Case 5:

One of the luxury car manufacturers usually wants to make a limited number of automobiles in a
given year and the company’s aim is to expand their profit margins in each car sold. After doing the
analysis on the sales of their cars, the company determined the below supply and demand functions
of the cars sold:
Supply function: P = 1000 + Q2
Demand function: P = 21000 – Q2
a) Calculate the producer, consumer and total surplus at the market equilibrium.
b) If the manufacturer restricts the number of cars manufactured and sold to X00 (X = third last
digit of your student id (X00 will be rounded to nearest hundred); for example if last three
digits of your id is 367 then X00 = 400, if 089 then X00 = 100; if 211, then X00 = 200) at the
demand price of $15,000, how much is the total producer surplus?
c) A manufacturer wants to maximize the producer surplus and hence determine the quantity (give
the whole number) at which this can be possible. Also determine the producer surplus at this
quantity.
Answer:
a) At equilibrium:
Qsupply= Qdemand, Psupply= Pdemand, thus:
1000+Q2=21000−Q 2 => Q2=10,000
Since quantity must be positive ⟹ Qε =100
Pε =1000+1002=11,000
Q=Q ε

Consumer surplus = ∫ ( demand function ) dQ−Pε Q ε

Q =0
Q=Q0

= ∫ ( 21000−Q2 ) dQ−11000∗100
Q=0
Qε
Q3
[
¿ 21000 Q−
3 ]
3
0
−1100000=¿

Qε 03
[
¿ 21000 Q ε −
3
−21000∗0+ −1100000
3
3 ]
100
[
¿ 21000∗100−
3 ]
−1100000 = 666,666.67
Q=Q ε

Producer surplus = Pε Q ε − ∫ ( supply function ) dQ

Q =0
Q =Q0

=11000∗100− ∫ ( 1000+Q2 ) dQ
Q =0
Qε
Q3
[
¿ 1100000− 1000 Q+
3 ]
3
0
=¿

Qε 03
[
¿ 1100000− 1000 Q ε +
3
−1000∗0−
3 ]
 1003
[
¿ 1100000− 1000∗100−
3
= 666,666.67 ]
Total market surplus = Consumer surplus + Producer surplus
= 666,666.67+666,666.67=13,333,333

b) At Q0 = 100 and P0 = 15000

Q=Q 0

Producer surplus = P0 Q 0− ∫ ( supply function ) dQ

Q=0
100
2
=15000∗100− ∫ ( 1000+Q ) dQ
0
100
Q3
[
¿ 1500000− 1000Q+
3 ] 0
=¿

1003 03
[
¿ 1500000− 1000∗100+
3
3
−1000∗0−
3 ]
100
[
¿ 1500000− 1000∗100+
3
= 1,066,666.66 ]
c) Assuming no price discrimination, when manufacturer decides to produce quantity Q, the
price at which consumer is willing to pay is determined by demand function.
d) P=21000−Q2
Q

Producer surplus = PQ− ∫ ( supply function ) dQ

Q=0
Q
PS=(2 1000−Q2 )Q−∫ ( 1000+Q2 ) dQ
0
100
Q3 03
3
[
PS=21000Q−Q − 1000 Q+ −1000∗0−
3
3
3 0 ]
3 Q 4 Q3
PS=21000 Q−Q −1000Q− =2000 Q−
3 3
First order derivative:
PS ’=2000−4 Q 2=0⇒ Q=± √500 ≈ ± 22.
Since quantity must be positive, thus Q = 22
Second order derivative:
PS”=-8Q < 0 since Q>0, thus this is a maximum point.
4 Q3 4∗223
Producer surplus = 2000 Q− =2000∗22− =29,802.67
3 3
Thus maximum producer surplus is 29,802.67 at Q=22