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?
Solutions
a) For maximizing profit we know that MR=MC
The demand curve is given by: QD = 160 – 4P, this can be expressed as
P= 40-(Q/4)
Now we know that total revenue (TR) =Price *Quantity
TR = Q * (40-Q/4)
TR= 40Q – Q^2/4

To calculate the value of marginal revenue MR = dTR/d𝑄

= 40-2Q/4
=40-Q/2
Now marginal cost can be obtained as MC = dTC/dQ
=12Q+15
MR=MC

Equating 12Q+15 = 40-Q/2

Now Q= 2 and P=40-(Q/4)
P = 39.5
Profit maximsation = TR-TC
TR= 40Q – Q^2/4
TC = 6Q2+15Q+5
Substituting value of Q =2 we get TR =79 and TC=59
Now profit = TR-TC
=79-59 =20
b) In perfect competition, P=AR=MR.
As calculated in part (a), MC= 12Q+15
For a firm in perfect competition, the short-run profit maximizing level of output can be found by
setting
MC = MR
 12 Q + 15 = 27

𝑄=1

Profit = TR − TC

TR= P*Q = 27 × 1 = 27

TC = 6Q2 + 15Q+ 5

TC = 26

Profit = 27 − 26

Profit = 1

c) Now market price is 75

MR=MC

12Q+15=75

Q= 5

Profit = TR− TC

TR = P*Q= 75 *5 = 375

TC= 6Q2 + 15Q + 5

TC = 230

Profit (𝜋) = 375 − 230

Profit (𝜋) = 145

Problem 2
Consider the market for biryani in Hyderabad. In this market, the supply curve is given by Q s = 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 P R = 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.
Solutions
a) If PR = 1 and PK = 5, the demand curve is QD = 150 − 15PB and the supply curve is Qs = 10PB –
5
Equilibrium price and quantity can be calculated by equating the demand and supply curves:

150 – 15 Pb = 10Pb - 5

Pb = 6.2

Put this value into demand curve to get equilibrium quantity: QD = 150 – 15 (6.2)

QD = 57
b) Given that PR = 2, new supply curve Qs = 10PB – 10
The demand curve remains the same; Qd = 150 − 15PB

Equilibrium price and quantity can be calculated by equating the demand and supply curves:

150 – 15Pb = 10Pb - 10

Pb= 6.4
Plug this value into demand curve to get equilibrium quantity: Qd = 150 – 15 (6.4)

Qd = 54

c) Now at PK = 3, the demand curve can be rewritten as QD = 130 − 15PB while the supply curve
remains the same; Qs = 10PB –

Equilibrium price and quantity can be calculated by equating the demand and supply curves:

130 − 15𝑃𝐵 = 10𝑃𝐵 - 5

𝑃𝐵 = 5.4

Plug this value into demand curve to get equilibrium quantity: QD = 150 – 15 (5.4)

Q𝐷 = 49

d) As in part (a), if PR = 1 and PK = 5, the demand curve will be: QD = 150 − 15PB and the supply curve
will be Qs = 10PB – 5

Given that 𝑃𝐵 = 5 .Quantity demanded and supplied can be found by plugging P𝐵 = 5 in the demand and
supply equations.
Q𝐷 = 75
Q𝑆 = 45