Module 1 – Case
SUPPLY AND DEMAND
Assignment Overview
Before beginning this assignment, make sure you have gone carefully
through all of the required readings for this module. It is very important to
carefully absorb the general concepts as well as the numerical examples in
the background readings. For this assignment, you will have to answer
some purely conceptual questions, as well as some numerical problems.
For conceptual questions, make sure to thoroughly explain your answers
and to cite specific readings from the required background materials to
explain your answers. For numerical problems, make sure to show all of
your work and explain how you arrived at your answers (partial credit can
be given if you get the final answer wrong but do some of the steps
correctly).
Case Assignment
Part A: Conceptual questions
1. Suppose you own a pet shop. Your sales are decent but a marketing
consultant tells you that you could increase your sales and be able to
charge a higher price if you spend some money on local television ads.
If the consultant is right, will advertising lead to an increase in quantity
demanded? Or a shift in the demand curve? Both? Neither? Explain
your answer and make sure to cite at least one of the required readings
in your answer.
2. You are the owner of a furniture factory. You normally produce 100
pieces of furniture a day because that is how much you can produce
given the amount of qualified workers in your town and the amount of
reasonably priced wood that you can purchase locally. Then one day
you get an order from a large national retail chain who wants to
purchase 200 pieces of furniture a day from you. You are hesitant, as
you will have to pay higher wages to get some qualified workers to
move to your town. You also will need to pay higher prices for wood
because you will no longer be able to rely solely on local suppliers and
Listen
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will have to spend more on shipping wood from other towns. But you
drive a hard bargain and the retail chain agrees to pay one and a half
times your normal price. Does this situation describe a change in
quantity supplied? A shift in the supply curve? Both? Neither? Explain
your answer and make sure to cite at least one of the required readings
in your answer.
3. Suppose marijuana has just been legalized in your state. Nobody in
your home town wants to start a marijuana business, as this would be
too much of a stigma. But being an MBA student, you know a good
business opportunity when you see one and decide to take a stab.
Shortly after starting up your business, you gain a loyal following of
customers and start raking in some steep profits. However, the local
government decides that they want a cut of your profits and starts
charging a 20% sales tax on marijuana. Do you think this would lead to
a 20% or greater loss in sales? Do you think marijuana in this situation
would be facing inelastic or elastic demand? Explain your reasoning,
and make sure to cite at least one of the required readings regarding
elasticity.
Part B Quantitative Problem
Suppose the demand function for a new smartphone can be expressed as
QD = 1000 – 1.5P with QD being quantity demanded and P being price.
The supply function can be expressed as QS = 50 + 2P
Fill out the following table using the above equations:
Price Quantity
Demanded
Quantity Supplied Surplus Amount or
Shortage Amount
200
220
240
260
280
300
320
340
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Now answer the following questions:
1. What is the equilibrium price? You can compute this either using
Microsoft Excel, or by using algebra from the equations above and
solving for a price where quantity supplied equals quantity demanded.
Show your work by either showing the algebra steps or by showing how
you used Excel to calculate.
2. Suppose the supply function changes to 100 + 2P. What is the new
equilibrium? Show your work by either showing the algebra steps or by
showing how you used Excel to calculate.
Assignment Expectations
• Answer the assignment questions directly.
• Stay focused on the precise assignment questions. Do not go off on
tangents or devote a lot of space to summarizing general background
materials.
• For computational problems, make sure to show your work and explain
your steps.
For short answer/short essay questions, make sure to reference your
sources of information with both a bibliography and in-text citations. See
the Student Guide to Writing a High-Quality Academic Paper, including
pages 11-14 on in-text citations. Another resource is the “Writing Style
Guide,” which is found under “My Resources” in the TLC Portal.
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