Problem set 2 – Answer

P2.7

A.

Regular price $12, discount $5

Sales 3200 to 5200.

Slope = (12-7)/(3200-5200) = -0.0025

Intercept = 7 - -0.0025(5200) = 20

Price = -0.0025Quantity + 20
Quantity = (20 - Price)/(0.0025) = 8000 - 400P

B.

Quantity
Price,$
sold TR
5 6000 30000
6 5600 33600
7 5200 36400
8 4800 38400
9 4400 39600
10 4000 40000
11 3600 39600
12 3200 38400
13 2800 36400
14 2400 33600
15 2000 30000
max 40000

The revenue maximising price is $10. This is not the profit maximising ticket price as the
cost (FV and VC) have not been deducted.

P2.10
We could use Min AC = TC/Q

AVERAGE COST = TC(Q)/Q = (12,100,000 + 800Q + 0.004Q2)/Q = 12,100,000/Q + 800 +

0.004Q

Cost minimizing output is when AC = MC

12,100,000/Q + 800 + 0.004Q = 800 + 0.008Q

Q = 55,000
MC = 800 + 0.008(55,000) = $1240
AC = $1240
Profit = TR – TC = 1800(55,000) - 0.006(55,000*55,000) - 12,100,000 - 800(55,000) -
0.004(55,000*55,000) = $12,650,000

B.
WE could use Max Profit = TR-TC
Profit maximising output is MR = MC
1,800 - 0.012Q=800 + 0.008Q
Q=50,000

MC=800 + 0.008(50,000) = $1200

AC=12,100,000/(55,000) + 800 + 0.004(55,000) = =$1,240
P=TR/Q=$1,470
Profit = P × Q – TC =$12,900,000

C.

Cost is minimized at AC = MC = $1240. The output at that point is 55,000 and profit is
$12.65m. The profit per unit is $230.

Profit maximising output is at the point where MR = MC = $1240. The output at that point is
50,000 and profit is $12.9m. The profit per unit is $258.

Although cost is minimized at 55,000, the profit is less than producing at 50,000 units. This is
because the cost of producing after 50,000 units is higher than the increase in revenue.

P3.4

Q = 5,000 - 4,000P + 0.02Pop + 0.25I + 1.5A,

A. Determine the demand faced by CPC in a typical market in which P = $10, Pop =
1,000,000 persons, I = $60,000, and A = $10,000.

Q = 5,000 - 4,000(10) + 0.02(1,000,000) + 0.25(60,000) + 1.5(10,000) = 15000

B. Calculate the level of demand if CPC increases annual advertising expenditures from
$10,000 to $15,000.

Q = 5,000 - 4,000(10) + 0.02(1,000,000) + 0.25(60,000) + 1.5(15,000) = 22,500

C. Calculate the demand curves faced by CPC in parts A and B.

When advertising is $10,000,

Q = - 4,000P + 55,000
P = 13.75 – 0.00025Q
When advertising is $15,000,

Q = 62,000 – 4000P
P = 15.625 – 0.00025Q

P3.10

Quantity Quantity Diff (2- Surplus (+) or Shortage

Price, c Supplied Demanded 3) (-)
15 115000 167500 -52500 -
16 122500 157500 -35000 -
17 130000 147500 -17500 -
18 137500 137500 0 +
19 145000 127500 17500 +
20 152500 117500 35000 +