classical music recordings in general
Classical recordings have an elastic demand because they belong to a broad category and can
be narrowed down to different classical genres.
c. cooking oil during the next six months or cooking oil during the next five years
Cooking oil during the next five years have an elastic demand because by this time, you have
already found a substitute for cooking oil, that is cheaper.
d. root beer or water
Root beer has an elastic demand since it has many substitutes. If the price of root beer increases,
you can easily look for other softdrinks to buy.

2. The Philippine government has set a minimum price for rice.

a.
b.
c.

Draw where the price is set. (above the market

equilibrium)
What is the effect of this minimum price?
surplus
Show graphically in your figure how the market
should adjust without changing the price and
how will this be achieved? (see notes for the
appropriate shifts)

3. How does the concept of price elasticity of demand help firms in decision-making? If demand is elastic?
If demand is inelastic? Impact of price changes to revenues
a. Demand is Elastic
b. Demand is Inelastic
Increase in Price Decrease in Revenues
Increase in Price Increase in Revenues
Decrease in Price Increase in Revenues
Decrease in Price Decrease in Revenues
4. Compute for the price elasticity of demand if % P is 30% and %Qd is 40%. 1.33
5. Compute for the % P if %Qd is 50% and Ped is |-2|. -0.25 or -25% or decrease by 25%
6. Compute for the %Qd if % P is 15% and Ped is |-0.30|. -0.045 or -4.5% or decrease by 4.5%

7. Suppose Violets income rises by 10% and his income elasticity is 1.5. Compute for %Qd in the demand
for the good. Is the good normal or inferior? 15% (normal good)
8. What is the cross price elasticity of demand for Sprite if the demand for Sprite decreases by 10% after
the price of 7-up decreases by 5%? Are they substitutes or complements? Prove.
Insufficient Data
9. Consider public policy aimed at smoking.
a. Suppose the studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack
of cigarettes currently costs $2 and the government wants to reduce smoking by 20%, by how much
should it increase the price?
The price should increase by $1, from $2 to $3 if the government wants to reduce smoking by 20%.
b. Suppose that studies also find that teenagers have a higher price elasticity than do adults. Why
might this be true?
This might be true because teenagers have limited financial resources than adults. The latter has
more excess money to buy cigarettes.
III. Utility and Demand
Complete the table. Given Income is Php 40.
Chocolate (Php 10)
Qty
TU
MU MU/Php
1
200
200
20
2
390
190
19
3
570
180
18
4
740 170
17
5
900 160
16
6
1030 130
13
7
1130 100
10

Candy (Php 5)
Qty TU
MU
1
200 200
2
380 180
3
540 160
4
680 140
5
800 120
6
900 100
7
980 80

MU/Php
40
36
32
28
24
20
16

Choice
CA
CA
CA
CA
CA
CA
CH

MU/Php
40
36
32
28
24
20
20

P
5
5
5
5
5
5
10

Income
Remaining
35
30
25
20
15
10
0

MU
200
180
160
140
120
100
200

TU
200
380
540
680
800
900
1100

When does consumer equilibrium occur?

Occurs when the last MU/P spent is EQUAL across all goods consumed (and all income has been spent)
IV. Market Structures
Complete the table.

No. of Sellers
Products
Entry
Exit
Market Power
Example

Perfect Competition
Several/Many
Identical
Easy
Easy
No
Bazaars/Kiosks in
Divisoria; Street food

Monopoly
One
Unique
Difficult
Difficult
Complete
MERALCO

Oligopoly
Few
Identical/Differentiated
Difficult
Difficult
Large
Telecom

Monopolistic Competition
Several/Many
Differentiated
Easy
Easy
Small
Toothbrush