SELECT COLLEGE

SCHOOL OF POSTGRADUATE STUDIES

MBA PROGRAM

Individual Assignment for the course of: Managerial Economics

COMPILED BY:

Name ID. No Section

1. Demisachew Tena 7644/14 D

July, 2022.
ADDIS ABABA,
ETHIOPIA.
PART I : DISCUSSION QUESTIONS

1. Explain the differences between profit maximization and shareholder wealth

maximization.

The process through which the company is capable of increasing earning capacity known as
Profit Maximization. On the other hand, the ability of the company in increasing the value of its
stock in the market is known as wealth maximization. Profit maximization vs. wealth
maximization. The essential difference between the maximization of profits and the
maximization of wealth is that the profits focus is on short-term earnings, while the wealth focus
is on increasing the overall value of the business entity over time.
Profit maximization is a short term objective of the firm while the long-term objective is Wealth
Maximization. Profit Maximization ignores risk and uncertainty. Unlike Wealth Maximization,
which considers both. Profit Maximization avoids time value of money, but Wealth
Maximization recognizes it. Profit Maximization is necessary for the survival and growth of the
enterprise. Conversely, Wealth Maximization accelerates the growth rate of the enterprise and
aims at attaining the maximum market share of the economy.
Comparative Table

Basics Stakeholder wealth Maximization Profit maximization

Definition  It is defined as the management of It is defined as the management of
financial resources aimed at increasing the financial resources aimed at
value of the stakeholders of the company. increasing the profit of the
company.
Focus Focuses on increasing the value of the Focuses on increasing the profit of
stakeholders of the company in the long the company in the short term.
term.
Risk It considers the risks and uncertainty It does not consider the risks and
inherent in the business model of the uncertainty inherent in the business
company. model of the company.
Usage It helps in achieving a larger value of a It helps in achieving efficiency in
company’s worth, which may reflect in the the company’s day-to-day
increased market share of the company. operations to make the business
profitable.

2. Explain the implications of the agency problem for the theory of the firm.

An agency problem is a conflict of interest inherent in any relationship where one party is
expected to act in the best interest of another. Agency problems arise when incentives or
motivations present themselves to an agent to not act in the full best interest of a principal.

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Further, the production output is also lower when agency problems are present. The suboptimal
operational decisions result in not only decreased shareholder value, but also lower consumer
surplus and lower total social welfare. In the firm, agency problem usually refers to a conflict of
interest between a company's management and the company's stockholders. Here the managers
acting as the agent for the shareholders, are supposed to make decisions that will maximize the
shareholders wealth even though it is the best interest of the manager to instead maximize his
own wealth. This could create a conflict of interest and there is a chance that Manager may not
work with the best of his capability or interest because the agent for the shareholders, are
supposed to make decisions that will maximize the shareholders wealth even though it is the best
interest of the manager to instead maximize his own wealth. This could create a conflict of
interest and there is a chance that Manager may not work with the best of his capability.

3. What do you understand by Price elasticity of supply? Explain the factors

influencing the elasticity of supply in the market with an example.

Price elasticity of supply measures the responsiveness to the supply of a good or service after a
change in its market price. According to basic economic theory, the supply of a good will
increase when its price rises. Conversely, the supply of a good will decrease when its price
decreases. For example: If the price of a cappuccino increases by 10%, and the supply increases
by 20%. We say the PES is 2.0. If the price of bananas falls 12% and the quantity supplied falls
2%. We say the PES = 2/12 = 0.16.

Factors influencing the elasticity of supply in the market with an example

A. Nature of the industry

This will indicate the extent to which production can be increased in response to an increase in
the price of the product. for example If inputs (especially raw materials) can be easily found
existing market prices, as in the textile industry, then output can be greatly increased if price
rises slightly. This means that supply is fairly elastic in the textile industry. On the other hand, if
production capacity is severely limited, as in gold mines, then even a very large increase in price
of gold will lead to a very small increase in production. This means that the supply of gold is
fairly inelastic.
B. Nature Constraints:

The nature world also places restrictions upon supply. Rubber trees, for example, take 15 years
to grow. So it is not possible to increase the supply of rubber overnight.
C. Risk-Taking:

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The willingness of entrepreneurs to take risks also affects price elasticity of supply. This, in its
turn, depends on the system of incentives and disincentives. If, for example, the marginal rates of
tax are very high, a price rise will not evoke much response among producers.
D. The Nature of the Good:
As with demand elasticity, the most important determinant of elasticity of supply is the
availability of substitutes. In the context of supply, substitute goods are those to which factors of
production can most easily be transferred. For example, a farmer can easily move from growing
wheat to producing jute. Of course, mobility of factors is very important for such substitution.
E. The Definition of the Commodity:
As in the case of demand, elasticity of supply also depends on the definition of the commodity.
The narrowly a commodity is defined, the greater its elasticity of supply. For example, it is easier
for a tailor to transfer resources from producing red skirts to green skirts than from skirts to
men’s trousers.
F. The Level of Price:
Elasticity of supply is also likely to vary at different prices. Thus when the price of a commodity
is relatively high, the producers are likely to be supplying near the limits of their capacity and
would, therefore, be unable to make much response to a still higher price. When the price is
relatively low, however, producers may well have surplus capacity which a higher price would
induce them to use.
4. What is Break- even point? Explain the important managerial uses of breakeven
analysis.

The break-even point refers to the amount of revenue necessary to cover the total fixed and
variable expenses incurred by a company within a specified time period. This revenue could be
stated in monetary terms, as the number of units sold or as hours of services provided. In other
words BEP is the production level at which total revenues equal total expenses.

Managerial Uses of Break-Even Analysis

1. Product planning: it helps the firm in planning its new product development. Decisions
regarding removal or addition of new products in their product line.
2. Profit planning: this helps the firm to plan about their profit well in advance and at the same
time it helps to identify the quantity to be sold to achieve the targeted profit.
3. Target capacity: the targeted sales quantity helps to decide the purchase, inventory and
management.

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 4. Price and cost decision: Decision regarding how much the price of the commodity should be
reduced or increased to cover their cost of production.
5. Safety margin: it helps to understand the extent to which the firm can withstand their fall in
sales.
6. Price decision: the selling price can be fixed based on its expected revenue or profit. Etc.

5. Distinguish between monopoly and perfect market.

The basic difference between Perfect Competition and Monopoly is that perfect competition

involves a large number of sellers with a large number of buyers whereas a monopoly market has
one single seller for a large number of buyers.
In a perfectly competitive market price equals marginal cost in the firms on an economic profit
of zero whereas, in monopoly the price is set above the marginal cost and the firm answer
positive economic profit.
Basis of Difference Perfect Competition Monopoly

It refers to the market in which there are many Monopoly market is a market
firms selling a certain homogenous product. structure in which a single firm is a
Meaning
sole producer of a product for which
there are no close substitutes
available in the market
Output Price is equal to the marginal cost at the Price is greater than the average cost
equilibrium output. at equilibrium output.
Equilibrium It is possible only when MR=MC and MC cut Equilibrium can be realized whether
the MR curve from below. the MC is rising, constant or falling.
Barriers for entry of Here, there are no restrictions or barriers for new It has strong restrictions for entry of
new firms firms to enter the market. new firms in the market.
Price Discrimination There is no price discrimination by sellers as the The monopolist can charge different
prices are determined by supply and demand prices from different groups of
forces. buyers.
Here, the supply curve can be identified as all In a monopoly, the supply curve
firms sell the desired quantity at the prevailing cannot be known because of price
Supply Curve
price. discrimination.
Here, the sellers don't have any control over the In this market, the seller has full
price. control over the price.

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Control over Price
Sellers are known as In this market, the sellers are known as price In this market, the sellers are price
takers. makers.
Degree of Competition This market has strong competition in the There is no competition in the market.
market.
Close Substitutes In this market, the close substitutes are available. There are no close substitutes of the
products in this market.
There are a large number of sellers with a large
There is only one single seller of a
commodity with a large number of
Number of sellers Number of Buyers offering homogenous products.
buyers.

6. Describe graphically the pricing and profit determination under monopoly market.

In monopolistic market price the market period being a very short period which can be discussed
in terms of the two approaches (i.e. total revenue-total cost approach and the marginal revenue-
cost approach). The following figure shows a short-run situation in which the monopolist earns
only normal profits. The short-run average cost curve is tangential to the AR or price line where
the firm is earning normal profits. The amount incurred to produce OM output is just equal to the
amount earned from OM output.

On the other hand monopoly Price determination depends on two factors, (a) The nature of
demand for the product produced by the monopoly and (b) the cost of production of the product.
In monopoly market the average revenue curve will slope downwards. Moreover, the marginal
revenue per will also be falling and it will be steeper occupying a low level than the AR curve.
The reason is since the AR is falling the extra units sold will be bring less and lesser revenue in
the market.

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In monopoly, the AR curve will be at a higher
level sloping down, the MR curve will be at a lower level sloping down. The principle of profit
maximization is the same as that of perfect competition. The monopolist will maximize his net
monopoly revenue by keeping the marginal cost and the marginal revenue at the same level.
The following diagram illustrate determination of profit maximization under monopoly market:

7. A monopolist aims at maximizing price rather than profits, do you agree with this
statement
A monopolist will go on producing additional units of a product as long as the marginal revenue
exceeds marginal cost. This is because it is profitable to produce an additional unit if it adds
more to revenue than to cost. The profit of the monopolist will be maximum and he will attain
equilibrium at the level of output at which marginal revenue equals marginal cost. 
A monopolist aims at maximizing price rather than profits, do you agree with this statement
While a monopolist can charge any price for its product, that price is nonetheless constrained by
demand for the firm’s product. No monopolist, even one that is thoroughly protected by high
barriers to entry, can require consumers to purchase its product. Because the monopolist is the
only firm in the market, its demand curve is the same as the market demand curve, which is,
unlike that for a perfectly competitive firm, downward-sloping.
The primary concern of a monopolist is to maximize its profit and it can easily do so as it can
arbitrarily decide the price of the goods or service they are selling. Usually this decision is made
in such a way that prices are kept as highest possible while also satisfying the customers demand.
So both profit maximization and price determination goes hand-in-hand as both of the factors are
interrelated with one another. This means that if a monopolist want to increase their profit they
have to increase the price and vice versa. 

8. What is the difference between monopoly and monopolistic competition?

A monopoly is the type of imperfect competition where a seller or producer captures the majority
of the market share due to the lack of substitutes or competitors. A monopolistic competition is a

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 type of imperfect competition where many sellers try to capture the market share by
differentiating their products. Monopolistic competition is characterized by an industry with
many firms, differentiated products and easy entry and exit, while monopoly is a single firm with
high barriers to entry.
Monopoly vs Monopolistic Competition Comparative Table

Basics Monopoly Monopolistic competition

Meaning The market is created for a product Any product provided by a handful of
offered by a single seller – no sellers affects a small competition
competition. between them.
Players The single-player in the market. More than one but a small number in the
market.
Competition No competition for the seller. As a few players exist, minimal
competition exists, although not good
enough for controlling the demographics.
Effect Due to the monopoly of the single- Due to a small competition, there is some
player, products, their demand and control from the buyer front.
supply, and price are controlled by the
seller – hardly any control by the buyer
side.
Demand & Demand and supply depend on the seller, Demand and supply can be controlled.
Supply although it may not be too biased on the
seller’s side due to the nature of the
commodity.
Entry & Exit Entry and exit are extremely difficult in Comparatively easier.
such a market.
Price of Product The seller decides the product’s price – Buyers may have a small controlling
hardly any control from the buyer front. power over the cost of such products.
Variety in Variants in a particular product may or Variants do exist which are produced by
Product may not exist depending upon the seller. the different players in the market.
Predictability of Highly predictable as there is only one Very unpredictable.
Product seller.

9. How does the monopolistic competitor incur loss in the business Explain with a
suitable graph?

If a monopolistic competitor raises its price, it will not lose as many customers as would a
perfectly competitive firm, but it will lose more customers than would a monopoly that raised its
prices. In the short run, a monopolistic competitive market is in efficient. As it does not achieve
allocative or productive efficiency. Since, the monopolistic competitor firms has power over the
market that are similar to a monopoly, its profit maximizing level of productivity will result in a
net loss of consumer and producer surplus which will create a dead weight loss.

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If the average total cost exceeds the market price, then the firm will suffer losses, equal to the
average total cost minus the market price multiplied by the quantity produced. Losses will still be
minimized by producing that quantity where marginal revenue = marginal cost, but eventually
the firm either must reverse the losses or be forced to exit the industry.
Short run loss= (ATC-P)*Q
Example: the following diagram shows a firm in monopolistic competition in short-run incur an
economic loss,

10. What do you mean by oligopoly market? What are its characteristic features? Give
a suitable examples

Oligopoly markets are markets dominated by a small number of suppliers. They can be found in
all countries and across a broad range of sectors. Some oligopoly markets are competitive, while
others are significantly less so, or can at least appear that way. Oligopoly arises when a small
number of large firms have all or most of the sales in an industry. Examples of oligopoly abound
and include the auto industry, cable television, and commercial air travel. Oligopolistic firms are
like cats in a bag. OPEC is the best example of oligopoly.

Characteristics of Oligopoly
 Few firms

Under Oligopoly, there are a few large firms although the exact number of firms is undefined.
Also, there is severe competition since each firm produces a significant portion of the total output.
 Barriers to Entry

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Under Oligopoly, a firm can earn super-normal profits in the long run as there are barriers to entry
like patents, licenses, control over crucial raw materials, etc. These barriers prevent the entry of
new firms into the industry.
 Non-Price Competition

Firms try to avoid price competition due to the fear of price wars in Oligopoly and hence depend
on non-price methods like advertising, after sales services, warranties, etc. This ensures that firms
can influence demand and build brand recognition.
 Interdependence

Under Oligopoly, since a few firms hold a significant share in the total output of the industry,
each firm is affected by the price and output decisions of rival firms. Therefore, there is a lot of
interdependence among firms in an oligopoly.
 No unique pattern of pricing behavior

Under Oligopoly, firms want to act independently and earn maximum profits on one hand and
cooperate with rivals to remove uncertainty on the other hand Depending on their motives,
situations in real-life can vary making predicting the pattern of pricing behavior among firms
impossible.

11. What is price discrimination? What are its objectives?

Price discrimination is a selling strategy that charges customers different prices for the same
product or service based on what the seller thinks they can get the customer to agree to. In pure
price discrimination, the seller charges each customer the maximum price they will pay. In more
common forms of price discrimination, the seller places customers in groups based on certain
attributes and charges each group a different price. An example for this can be the cost of movie
tickets. As the charge differently for children, adults, the price can also vary based on the date
and time of the show and the part of the country as well.
Objectives of price discrimination
 To charge different prices from different consumers according to their paying capacity,
such as – to charge more price from rich consumers and less price from poor consumers.
 To charge different prices from different consumers on the basis of their geographical
locations.
 To charge different prices from different consumers, on the basis of use of the product
 To charge different prices from different consumers of different areas on the basis of
competition prevailing in the area,
 To discriminate in the price with an object of entering into a new market or with an
object of expanding the market.

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  To discrimination in the price with an object to discourage possible competition in a
particular area.
 To discriminate in the price with an object of making maximum utilization of the
capacity of the plant.

12. Discuss briefly the major types of price discriminations with suitable examples.

Major types of price discriminations

A. First degree price discrimination: First-degree discrimination, or perfect price

discrimination, occurs when a business charges the maximum possible price for each unit
consumed. Because prices vary among units, the firm captures all available consumer surplus
for itself or the economic surplus.

Example: issuing coupons, applying specific discounts (e.g., age discounts), and creating loyalty
programs.

B. Second degree price discrimination: this process involves charging customers different
prices for the different amount or quantity that they consume.

Example can be different kinds of phone plans, rewards on cards, quantity discount for
purchasing specified number of certain goods et cetera.
C. Third degree price discrimination: This involves charging different prices depending on
the market segment or consumer group.

For example, a theater may divide moviegoers into seniors, adults, and children, each paying a
different price when seeing the same movie. This discrimination is the most common.

13. What are the managerial uses of understanding the market structure?

The knowledge about different market structures helps a manager understand real-life market
conditions and the associated rules for decision-making. Knowledge about different market
structures also helps in managing a firm under specific market conditions. For example, in a
perfectly competitive market, a firm will produce where the marginal cost is equal to marginal
revenue. Therefore, in a perfectly competitive market, marketing will play an important role to
differentiate the product. The manager will promote aggressively, which helps to differentiate
and promote the quality of their product.
In a monopoly, the manager has to make a choice between price and quantity for a commodity
sold in the market. In a monopoly, a single seller sells a product to many buyers. Marketing

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 under this market structure is not product-differentiating, but rather product-enhancing. The
marketing is generally focused on how the product is making a change in individual lifestyles.

PART II WORK OUT QUESTIONS

1. Suppose that you have the following demand curve. Q  800  12P .01I
Q = quantity demanded P = price and I= average income.
You know that the current market price is $40 and average income is $40,000
i. Calculate current demand.
ii. Calculate the price elasticity of demand
iii. Calculate the income elasticity of demand

Q= 800-12P+0.01I
Current Market Price= 400
Average Demand = 40,000

I) Current Demand = 
Q= 800-12P+0.01I
Q= 800-12(400) +0.01(40,000)
Q= 800-480+400
= 720 units
 
II) Price Elasticity of Demand=
DQ/dP* P/Q
= -12P/ 800-12P+0.01I
= -12(40)/ 800-12(400) +0.01(40,000)
= -480/ 800-480+400 
= -480/720
= -0.667
 
III) Income Elasticity of Demand=
dQ /dI* I/Q
= 0.01I/ 800-12P+0.01I
= 0.01(40,000)/ 800-12(400) +0.01(40,000)
= 400/ (800-480+400) 
= 400/720
= 0.556

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 2. Assuming the unit price of a commodity is defined by: P = 90 – 2q, and the cost function
is given as: C = 10 + 0.5 q 2 ,
i. Determine the profit-maximizing level of output and the unit price.
ii. Determine the cost-minimizing level of output

Solutions.

I. C = 10 + 0.5Q 2
TR = PQ
(90 – 2q) Q
90q -2 q 2
MR= dTR/DQ
= 90- 4q
MC= dTC/dQ
=Q
MR=MC
90- 4q=Q
90=5Q
Q = 18
P= 90 – 2q
90-2(18)
P = 54

II.= 10 + 0.5 q2
0 = 10 +0.5 q2
- 0.5 q2/0.5 = 10 /-0.5
q 2 = √−20
Q = -4.472
C = 10 + 0.5 q 2
C = 10 + 0.5 (−4.472) 2
C = 20 Ans.

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 3. Determine whether the following production functions show constant, increasing, or
decreasing returns to scale:
I. Q = L 0.60 K 0.40
II. Q = 5K 0.5 L 0.3
III. Q = 4L + 2

Answer

I. The production function exhibits constant returns to scale, because doubling of input
doubled output.
II. The production function exhibits decreasing returns to scale, because doubling of
input leads to less than doubling of output.
III. The production function exhibits constant returns to scale, because doubling of input
doubled output.

Explanation

Step by step explanation

I. Q = L 0.60 K 0.40

(1) 0.60 (1) 0.40 =1

(2) 0.60 (2) 0.40 = 2
Therefore, the production function exhibits constant returns to scale, because doubling of input
doubled output.

II. Q = 5K 0.5 L 0.3

5(1) 0.5 (1) 0.3 =5

5(2) 0.5 (2) 0.3 =8.7

Thus, The production function exhibits decreasing returns to scale, because doubling of input
leads to less than doubling of output.
 
III. Q = 4L + 2
4(1) + 2(1) =6
4(2) + 2(2) =12

Thus, doubling both inputs results double the output, and hence the production function exhibits
constant returns to scale, because doubling of input doubled output.

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4. Given the cost function: C = 1000 + 10Q 1/2 + Q + 2Q 2, derive the average and marginal
cost functions. At 5 units of output, what are the average and marginal costs?

Answer

The average cost function is C/Q = 1000 + 10Q1/2 + Q + 2Q 2 /Q.

At 5 units of output, the average cost is 1000+ 10(5)0.5+ 1 + 2(5) 2/5
= 215.472
The marginal cost function is C' = dTC/DQ
5Q-0.5+ 1 + 4Q
5(5) -0.5+1+4(5)
 =23.23

5. A monopoly firm wishes to supply two different markets, 1 and 2, with the
corresponding demand functions given as:
P1 = 500 – Q1 (Market 1)
P2 = 300 – Q2 (Market 2)
P1 and P2 represent the prices charged in markets 1 and 2, respectively, and Q1 and Q2 are
quantities sold in markets 1 and 2, respectively.
The cost function is given by: C = 50,000 – 100Q

i. The profit maximizing output for the monopolist

ii. Allocation of output between the two markets
iii. The price charged in each of the two markets
iv. The total or maximum profit.

Answer

The profit maximizing output for the monopolist is Q = 250. 

The monopolist should allocate output such that Q1 = Q2 = 125.
Therefore, the monopolist should charge prices P1 = 375 and P2 = 275.
The maximum profit is given by P = $62,500.

Step by Step Explanation

I) Explanation

The monopolist's profit is given by:

Profit = (P1 - C) Q1 + (P2 - C) Q2
Substituting in the values for P1, P2, and C, we get:

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Profit = (500 - 50,000 - 100Q) Q1 + (300 - 50,000 - 100Q) Q2
Differentiating with respect to Q, we get:
Profit/dQ = -100Q1 - 100Q2
Setting this equal to 0 and solving for Q, we get:
Q = (Q1 + Q2)/2
Substituting in the values for Q1 and Q2, we get:
Q = (250 + 250)/2 = 250
 
II) Explanation

The monopolist's profit is given by:

Profit = (P1 - C) Q1 + (P2 - C) Q2
Substituting in the values for P1, P2, and C, we get:
Profit = (500 - 50,000 - 100Q) Q1 + (300 - 50,000 - 100Q) Q2
Differentiating with respect to Q1 and setting equal to 0, we get:
DProfit/dQ1 = (500 - 100Q) - 100Q2 = 0
Solving for Q2, we get:
Q2 = (500 - 100Q)/100
Similarly, differentiating with respect to Q2 and setting equal to 0, we get:
DProfit/dQ2 = -100Q1 + (300 - 100Q) = 0
Solving for Q1, we get:
Q1 = (300 - 100Q)/100
Substituting Q1 into the equation for Q2, we get:
Q2 = (500 - 100(300 - 100Q)/100)/100
Simplifying, we get:
Q2 = (500 - 300 + 100Q)/100
Solving for Q, we get:
Q = 200
Substituting Q into the equation for Q1, we get:
Q1 = (300 - 100(200))/100
Simplifying, we get:
Q1 = 100
Therefore, the monopolist should allocate output such that Q1 = Q2 = 125.

III) Explanation

The monopolist's profit is given by:

Profit = (P1 - C) Q1 + (P2 - C) Q2
Substituting in the values for Q1, Q2, and C, we get:
Profit = (P1 - 50,000 - 100(250)) Q1 + (P2 - 50,000 - 100(250)) Q2
Differentiating with respect to P1 and setting equal to 0, we get:
DProfit/dP1 = Q1 - 100Q2 = 0
Solving for Q2, we get:
Q2 = Q1/100
Substituting Q2 into the equation for P2, we get:
P2 = 275

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 Similarly, differentiating with respect to P2 and setting equal to 0, we get:
DProfit/dP2 = -100Q1 + Q2 = 0
Solving for Q1, we get:
Q1 = 100Q2
Substituting Q1 into the equation for P1, we get:
P1 = 375
Therefore, the monopolist should charge prices P1 = 375 and P2 = 275.

IV) Explanation

The maximum profit is given by P = $62,500.

The monopolist's profit is given by:
Profit = (P1 - C) Q1 + (P2 - C) Q2
Substituting in the values for P1, P2, Q1, Q2, and C, we get:
Profit = (375 - 50,000 - 100(250)) (125) + (275 - 50,000 - 100(250)) (125)
Simplifying, we get:
Profit = 62,500

1. The demand for petrol rises from 500 to 600 Barrels when the price of a particular
scooter is reduced from Birr. 25000 to Birr.22000. Find out the cross elasticity of
demand for the two. What is the nature of their relationship?

A company has the following demand equation

Q= 1000–3000P+10A
Q = Quantity demanded
P = Product Price
A = Advertisement expenditure
Assume that P = 3 and A = 2000
1. The cross elasticity of demand is -1.667
The relationship between the two is that: The demand for scooters will decrease as the price for
petrol goes up. 
2. If the firm drops the price, it will be beneficial since the demand will increase.
3. If the firm increases the price and also increase the advertisement expenditure, it will not be
beneficial since the demand will drop.

Step by Step Explanation

Question 1:
Cross elasticity of demand E= Percentage change in quantity X / Percentage change in price of Y
Change in quantity X= 500-600=-100
Change in price Y = 25,000-22,000= 3,000
X= 25,000

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Y= 500
= (-100/3000) * (25,000/500)
= - 1.667
Negative cross elasticity of demand means that the demand for the scooters will decrease as the
price for petrol goes up.

Suppose the firm drops the price to Birr. 2.50 would this be beneficial.

Question 2:
Q= 1000-3000P+10A
Q= 1000- 3000(3) + 10(2000)
Q=12,000
If the Price P is 2.50; Q=1000-3000(2.50) +10(2000)
Q= 13,500
The demand will increase if the is reduced to 2.50 from 3. 
This will be beneficial.

Suppose the firm raises the price to Birr. 4.00 While increasing its advertisement expenditure by
100 would this be beneficial? Explain
Question 3:
If the price P= 4.00, Advertising expenditure= 2000+100
Q= 1000-3000(4) + 10(2100)
Q= 10,000
This step will not be beneficial. This is because, these changes will reduce the demand

A. Assume a firm’s total cost function is

TC= 12+60Q-15 Q 2+ Q3

Required: Suppose that the firm produces 20 units of output. Calculate total fixed cost
(TFC), total variable cost (TVC), average total cost (ATC), average fixed cost (AFC),
average variable cost (AVC), and marginal cost (MC).

Total fixed cost (TFC) = 12

Total variable cost (TVC) = 60Q-15Q2+Q3 
When Q= 20, TVC = 60*20-15*202+203 
= 3200
Average total cost (ATC) = Total cost (TC) /Q
= (12+60Q-15Q2+Q3)

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= 12/Q+60-15Q+Q2 
When Q= 20,
ATC = 12/20+60-15*20+202 
= 160.6
Average fixed cost (AFC) = Total fixed cost (TFC)/Q
= 12/Q when Q= 20 AFC 12/20
= 0.6
Average variable cost (AVC) = Total variable cost (TVC)/Q
= (60Q-15Q2+Q3)/Q
= 60 -15Q+Q2 
When Q= 20, AVC
= 60-15*20+202 
= 160
Marginal cost (MC) =
dTC/ dQ
= 60-30Q+3Q2 
When Q= 20
MC= 60-30*20+3*202 
= 660

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