UNIVERSITY OF GHANA BUSINESS SCHOOL
(MBA PROGRAM: REGULAR AND WEEKEND)
First Semester 2024/2025
UGBS 603: Economics
Instructors: S. Addo, E. Asiedu, P. Asuming, A., A. Gyeke-Dako and J. I.
Mohammed
Problem set one
Submission instructions:
This problem set is due at beginning of class on 29th November 2024 (for group
3) and 30th November 2024 (for all other groups). All answers should be
handwritten.
Problem one (from Farnham, 2014)
The weekly demand for fried-rice among the 2024/25 cohort of UGBS Executive Master
of Business Administration students is
𝑄 = 500 − 5𝑃 + 0.65𝐼 + 10𝑃 − 3𝑃
Where 𝑄 is the quantity demanded of fried-rice
𝑃 is the price of fried-rice per lb
I is consumer income in Ghana Cedis
𝑃 and 𝑃 are the prices of two goods that are related to fried-rice.
a) Based on the demand function above, is fried-rice a normal good or an inferior good?
Show this algebraically and explain your answer.
Fried-rice is a normal good. The function above shows that quantity increases with
Qxd
income: 0 .5
I
b) Based on the demand function above, what is the relationship between Fried-rice and
good Y?
𝜕𝑄
= 10
𝜕𝑃
Pancakes and Good Y are substitutes since the coefficient of 𝑃 is positive.
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c) Based on the demand function above, what is the relationship between Fried-rice and
good Z?
𝜕𝑄
= −2
𝜕𝑃
Pancakes and Good Z are complements since the coefficient of 𝑃 is negative.
d) What is the equation of the demand curve if consumer incomes are GHS 30, the price
of good Y is GHS 10 and the price of good Z is GHS 20?
𝑄 = 500 − 5𝑃 + 0.5(30) + 10(10) − 2(20)
𝑄 = 575 − 5𝑃
e) Graph the demand function for Fried-rice from d)
𝑄 = 575 − 5𝑃
Using the intercept approach,
On the Q intercept, P=0
𝑄 = 575 − 5(0)
Q=575 (575, 0)
On the P intercept, Q=0
0 = 575 − 5𝑃
𝑃 = 115 (0, 115)
115
575 Q
Now suppose the weekly supple function of Fried-rice at the UGBS graduate campus is
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𝑄 = −210 + 20𝑃 − 5𝑃
Where 𝑄 is the quantity supplied of Fried-rice and 𝑃 is the price of inputs used in
preparing Fried-rice
f) What is the supply function if input prices are GHS 10?
𝑄 = −210 + 20𝑃 − 5𝑃
𝑄 = −210 + 20𝑃 − 5 (10)
𝑄 = −210 + 20𝑃 − 5 (10)
𝑄 = −260 + 20𝑃
g) Graph the supply curve from f).
𝑄 = −260 + 20𝑃
Using the intercept approach,
On the Q intercept, P=0
𝑄 = −260 + 20(0)
Q=-260 (-260, 0)
On the P intercept, Q=0
0 = −260 + 20𝑃
𝑃 = 13 (0, 13)
13
-260 Q
h) Compute the equilibrium price and quantity of Fried-rice.
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Suppose authorities at UGBS are concerned that Fried-rice sellers at UGBS are exploiting
students by charging exorbitant price for their Kelelwele so they decree that no one should
seller Fried-rice above GHS 20 per lb.
At equilibrium
Qs =Qd
−260 + 20𝑃 = 575 − 5𝑃
25𝑃 = 835
𝑃 = 33.4
Substituting into the demand equation we have
Qd = -260 + 20(33.4)
Qd = 408
i) What type of price control measure is this?
Price ceiling/Maximum price control
j) Following this decree, will there be excess demand or excess supply of Fried-rice at
UGBS? Calculate the excess demand or excess supply?
𝑄 = −260 + 20𝑃 𝑄 = 575 − 5𝑃
Substituting the price of 20 into both function
𝑄 = −260 + 20(20) 𝑄 = 575 − 5(20)
𝑄 = 140 𝑄 = 475
Excess demand or excess supply
475-140 = 335
k) To ensure that the price control measure stands, the authorities have to produce the
excess demand or buy the excess supply in j) off the market. How much will this cost the
Authorities?
335 * 20 = 6700
Problem Two
The demand for personal computers can be characterized by the following point
elasticities: i) price elasticity = -5, ii) cross-price elasticity with software = -4, and iii)
income elasticity = 2.5. Based on this information, indicate whether each of the
following statements is true or false, and explain your answer:
a) A price reduction for personal computers will increase both the number of units
demanded and the total revenue of sellers
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TRUE
By the law of demand, a reduction in price will increase the quantity demanded. The
demand for computers is price-elastic and by the total revenue test, a reduction in price
will increase total revenue
b) The cross-price elasticity indicates that a 5 per cent reduction in the price of personal
computers will cause a 20 per cent increase in software demand.
TRUE
%Δ𝑄 %Δ𝑄
𝜀 = = 2.5 = = 4 => −4 ∗ −5 = 20%
%Δ𝑃 −5
From the cross-price elasticity of demand, personal computers and software are
complements so an increase in of computers will reduce the demand for software by
20%, not increase
c) Demand for personal computers is price elastic and computers are normal goods
TRUE
PED = -5 means price elastic demand, income of 2.5 means computers are normal
goods (luxury goods).
d) Falling software prices will increase revenues received by sellers of both computers
and software
FALSE
Falling software prices will increase the demand for computers and increase revenue
for computers. The effect of falling software prices on software on revenues from
software depends on the price elasticity of demand for software, which is not provided
and so this cannot be determined.
e) A 2 per cent price reduction would be necessary to overcome the effects of a 1 per
cent decline in consumer income
FALSE
Based on the income elasticity a 1 per cent decline in consumer income will increase
demand by 2.5 per cent. Given the PED, it will take a 0.5 per cent reduction in price to
achieve a 2.5 per cent in quantity to offset the decline in income
Problem three
For this problem refer to the article from the Economist magazine.
a) The article states that "the cheaper the liquor, the more people drink". Can you infer
the nature of the price elasticity of demand from this statement? Why or why not?
No, it does not. It is just a statement of the law of demand.
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b) "A 2009 paper in Addiction, a public health journal, reviewed 112 distinct studies of
changes in alcohol taxes and found an unambiguous link. This suggested that a 10%
rise in prices would cut consumption by around 5%". Calculate the price elasticity of
demand for alcohol. Is the demand for alcohol price elastic or price inelastic?
%Δ𝑄 −5%
𝜀= = = −0.5
%Δ𝑃 10%
c) In spite of your answer in part (b) the author of the article believes that imposition
of tax on alcohol would significantly reduce alcohol consumption. Why? What
information is provided to support this belief?
This is because the article identified specific segments of the population where the
demand is likely to be price elastic.
Problem four
Revenue at a major mobile telephone manufacturer was GHS 2.3 billion for the nine
months ending March 2024, up 85% over revenues for the same period last year.
Management attributes the increase in revenues to a 108% increase in shipments,
despite a 21% drop in the average blended selling price of its lines of phones. Given
this information, is it surprising that the company’s revenue increased when it decreased
the average selling price of its phones? Explain.
No, it is not surprising. From the information provided, the demand for the company’s
mobile phone is price elastic: a 21% drop in average selling price lead to a 108% increase
in shipments, meaning that the PED is -5.14. Thus, a decrease in price will lead to an
increase in revenue.
Problem five
To better serve customers, Toyota Ghana hired a sales consultant to respond to
inquiries and offer price quotes. During the last year, the consultant averaged 1.5
vehicles sales per week. On average, these vehicles sold for a retail price of GHS 25,000
with a profit of GHS 1,000 each.
a) Estimate the consultant’s annual marginal revenue product, assuming she worked 50
weeks in the year
The marginal revenue product is 𝑀𝑅𝑃 = 𝑃 ∗ 𝑀𝑃 = 1.5 ∗ 50 ∗ 1,000 = 𝐺𝐻𝑆 75,000
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b) The consultant earned base salary of GHS 60,000 per year, and the company pays an
additional 28% of this base salary in taxes and various fringe benefits. Is the consultant
a profitable employee?
The total compensation for the consultant is GHS 60,000*1.28=GHS 76,800.
The consultant is not a profitable employee.
Problem Six
For the remaining parts of this question, refer to the article from The Economist
magazine titled “Why the gold price is falling”.
a) The article identifies a number of factors behind the falling price of gold. Mention
three of these factors and indicate whether they are demand-side or supply-side factors.
The factors identified are:
Strong value of the US dollar
Expectation of higher interest rate
Lower than expected demand from China
Unusually good political news
All these are factors that affect the demand side of the gold market.
b) According to the article, what is the relationship (i.e. substitutes or complements)
between interest-bearing assets and gold? Explain.
They are substitutes. Interest-bearing assets and gold are alternative ways of holding
wealth.
c) According to the article, what is the relationship (i.e. substitutes or complements)
between prospects of the US economy and gold? Explain.
They are substitutes. Good news about the US economy reduces the demand for gold.
d) According to the article, “unusually good political news” is one of the reasons for
the recent decline in gold prices. With the aid of a diagram, explain how good political
news leads to a fall in the price of gold.
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Unusually good political news reduces demand for gold, shifting the demand curve to
the left. Given supply this leads to a fall in the price of gold
P
S
P1
P2
D’ D
Q2 Q1 Q
