Mapua Institute of Technology – Intramuros

School of Language, Humanities and Social

Sciences
Muralla St, Intramuros, Manila, Metro Manila

Problem Sets
SS12/A3

Submitted by:
Dones, Mark Lester T.
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 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

800
723
700
584
600

500

400 367

300

200

100

0
Sun Cellular Smart Globe
Number of Users 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.

1400
1300
1267
Quantity Demanded for Tickets

1200
1100
1000
956
900
800
700
600
500 500
400
300
200
100
0
12 15 20
Quantity of tickets demanded 500 1267 956
Ticket Prices

Quantity of tickets demanded

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

500 509

400
360 375
325
300 300
250
200 207 197
135
100
50
0 15
Santol Katipu Anona Betty Gilmor V. Legard
Cubao J. Ruiz Pureza Recto
an nan s Go e Mapa a
Quantity of tickets demanded 300 135 50 15 360 207 325 375 250 197 509

Quantity of tickets demanded

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

700
609
600
509
460 475
500 450
425
400
360 375
400
307 325
300 297
300 235 250
207 197
200 135 150
115
100 50
15
0
Santol Katipu Anona Betty Gilmor V. Legard
Cubao J. Ruiz Pureza Recto
an nan s Go e Mapa a
Non-peak hours 300 135 50 15 360 207 325 375 250 197 509
Peak hours 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.
Number of viewers (in %)
45
38.6
40
35
30
23.4
25 21.6
20
12.9
15
10
3.4
5
0
The
Ang Juan Happy
Supernatural Boardroom Mars (GMA
Probinsyano Love Story
(TV-5) (CNN News TV)
(ABS-CBN) (GMA)
Philippines)
Number of viewers (in %) 38.6 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.
Price

7
6
5
4
3
2
1
0
0 1 2 3 4 5 6

Market Quantities

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.

7
Price

0
0 1 2 3 4 5 6

Market Quantities

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
Price
5

0
0 1 2 3 4 5 6

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.

0
0 1 2 3 4 5 6
 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 0.5 1 1.5 2 2.5 3

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

7
6
5
4
3
2
1
0
0 1 2 3 4 5 6

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
Price

0
0 1 2 3 4 5 6
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
Price

0
0 1 2 3 4 5

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

Price/transaction Quantity Demanded Quantity Supplied

(in dollars) Per Year 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.

80 75 75

70

60
50 50
50
Axis Title

40 35 35

30 25 25

20 15 15
10 10
10

0
0 5000000 10000000 15000000 20000000
Axis Title

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

5 3−2
𝐸=| | ∗ 100% = 50%
2−4
4
𝑅0 = 4 ∗ 2 = 8 𝑅1 = 2 ∗ 3 = 6
3
𝑃𝑟𝑜𝑜 = 𝑅 − 𝑃𝐶 𝑃𝑟𝑜1 = 𝑅 − 𝑃𝐶
=8−3 =6–3
Price

2 =5 =3
∆𝑃𝑟𝑜 = 𝑃𝑟𝑜1 − 𝑃𝑟𝑜0
1
=3–5
0 = -2
0 1 2 3 4 5 Statement is false
Quantity Demanded

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

5 4−2
𝐸=| | ∗ 100% = 100%
2−4
4 𝑅0 = 4 ∗ 2 = 8 𝑅1 = 2 ∗ 4 = 8

3 ∆𝑅 = 𝑅1 − 𝑅0
Price

=8 – 8
2
=0
1
Statement is false, revenue will
stay the same
0
0 1 2 3 4 5
Quantity Demanded
 3. If PC = R, change in profit is zero for any good regardless of its demand
elasticity.

PC = R PC = R
𝑃𝑟𝑜0 = 𝑅0 − 𝑃𝐶0 𝑃𝑟𝑜1 = 𝑅1 − 𝑃𝐶1
𝑃𝑟𝑜0 = 0 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.

5 4−1
𝐸=| | ∗ 100% = 300%
3−4
4 𝑅0 = 4 ∗ 1 𝑅1 = 3 ∗ 4
=3 = 12
3
∆𝑅 = 12 − 3
Price

2 =9
𝑃𝑟𝑜0 = 3 − 2 𝑃𝑟𝑜1 = 12 − 2
1
=1 = 10
0 ∆𝑃𝑟𝑜 = 10 − 1
0 1 2 3 4 5
Quantity Demanded
=9
Statement is true
 5. Market inflation always pulls down market revenues.

5 There are different kinds of inflation,

and they can all pull down market
4
revenues.
3
Price

0
0 1 2 3 4 5
Quantity Demanded

6. Goods on sale with elastic demand create a positive impact on revenues but
do not necessarily mean a profit gain.

5 This implies that changes in the price

have no effects on the quantity of a
4
good.
3
Price

0
0 1 2 3 4 5
Quantity Demanded
 7. The demand elasticity for any good whose price and quantities demanded do
not change is perfectly inelastic.

5 Statement is false. If a change in

price produces no change in the
4
quantity demanded of a commodity,
then the price elasticity of Good X is
3
perfectly inelastic.
Price

0
0 1 2 3 4 5
Quantity Demanded

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

graphed.)

5 2−2
𝐸=| | ∗ 100% = 0%
4−1
4

Statement is false, slope is equal to 0.

3
Price

0
0 1 2 3 4 5
Quantity Demanded
 9. Revenues are always positive for any goods regardless of elasticity.

5 The revenue can either be positive or

negative, but since it includes
4 substitutes, the price of elasticity is
generally positive.
3

0
0 1 2 3 4 5

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

elasticity.

5 Statement is false. In an inelastic

demand, if the price of a good is
4 decreased, the revenue will also
decrease. This means that R0 > R1. If
3 we use the formula:
Price

∆𝑅 = 𝑅1 − 𝑅𝑜
2 the change in revenue will be
negative, since Ro is greater than R1.
1

0
0 1 2 3 4 5
Quantity Demanded
 Problem Set 5: Production Costs
QUANTITIES/OUTPUTS (QTY) VARIABLE COST (VC) GI
1 10 VE
2 15 N:
3 20 PRI
4 30 CE
5 50 (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

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 = (𝑃2000)(30 𝑑𝑎𝑦𝑠) ∑ 𝑃𝑟𝑜 = 𝑃696999.96
𝑃𝐶 = 𝑃60000
𝑅 = (𝑃14)(300)(30) = 𝑃 126000 𝑇𝑎𝑥 = 696999.96(0.15)
𝑃110000 𝑇𝑎𝑥 = 𝑃104549.97
𝑃𝐶1 = (𝑃60000) + ( )
12 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 = ∑ 𝑃𝑟𝑜 − 𝑇𝑎𝑥

𝑃𝐶2 = 𝑃𝐶1 − 𝑃15000 = 𝑃54166.67 𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑃592449.99

(Month 1)
𝑃110000
𝑃𝐶2 = (𝑃60000) + ( )
12
(Month 2 onwards)

𝑃𝑟𝑜𝑜 = 𝑅 − 𝑃𝐶2 = 𝑃71833.33

(Month 1)
𝑃𝑟𝑜𝑜 = (𝑅 − 𝑃𝐶2 ) − 𝑃15000 = 𝑃56833.33
(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 production’s pricing strategy?
o Cost Absorption Approach
 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: Since taxable income is above P500,000

𝑃80,000 ∗ 12 = 𝑃960,000 𝑃125,000 + 0.32(862,000 − 500,000)
Deduction: 𝑃125,000 + 𝑃115,840
(𝑃50,000) + [(1,800 + 1,200 + 1,000) Income tax due:
∗ 12] = 𝑃98,000 P 240,840
Taxable Income:
𝑃960,000 − 𝑃98,000 = 𝑃862,000

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: Since taxable income is between P250,000

𝑃60,000 ∗ 10 = 𝑃600,000 and P500,000
Deductions: 𝑃50,000 + 0.30(𝑃450,000 − 𝑃250,000)
𝑃50,000 + 𝑃100,000 = 𝑃150,000 𝑃50,000 + 𝑃60,000
Taxable Income: Income tax due:
𝑃600,000 − 𝑃150,000 = 𝑃450,000 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: Deductions:
MIT = P120,000 P50,000
SLHS = P6,000 Taxable Income:
UST = P10,000 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 Tax withheld:
𝑃125,000 + 0.32(1,582,000 − 500,000) P 6,500 * 12
P125,000 + 346,240 P 78,000
Income Tax Due: Net tax due:
P 471,240 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: Since taxable income is more than P500,000

P50,000 * 12 = P600,000 P125,000 + 0.32(P528,000 – P500,000)
13th month pay = P85,000 P125,000 + P8,960
P85,000 – P82,000 = P3,000 Income tax due:
Total income = P603,000 P133,960
Deductions:
P50,000 + P25,000
P75,000
Taxable income:
P603,000 – P75,000
P528,000

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: Since taxable income is between P140,000

P30,000 * 12 = P360,000 and P250,000
Deductions: P22,500 + 0.25(P210,000 – P140,000)
P50,000 + (4 * P25,000) = P150,000 P22,500 + P17,500
Taxable income: Income tax due:
P360,000 – P150,000 = P210,000 P40,000