Managerial Economics

Indian School of Business

Homework 2

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?
Problem 7
Consider the labor market and specifically the demand and supply for unskilled workers. Assume
that the market is competitive. The labor supply and labor demand curves are as follows:
Ls = 10W – 1,000
Ld = 3,000 – 10W
Where, L is measured in terms of number of workers and W is the wage rate paid to each worker
per day (in Rs).

a. What is the market clearing wage and employment that would exist in equilibrium?

b. The current minimum wage for unskilled workers is Rs 180 per day. What impact does this
minimum wage on the market?

c. The government is considering increasing the minimum wage to Rs. 220 per day. Calculate
the impact of the proposed minimum wage on the quantity of labor that will be demanded and
supplied at this revised minimum wage.

d. Calculate the producer surplus (workers’ surplus) at the market clearing wage rate and under
the proposed Rs 220 minimum wage.

e. What is the effect of the proposed minimum wage on individual workers vis-à-vis the net
effect on unskilled workers as a whole? No additional calculations are required to answer this
part of the question. Explain your answer in no more than 1-2 sentences.

f. How would this minimum wage policy differ from a minimum support price program for
workers. Support prices are often used in agriculture but if a similar program was operationalized
in the labor market would your answer to part (d) change? No additional calculations are required
to answer this part of the question. Explain your answer in no more than 1-2 sentences.

g. Are either of the policies (minimum wage or price support) efficient from an economist's point
of view? No additional calculations are required to answer this part of the question. Explain your
answer in no more than 1-2 sentences.