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Victoria University

International School of Business


BEO6600: Business Economics Tutorial/Homework Assignment # 1 & 2 Coverage: Introduction & Marginal Analysis
6. *Define scarcity and opportunity cost. What role these two concepts play in the making of business decisions? Scarcity One of the fundamental economic problem is scarcity as humans have unlimited wants and needs whereas the resources are limited. Limited resources include land, food, minerals, raw materials, energy etc. As such it prompts them to make choices to maximise their economic benefits. The goods and services are scarce are known as economic goods. Opportunity cost The opportunity cost is the trade-off of taking a decision over the next best alternative foregone or in other words the implicit cost. Opportunity can be monetary or non-monetary. Nonmonetary cost can be stated as lost in time, pleasure or any other benefits can would have been foregone. Opportunity cost ensures that resources are used efficiently. In determining a business decision, it is utmost important to consider both the explicit and implicit cost (opportunity cost) in order to determine the total economic cost so that resources are utilised to the optimum efficiency.

Victoria University
International School of Business
BEO6600: Business Economics Tutorial/Homework Assignment # 1 & 2 Coverage: Introduction & Marginal Analysis
8. *(a) what is Marginal Analysis? (b) Why Is Marginal Analysis Important in Economics? (c) What is the role of Marginal analysis? a) Marginal Analysis helps us in making decision by considering small changes in a decision and determining whether the change will improve the final decision. In addition it also analyses both benefit versus the cost of marginal unit of the goods as compared to the inputs which are allocated. b) Marginal Analysis is important in economic because it helps people in allocating scare resources to maximise the benefit of output produce. Example in a business decision whether to produce an additional unit of product, we compare the marginal cost and the marginal revenue of that additional product. c) The role of Marginal Analysis is to support decision making, based on marginal changes rather than decision based on total or averages. This helps in allocating scarce resources during decision making.

Victoria University
International School of Business
BEO6600: Business Economics Tutorial/Homework Assignment # 1 & 2 Coverage: Introduction & Marginal Analysis
9. *Suppose a firm's inverse demand curve is given by P = 120 - .5Q, and its cost equation is C = 420 + 60Q + Q2. (a) Calculate Price (P), Total Revenue (TR), Marginal Revenue,(MR) Total Cost (TC), Marginal Cost (MC), Total Profit and Marginal Profit for Q =1535.

QUANTIY

PRICE

TOTAL REVENUE

TOTAL COST

MARGINAL COST

TOTAL PROFIT

MARGNAL PROFIT

18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

111.0 110.5 110.0 109.5 109.0 108.5 108.0 107.5 107.0 106.5 106.0 105.5 105.0 104.5 104.0 103.5 103.0 102.5

1998.0 2099.5 2200.0 2299.5 2398.0 2495.5 2592.0 2687.5 2782.0 2875.5 2968.0 3059.5 3150.0 3239.5 3328.0 3415.5 3502.0 3587.5

1824 1921 2020 2121 2224 2329 2436 2545 2656 2769 2884 3001 3120 3241 3364 3489 3616 3745

na 97 99 101 103 105 107 109 111 113 115 117 119 121 123 125 127 129

174.0 178.5 180.0 178.5 174.0 166.5 156.0 142.5 126.0 106.5 84.0 58.5 30.0 -1.5 -36.0 -73.5 -114.0 -157.5

na 4.5 1.5 -1.5 -4.5 -7.5 -10.5 -13.5 -16.5 -19.5 -22.5 -25.5 -28.5 -31.5 -34.5 -37.5 -40.5 -43.5

(b) Find the firm's optimal quantity, price, and profit I. numerically (i.e., using the data in above table), Optimal quantity when marginal profit = 0 is 20 units (NOT WHEN MARGINAL REVENUE = 0 ) ?? Optimal quantity = most quantity before revenue starts become negative OR Optimal quantity = the most quantity before next profit becomes negative Optimal price is when optimal quantity = 20 units is $110 Optimal profit is when optimal quantity = 20 units is $180 II. by using the profit and marginal profit equations and P = 120 - 0.5Q C = 420 + 60Q + Q2 TR = P x Q = (120 - 0.5Q)Q

Victoria University
International School of Business
BEO6600: Business Economics Tutorial/Homework Assignment # 1 & 2 Coverage: Introduction & Marginal Analysis
= 120Q - 0.5Q2 = TR - TC = 120Q - 0.5Q2 - (420 + 60Q + Q2) = 60Q - 1.5Q2 - 420 d/dQ = MP = 60 - 3Q At optimal profit, MP=0 60 - 3Q = 0 Q = 20 Q = 20, P = 120 - 0.5(20) = 110 = 60Q - 1.5Q2 420 = 60(20) - 1.5(20)2 420 = 180 III. by setting MR equal to MC. Also provide a graph of MR and MC. Price 120 110 60 MC = MR Marginal cost and marginal revenue graph

20

120

Quantity

(c) Suppose instead that the firm can sell any and all of its output at the fixed market price P = 120. Find the firm's optimal output. P = 120 - 0.5Q P = 120, Q = 0 If the firm sells any at P=120, the firm will sell 0 quantity because there will be no demand for the product.

Victoria University
International School of Business
BEO6600: Business Economics Tutorial/Homework Assignment # 1 & 2 Coverage: Introduction & Marginal Analysis
10. *The original revenue function for the microchip producer is R = 170Q - 20Q2. Derive the expression for marginal revenue, and use it to find the output level at which revenue is maximized. Confirm that this is greater than the firm's profit-maximizing output, and explain why. (Hint: Revenue is maximised when MR=0 and Profit is maximised when MP=0). a) R = 170Q - 20Q2 MR = dR/dQ = 170 - 40Q Revenue max, MR=0 170 - 40Q = 0 Q = 4.25 units b) Price 170

Profit maximisation MC = MR

4.25

Quantity

Profit maximisation is when MC = MR (MC intersects with MR). From the graph, the intersection can never exceed the revenue maximisation at 4.25 unless the MC is 0, which is impossible because the firm will have no costs to begin with.