Lebanese American University

Adnan Kassar School of Business

Department of Economics
Business Economics, ECO811-11
Spring 2021

Solve the Following Questions:

Chapter 2:

1. Complete the following table and draw TP, MP, and AP curves.

Total Marginal Average

Output Profit (TP) Profit (MP) Profit (AP)

0 48 0 ______
1 26 ______ ______
2 8 ______ ______
3 6 ______ ______
4 16 ______ ______
5 22 ______ ______
6 24 ______ ______
7 22 ______ ______
8 16 ______ ______
9 6 ______ ______
10 8 ______ ______

2. A firm has decided to invest in a piece of land. Management has estimated that the land can be sold in 5
years for the following possible prices:

Price Probability

10,000 .20
15,000 .30
20,000 .40
25,000 .10

(a) Determine the expected selling price for the land. Explain
(b) Determine the standard deviation of the possible sales prices. Explain
(c) Determine the coefficient of variation. Explain
Chapter 3:

1. The manager of the Sell-Rite drug store accidentally mismarked a shipment of 20-pound bags of
charcoal at $4.38 instead of the regular price of $5.18. At the end of a week, the store's inventory of
200 bags of charcoal was completely sold out. The store normally sells an average of 150 bags per
week.

(a) What is the store's arc elasticity of demand for charcoal?

(b) Give an economic interpretation of the numerical value obtained in part (a)

2. The Future Flight Corporation manufactures a variety of Frisbees selling for $2.98 each. Sales have
averaged 10,000 units per month during the last year. Recently Future Flight's closest competitor,
Soaring Free Company, cut its prices on similar Frisbees from $3.49 to $2.59. Future Flight noticed
that its sales declined to 8,000 units per month after the price cut.

(a) What is the arc cross elasticity of demand between Future Flight's and Soaring Free's
Frisbees?
(b) If Future Flight knows the arc price elasticity of demand for its Frisbees is 2.2, what
price would they have to charge in order to obtain the same level of sales as before
Soaring Free's price cut?

3. The British Automobile Company is introducing a brand new model called the "London Special."
Using the latest forecasting techniques, BAC economists have developed the following demand
function for the "London Special":

QD = 1,200,000  40P

What is the point price elasticity of demand at prices of (a) $8,000 and (b) $10,000?

4. Hanna Corporation markets a compact microwave oven. In 2010 they sold 23,000 units at $375 each.
Per capita disposable income in 2010 was $6,750. Hanna economists have determined that the arc
price elasticity for this microwave oven is 1.2.

(a) In 2011 Hanna is planning to lower the price of the microwave oven to $325. Forecast
sales volume for 2011 assuming that all other things remain equal.
(b) However, in checking with government economists, Hanna finds that per capita
disposable income is expected to rise to $7,000 in 2011. In the past the company has
observed an arc income elasticity of +2.5 for microwave ovens. Forecast 2011 sales
given that the price is reduces to $325 and that per capita disposable income increases to
$7,000. Assume that the price and income effects are independent and additive.