Practice Questions

1. Firm D’s marginal cost is given by the equation 𝑀𝐶 = 3 + 2𝑄. If the market price of the
firm’s product is INR 9,
a) What will be the optimum output?
b) What will be the firm’s producer surplus?

2. Suppose the Government imposed a tax on sugar consumption. The price elasticity of
supply of sugar is 4 and the price elasticity of demand is 0.2. The cross-price elasticity of
demand for jaggery (a substitute) with respect to the sugar is 0.1.

a) How will the tax affect the jaggery market, if the supply is infinitely elastic?
b) Who will bear the greater burden, sugar suppliers or consumers?

3. The domestic demand for basmati rice is given by the equation 𝑄𝑑 = 1000 − 46𝑃. The
export demand for basmati rice is given by 𝑄𝑒𝑥.𝑑 = 2550 − 220𝑃. If the total demand for
basmati rice is the horizontal summation of the domestic and export demand;

a) What is the total demand curve equation?

b) Derive the total demand curve graphically. What is the specialty of the demand
curve in this case?

4. The short-run total cost of a company is given by the equation 𝐶 = 200 + 50𝑄 (both C
and Q measured in 10,000 units).
a) What is the company’s the fixed cost?
b) If the company produced 1,00,000 units, what would be the AVC, AFC and MC?
c) If the company borrows money and expands the business. In the process, the FC
rises by INR 50,000 and VC falls to INR 45,000 per 10,000 units. And, the
company now has to pay interest rate such that each 1-point increase in interest
rate raises the cost by INR 30,000. Formulate the new cost curve equation.

5. A monopoly firm faces the demand 𝑄 = 10,000/𝑃2. The firm’s short-run cost is 2000 +
5𝑄 and long-run cost is 6𝑄.
 a) What price should the monopolist charge to maximise profits in the short-run?
What is the output and profits? Would it be better to shut down the firm in the
short-run?
b) What should be the price and output in the long-run?
c) Will the monopolist have a lower marginal cost in the short-run than in the long
run? Why?

Review Questions

1. Firm E had already paid INR 50,000 to block an office room so that it can purchase
the room for INR 5,00,000 in the coming year. The total cost would then amount to
INR 5,50,000. Next year, it is observed that a similar office room in the same locality
is available for INR 5,25,000. Which office room should Firm E purchase?

2. You are appointed to control the transit cost in a city. The report on your table
suggests that; the cost of running a bus in a particular route in INR 3000 regardless of
the number of passengers using it. During peak hours, maximum 50 people might take
the bus and the average cost will be INR 60. But, during off-peak hours, the number
of passengers falls to 18 and the average cost per passenger rises to INR 166.67. Is it
better to encourage more rush hour trips when costs are lower and discourage the off-
peak trips? Justify your decision.

3. Is it possible for a firm G to enjoy monopoly power even if it is not the only producer
of the good in the market. Explain.

4. An apparel manufacturer finds that his marginal rate of technical substitution for
labour in the production is significantly greater than the ratio of rent on machinery to
the wages. How should the manufacturer adjust the usage of labour and capital so that
he can minimize the cost of production?

5. Firm H is at a point where its marginal cost is increasing. Is the average variable cost
of the firm increasing or decreasing? Now, suppose the marginal cost is greater than
the average variable cost, is the AVC increasing or decreasing?