Answered Problem Sets

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:

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 consumer’s 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 Supply

50 pesos 500 packs per week 60 pesos 487 packs per week 70 pesos 382 packs per week 80 pesos 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

Sun Cellular0 Smart Globe

100 200 300 400 500 600 700 800 367 584 723 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.

12 15 20 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 500 1267 956

Quantity of tickets demanded

Ticket Prices Quantity Demanded for Tickets

b. What about a graph showing a market equilibrium per station? (Consider Santolan-Recto Line) Sant olan Katip unan Anon as Cuba o Bett y Go Gilm ore J. Ru iz V. M apa Pure za Lega rda Rect o 0 100 200 300 400 500 600 300 135 50 15 360 207 325 375 250 197 509

Quantity of tickets demanded

Sant olan Katip unan Anon as Cuba o Bett y Go Gilm ore J. Ru iz V. M apa Pure za Lega rda Rect o 0 100 200 300 400 500 600 700 300 135 50 15 360 207 325 375 250 197 509 400 235 150 115 460 307 425 475 450 297 609

Non-peak hours 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.

Ang Prob insy ano (ABS -CBN ) Juan Hap py Lo ve S tory (GM A) Supe rnat ural (T V-5) The Boar droo m (C NN P hilip pine s) Mar s (G MA News TV) 0 5 10 15 20 25 30 35 40 4538.6 23.4 _21.6 3.4 12.9

Number of viewers (in %)

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.

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 0 1 2 3 4 5 6 7 Market Quantities Price

Hoarding of goods results in inflation

2. A rumored coup d’etat against the Pinoy administration causing panic buying of the basic commodities over the weekend.

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 0 1 2 3 4 5 6 7 Market Quantities Price

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

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 0 1 2 3 4 5 6 Market Quantities Price

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. 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 0 1 2 3 4 5 6

5. A sustained importation of meat from China (at lower prices) despite a stable market situation. 0.5 1 1.5 2 2.5 3 0 0.5 1 1.5 2 2.5 3 3.5

Y-Values

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

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 0 1 2 3 4 5 6 7 Market Quantities Price

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.

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 0 1 2 3 4 5 6 7 8 Market Quantities Price

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

0 1 2 3 4 5 0 1 2 3 4 5 6 Market Quantities Price

PART II. Below is a hypothetical schedule of price, demand, and supply for the flesh trade industry planet Mars:

Price/transaction (in dollars) Quantity Demanded Per Year Quantity Supplied Per Year $ 75 3 million 18 million $ 50 6 million 15 million $ 35 9 million 12 million $ 25 12 million 9 million $ 15 15 million 6 million $ 10 18 million 3 million

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

0 5000000 10000000 15000000 20000000 0 10 20 30 40 50 60 70 80 10 15 25 35 50 75 75 50 35 25 15 10 Axis Title Axis Title

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.

1 2 3 4 5 0 1 2 3 4 5 Quantity Demanded Price E=

|

3−2 2−4

|

∗100 =50 R₀=4∗2=8 Pro_o=R−PC ¿8−3 ¿5 R₁=2∗3=6 Pro₁=R−PC

= 6 – 3

= 3

∆ Pro=Pro₁−Pro₀

= 3 – 5

= -2

Statement is false

2. A 50% cut in the price of a good with unitary demand pulls down its

revenue.

E=

|

4−2 2−4

|

∗100 =100 R0=4∗2=8 R1=2∗4=8 ∆ R=R₁−R₀

=8 – 8

= 0

1 2 3 4 5 0 1 2 3 4 5 Quantity Demanded Price

Statement is false, revenue will

stay the same

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

elasticity.

PC = R

Pro₀=R₀−PC₀ Pro₀=0

PC = R

Pro₁=R₁−PC₁ Pro₁=0 ∆ Pro=Pro₁−Pro₀ ∆ 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.

E=

|

4−1 3−4

|

∗100 =300 R₀=4∗1

= 3

R₁=3∗4

= 12

∆ R=12−3

= 9

0 1 2 3 4 5 0 1 2 3 4 5 Quantity Demanded Price Pro₀=3−2

= 1

Pro₁=12−2

= 10

∆ Pro=10−1

= 9

Statement is true

5. Market inflation always pulls down market revenues.

1 2 3 4 5 0 1 2 3 4 5 Quantity Demanded Price

There are different kinds of

inflation, and they can all pull down

market revenues.

6. Goods on sale with elastic demand create a positive impact on revenues but

do not necessarily mean a profit gain.

0 1 2 3 4 5 0 1 2 3 4 5 Quantity Demanded Price

This implies that changes in the

price have no effects on the quantity

of a good.

7. The demand elasticity for any good whose price and quantities demanded do

not change is perfectly inelastic.

1 2 3 4 5 0 1 2 3 4 5 Quantity Demanded Price

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.

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

graphed.)

1 2 3 4 5 0 1 2 3 4 5 Quantity Demanded Price E=

|

2−2 4−1

|

∗100 =0

Statement is false, slope is equal to

0.

0 1 2 3 4 5 0 1 2 3 4

5

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.

0 1 2 3 4 5 0 1 2 3 4 5 Quantity Demanded Price

Statement is false. In an inelastic

demand, if the price of a good is

decreased, the revenue will also

decrease. This means that R

0

> R

1

. If

we use the formula:

∆ R=R₁−R_o

the change in revenue will be

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 VC FC PC AC MC R MR Pro 1 10 10 20 20 0 15 0 -5 2 15 10 25 12.5 5 30 15 5 3 20 10 30 10 5 45 15 15 4 30 10 40 10 10 60 15 20 5 50 10 60 12 20 75 15 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 doesn’t 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

QUANTITIES/OUTPUTS (QTY) VARIABLE COST (VC)

1 10

2 15

3 20

4 30

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 production’s pricing strategy? Show mathematically. (1 point) M R PCo PC1 PC2 Proo 1 P 126,000 P 60,000 P 69,166.67 P 54166.67 P 71833.33 2 P 126,000 P 60,000 P 69,166.67 P 69166.67 P 56833.33 3 P 126,000 P 60,000 P 69,166.67 P 69,166.67 P 56833.33 4 P 126,000 P 60,000 P 69,166.67 P 69,166.67 P 56833.33 5 P 126,000 P 60,000 P 69,166.67 P 69,166.67 P 56833.33 6 P 126,000 P 60,000 P 69,166.67 P 69,166.67 P 56833.33 7 P 126,000 P 60,000 P 69,166.67 P 69,166.67 P 56833.33 8 P 126,000 P 60,000 P 69,166.67 P 69,166.67 P 56833.33 9 P 126,000 P 60,000 P 69,166.67 P 69,166.67 P 56833.33 10 P 126,000 P 60,000 P 69,166.67 P 69,166.67 P 56833.33 11 P 126,000 P 60,000 P 69,166.67 P 69,166.67 P 56833.33 12 P 126,000 P 60,000 P 69,166.67 P 69,166.67 P 56833.33

PC=(P 2000)(30 days) PC=P 60000 R=( P 14 )(300) (30)=P 126000 PC₁=(P 60000)+

(

P 110000 12

)

PC2=PC1−P 15000=P54166.67 (Month 1) PC₂=(P 60000)+

(

P 110000 12

)

(Month 2 onwards) Pro_o=R−PC₂=P71833.33 (Month 1) Pro_o=

₍

R−PC₂

)

−P 15000=P 56833.33 (Month 2 onwards)

∑

Pro=P 696999.96 Tax=696999.96 (0.15 ) Tax=P 104549.97 Net Profit =

_∑

Pro−Tax Net Profit =P 592449.99

 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 production’s pricing strategy?

o

Problem Set 7:

BASIC PROBLEMS ON THE COMPUTATION OF ANNUAL INCOME TAX

1. Eng’r 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 80,000∗12=P 960,000 Deduction: (P50,000 )+

_[

(1,800+1,200+1,000 )∗12

_]

=P 98,000 Taxable Income: P 960,000−P 98,000=P 862,000

Since taxable income is above P500,000 P125,000+0.32(862,000−500,000)

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 60,000∗10=P600,000 Deductions: P50,000+P 100,000=P 150,000 Taxable Income: P 600,000−P 150,000=P 450,000

Since taxable income is between P250,000 and P500,000

P50,000+ 0.30 (P 450,000−P 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(1,582,000−500,000)

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