Managerial Economics

Indian School of Business

DHM 1, 2020-21

HOMEWORK 2
Due: Saturday, June 27 at 1 pm

Please write the names of ALL group members, their ID numbers, group name and section clearly
on your answer script.
You must adhere to the honor code while doing this assignment. This is a CODE 2N-b
assignment.

Problem 1
The market demand for Economics textbooks is given by QD = 160 – 4P. Total cost of the
firm is given by TC = 6Q2+15Q+5
a. Find the profit maximizing level of output, price, and profit if this firm is the only
firm in the market.
b. Find the short-run profit maximizing level of output and profit of the firm assuming
the market is perfectly competitive and the market price is 27.
c. If the market is perfectly competitive and the market price is 75, what will happen
in the long run?

Problem 2
Consider the market for biryani in Hyderabad. In this market, the supply curve is given
by Qs = 10PB − 5PR and the demand curve is given by QD = 100 − 15PB + 10PK , where B
denotes biryani, R denotes rice, and K denotes kebabs.
a. Assume that PR is fixed at 1 and PK = 5. Calculate the equilibrium price and
quantity in the biryani market. What is the producer and consumer surplus
generated by the biryani market at these prices?
b. Suppose that a poor harvest season raises the price of rice to PR = 2. The price of
kebabs remains the same as in part a. Find the new equilibrium price and quantity
of biryani. Draw a graph to illustrate your answer.
c. Suppose PR = 1 but the price of kebabs drops to PK = 3. Find the new equilibrium
price and quantity of biryani.
d. Suppose PR = 1, PK = 5, and the local government mandates that since a lot of
tourists like to eat biryani when they visit Hyderabad, in the interest of promoting
tourism, the price of biryani cannot exceed 5. How much is the shortage of biryani
as a result? Draw a graph to illustrate your answer.

Problem 3
The market demand curve for a monopolist is given by P = 40-2Q.
a. What are the marginal revenue and average revenue functions for the firm?
b. What will be the profit maximizing price and quantity for this firm if average cost
is given by Q?

Problem 4
It is lunch time and there are 2 kinds of customers at the Goel dining hall: students from
the afternoon sections, and students from the morning sections. Their respective demand
curves for lunch per week are given by QA = 800 – 2P and QM = 920 – 4P. The dining
hall’s marginal cost of each lunch served is 30.
a. Assume that the dining hall can price discriminate. What is the profit maximizing
price that the dining hall can charge from each type of student?
b. Why do you think the elasticity of demand is different for the two types of
students?

Problem 5
Suppose that the market for calcium is perfectly competitive. Consider the following
information about its price:
• Between 2000 and 2005, the market price was stable at about Rs. 200 per kilo.
• In the first 3 months of 2006, the market price doubled, reaching a high of Rs. 400
per kilo, where it remained for the rest of 2006.
• Throughout 2007 and 2008, the market price of calcium declined, eventually
reaching Rs. 200 per kilo by the end of 2008.
• Between 2008 and 2013, the market price was stable at that level

Assuming that the technology for producing calcium did not undergo any changes
between 2000 and 2013, and the input prices faced by calcium producers remained
constant, what explains the pattern of prices that prevailed between 2000 and 2013? Is it
likely that there were more producers of calcium in 2013 than there were in 2000?
Explain your answers using graphs.

Problem 6
Suppose that Air India has a monopoly on the route between Delhi and Srinagar. During
the winter months, the monthly demand on this route is given by P = a1 – bQ; and during
the summer months, it is given by P = a2 – bQ, where a2 > a1. Assume that Air India’s
marginal cost is constant, and is given by c. What will be the equilibrium price and
quantity in each season?