ROLVICA BALAN (53671)

DEMAND AND SUPPLY EXERCISE

1. Why is the market demand curve usually less elastic than demand curve by the individual firms in the
market?
The market demand curve is made up of all the individual demand curves for a good. That is
why market demand is usually less elastic than demand curve faced by the individual firms in
that market because the individual demand curve represents the quantity of good that a
consumer will buy at given price.

2. The demand for housing is often describe as being highly cyclical and very sensitive to housing prices
and interest rates. Given the characteristics, describe the effect of each following in terms of whether it
would increase or decrease the quantity demanded or the demand for housing. Moreover, when price is
expressed as a function of quantity, indicate whether the effect of each of the following is an upward or
downward movement along a given demand curve or involves an outward or inward shift in the
relevant demand curve for housing. Explain your answers.
a) An increase in housing prices
An increase in housing prices will decrease the quantity demanded and involve in upward
movement along the housing demand curve.

b) A rise in interest rates

A rise in interest rate will decrease the demand for housing and cause in inward shift of the
housing demand curve.

c) A severe economic recession

A severe economic recession will decrease the demand for housing and result in an inward
shift of the housing demand curve.

d) A robust economic expansion

A robust economic expansion will increase the demand for housing and result in an outward
shift of the housing demand curve.

3. A market consists of three people, A, B and C, whose individual inverse demand equation are as
follows:
A: P = 35 – 0.5QA
B: P = 50 – 0.25QB
C: P = 40 – 2QC
The industry supply equation is given by Qs = 40 + 3.5P
a) Determine the equilibrium price and quantity.
A: P = 35 – 0.5QA
0.5QA = 35 – P
QA = (35 – P)/0.5
QA = 70 – 2P

B: P = 50 – 0.25QB
0.25QB = 50 – P
QB = (50 – P)/0.25
QB = 200 – 4P

C: P = 40 – 2QC
2QC = 40 – P
QC = (40 – P)/2
QC = 20 – 0.5P

Qd = QA + QB + QC
Qd = 70 – 2P + 200 – 4P + 20 – 0.5P
Qd = 290 – 6.5P
To find the equilibrium, Qd = Qs
 290 – 6.5P = 40 + 3.5P
250 = 10P
25 = PE
Qd = 290 – 6.5(25)
QE = 127.5 = 128 units
Hence, the price equilibrium is $25 and quantity equilibrium is 128 units.

b) Determine the amount that will be purchased by each individual.

A: QA = 70 – 2(25)
QA = 20 units
B: QB = 200 – 4(25)
QB = 100 unis
C: QC = 20 – 0.5(25)
QC = 7.5 = 8 units
Therefore, the amount purchased by individual A, B and C is 20 units, 100 units and 8 units
respectively.

4. For each of the following equations, determine whether demand is elastic, inelastic or unitary elastic as
the given price.
EP = (P/Q) x (∆Q/∆P)
a) Q = 100 – 4P, P = RM20

Q = 100 – 4(20)
Q = 20
∆Q/∆P = -4
EP = 20/20 x (-4) = -4
Therefore, the demand is inelastic.

b) Q = 1200 – 20P, P = RM5

Q = 12000 – 20 (5)
Q = 1400
∆Q/∆P = -20
EP = 5/1400 x (-20) = 0.07
Therefore, the demand is inelastic.

c) P = 50 – 0.1Q, P = RM20

0.1Q = 50 – P
Q = (50 – P)/0.1
Q = 500 – 10P
Q = 500 – 10(20) = 300
∆Q/∆P = -10
EP = 20/300 x (-10) = -0.67
Therefore, the demand is inelastic.

5. The San Diego Zoo is contemplating a stuffed panda bear advertising promotion. Annualized sales data
from local shops marketing the ‘Can’t Bear it when you’re Away’ bear indicate that:
Q = 50000 – 1000P
Where Q is Panda Bear sales and P is price.
a) How many pandas could the zoo sells at $30 each?
QS = 50000 – 1000(30)
QS = 20000 of pandas

b) What price would the zoo have to charge to sell 25000 pandas?
25000 = 50000 – 1000P
1000P = 50000 – 25000
P = $25
 c) At what price would panda sales equal to zero?
QS = 0
0 = 50000 – 1000P
1000P = 50000 – 0
P = $50

d) How many bears could be given away?

P=0
QS = 50000 – 1000P
QS = 50000 bears will be given away

e) Calculate the price elasticity of demand at price of $10.

∆Q/∆P = -1000
Q = 50000 – 1000(0)
Q = 40000
EP = (10/40000) x (-1000) = -0.25
Therefore, the demand is inelastic at -0.25.

6. Suppose that the demand and supply functions for good X are:
Qd = 50 – 8P
Qs = -17.5 + 10P
a) What are the equilibrium price and quantity?
Qd = Qs
50 – 8P = -17.5 + 10P
50 + 17.5 = 8P + 10P
67.5 = 18P
3.75 = PE
QE = 50 – 8(3.75)
QE = 20 units
Therefore, the price equilibrium is $3.75 and quantity equilibrium is 20 units.

b) What is the market outcome if price is $2.75? What do you expect to happen?
When the price is $2.75, shortage will occur.

c) What is the market outcome if price is $4.25? What do you expect to happen?
When the price is $4.25, surplus will occur.

d) What happens to equilibrium price and quantity if demand function becomes

Qd = 59 – 8P
Qd = Qs
59 – 8P = -17.5 + 10P
59 + 17.5 = 8P + 10P
76.5 = 18P
$4.25 = PE
QE = 59 – 8(4.25)
QE = 25 units
The price equilibrium increase from $3.75 to $4.25 and quantity equilibrium also increase
from 20 units to 25 units.
PRODUCTION EXERCISE

1. A local scuba diving company, SCUBA Inc. has estimated its tank filling costs as a function of quantity
to be:

Q TC TFC AC = TC/C AFC MC =

∆TC/C
0 130 130 -
1 155 130 130
2 165 130
3 186 130
4 222 130
5 285 130

2. Given the data as shown, complete the following table:

Q TC TFC TVC ATC = AFC AVC = MC

VC/Q
0 100
1 20
2 35
3 145
4 40
5 17
6 45

3. Determine the average variable and marginal cost functions for the equation given below and
calculate the rate of output, which minimizes average variable cost.
TC = 12000 + 150Q – 5Q2 + 0.05Q3
MC = TC
MC = 150 – 10Q + 0.15Q2
AFC = TC (0) = 12000 + 150 (0) – 5(0)2 + 0.05(0)3 = 12000
TVC = 12000 + 150Q – 5Q2 + 0.05Q3
AVC = TVC/Q
AVC = (150Q – 5Q2 + 0.05Q3)/Q
AVC = 150 – 5Q + 0.05Q2
AVC’ = -5 + 0.10Q
Let AVC = 0
0 = -5 + 0.10Q
5 = 0.10Q
50 = Q

4. A firm’s total cost function is given by

TC = 120Q + 0.5Q2 + 0.002Q3
Is this a long run or short run cost function?
It is short run function because there is fixed cost in the function. Total cost (TC) is a sum of total
variable cost with total fixed cost.

5. Define the law of diminishing returns. Why is this law considered a short run phenomenon?
As additional units of variable input are combined with a fixed input at some point the additional
output starts to diminish. It appears in the short run because of the at least one fixed factors of
production.

6. Indicate whether each of the following statements is true or false. Explain why.
a) When the law of diminishing returns takes effect, a firm’s average product will start to decrease.
 False. At law of diminishing return the unit increase in variable input causes the output to
increase in lower rate. While the total average production remains constant for a while
before it starts to decrease.
b) Decreasing returns to scale occurs when a firm has to increase all of its inputs at an increasing rate
in order to maintain a constant rate of increase in its output.
True.
c) False. Stage one of production process ends at the point of optimum AP which usually start
after law of diminishing return has occurred.

1. Explain the difference between a short run and a long run production function. Cite one example of this
difference in a business situation.
The short run production function is one in which at least is one factor of production is thought
to be fixed in supply, for example it cannot be increased or decreased, and the rest of the factors
are variable in nature. On the other hand, long run production function refers to that period in
which all the inputs of the firm are variable. For example, Evey Mini Mart operates under law of
diminishing return where in short run, the activity level does not change. However, the mini mart
can expand or reduce the activity levels in the long run production function.

2. Define the law of diminishing returns. Why is this law considered a short run phenomenon?
Law of diminishing return refers to if one input in the production of a commodity is increased
while all other inputs are held fixed, a point will eventually be reduced at which additions of the
input yield progressively smaller increases in output. It is considered short run because of the at
least one fixed factors of production.

3. Indicate whether each of the following statements is true or false. Explain why.
a) When the law of diminishing returns takes effect, a firm’s average product will start to
decrease.
False. Because the firm’s marginal product will decrease.

b) Decreasing returns to scale occurs when a firm has to increase all of its inputs at an increasing
rate in order to maintain a constant rate of increase in its output.
True. Because as the increase of all inputs at an increasing rate takes place, it balances
out the increase in output at a decreasing rate and consequently maintains a constant
rate of increase in its output.

c) Stage I of the production process ends at the point where the law of diminishing returns
occurs.
False. The law of diminishing return occurs at Stage II. Stage I ends after the point of
where the law of diminishing return occurs because it happens when diminishing
marginal product intersects the average product at the marginal product maximum
value.

COST OF PRODUCTION’

1. ‘If it were not for the law of diminishing returns, a firm’s average cost and average variable
cost would not increase in the short run’. Do you agree with the statement? Explain.

2. Overheard at water cooler:’ I think our company should take advantage of economies of scale
by increasing our output, thereby spreading out our overhead cost’. Would you agree with this
statement (assuming the person is not your boss) Explain.

3. Discuss the following three cost functions:

A) TC=20+4Q
B) TC=20+2Q+0.5Q2
C) TC=20+4Q-0.1Q2
Calculate all cost curves:
a) Total Cost
b) Total fixed cost
 c) Total Variable cost
d) Average Total cost
e) Average Fixed Cost
f) Average variable cost
g) Marginal Cost

REVENUE AND MARKET STRUCTURE

1. A firm in a perfect competitive industry estimated its monthly total costs as follows:
TC = 1000 + 2Q + 0.01Q2
The market price for its product is RM10.
In order to maximize profit (minimize loss), how many unit of output should be produced each month?
Is the frim earning a profit?
Step 1: Find MC
MC = (∆TC/∆Q)
= 2 + 0.002Q
Step 2: Find MR
MR = 10
Step 3: Equate MC = MR
2 + 0.02Q = 10
Q = 400

2. Suppose that the total cost equation (TC) for firm competing in the monopolistic is given by:
TC = 500 + 20Q2
Let the demand equation be given by:
P = 400 – 20Q
What are the profit maximizing price and quantity?
Step 1: Find MC
MC = MR
TC = 500 + 20Q2
Step 2:
TR = PQ
TR = (400 – 20Q) Q
TR = 400Q – 20Q2
TR’ = 400 – 20Q
Step 3: MC = MR
40Q = 400 – 400Q2
80Q = 400
Q = 5 units
P = 400 – 20(5)
P = $300
Hence, the profit maximizing price and quantity is $300 and 5 units respectively.

3. ABC Sdn Bhd is a car manufacturer with given:

AC = 100000 – 1000Q + 10Q2
And the selling price of its car is RM75000.
Find the minimum output rate necessary to earn a normal profit in the short run.
AR(P) = AC
75000 = 100000 – 1000Q + 10Q2
-25000 = -1000Q + 10Q2
0 = -1000Q + 10Q2 + 25000

TUTORIAL QUESTION

1. Q = 20E – E2 + 12T – 0.5T2

MPE = 4000
 MPT = 2000
MPE + MPT = 28000
MPE/PE = MPT/PT
MPE = 20E – 2E
MPT = 12 – T
(20E – 2E)/4000 = (12 – T)/2000
T=E+2
4000E + 2000T = 28000
E = 4 and T = 6
The company should hire 4 engineers and 6 technicians to maximize the output from RM28000 wages.

2. TFC = 23000
TVC = 6.50
TC = TVC + TFC
TC = 6.50Q + 23000

ASSIGNMENT

1. The Small Corporation has estimated the demand function and total cost function to be:
Q = 25 – 0.05P
TC = 700 + 200Q
What will the price and quantity for Small Corporation if they want to
a) Maximizing profit:
Step 1: Find MR
Q = 25 – 0.05P
0.05P = 25 – Q
P = (25 – Q)/0.05
P = 500 – 20Q
TR = 500Q – 20Q2
MR = 500 – 40Q

Step 2: Find MC
TC = 700 + 200Q
MC = 200

Step 3: MR = MC
500 – 40Q = 200
500 – 200 = 40Q
300 = 40Q
Q = 7.5 = 8 units
Q = 8, substitute into demand function
P = 500 – 20(8)
P = $340
In order to maximize profit, the quantity to produce by Small Corporation is 8 units with
price at $340.

b) Maximizing revenue:
TR = 500Q – 20Q2
MR = 0 = 500 – 40Q
40Q = 500
Q = 12.5 = 13 units
Q = 13, substitute into demand function
P = 500 – 20(13)
P = $240
In order to maximize revenue, the quantity to produce by Small Corporation is 13 units with
price of $240.
2. Assume there are only two firms in the steel industry. Total demand for steel is
Q = 30 – 2P, the two firms have identical cost functions, TC = 3 + 5Q. The two firms agree to collude
and act as through the industry, were a monopoly. At what price and quantity will this carter maximize
profit?
Step 1: Find MR
Q = 30 – 2P
2P = 30 – Q
P = (30 – Q)/2
P = 15 – 0.5Q
TR = 15Q – 0.5Q2
MR = 15 - Q

Step 2: Find MC
TC = 3 + 5Q
MC = 5

Step 3: MR = MC
15 – Q = 5
15 – 5 = Q
Q = 10 units
Q = 10, substitute into demand function
P = 15 – 0.5(10)
P = $10

In order for the two firms to maximize profit, they must produce 10 units of steel with price of
$10.