MIDDLE EAST TECHNICAL UNIVERSITY FALL 2023

DEPARTMENT OF BUSINESS ADMINISTRATION

BA 2801 – MICROECONOMICS FOR BUSINESS

Dr. Danışoğlu

Homework 1
(© All rights reserved)
Due on Wednesday, November 22, 2023 by 12:40
Please submit your homework as a pdf file at the related assignment link on our course page.
Please remember that each student must submit a SCANNED COPY of the hand-written version of his/her
original work. Please solve each question on a separate page. If you collaborate with your classmates while
solving the homework, please make sure their names are stated on top of your homework next to your own
name. Please note that you may submit your homework at the link on our course page only once. Resubmissions
are not allowed.

PART 2

1. The manager of the ODTÜDEN is facing a pricing decision. Yesterday, a sales representative from a clothing
manufacturer offered to produce long-sleeved t-shirts with the METU logo on their front. The sales rep quoted
a price of TL10 per t-shirt (including shipping) plus a one-time TL1,600 cost for preparing the patterns for
producing the logo. ODTÜDEN’s manager has experience with this type of product and knows that products
with a METU logo sell really well. Therefore, she would like to add the long-sleeved t-shirts to ODTÜDEN in
order to increase the store’s earnings.

a. Assume that the demand for t-shirts is estimated as follows:

P = 40 – 0.02Q

Calculate ODTÜDEN’s profit-maximizing price and quantity for the t-shirts and the total profits at this price
and quantity combination.

b. Due to limited shelf space at ODTÜDEN’s new location, the manager has decided that she needs to limit
the number of t-shirts stocked on location to 80% of the profit-maximizing quantity found in part (a). Calculate
the “marginal cost” associated with this constraint. Explain.

c. Now, assume that the manager re-estimates the demand for the t-shirts as follows:

P = 20 – 0.02Q

Assuming that costs remain the same as before, determine if it is still possible to earn a profit on the t-shirts.
Explain.

2. Renault just opened a new dealership in a rapidly growing part of Paris. This dealership will sell cars and
trucks. Based on past trends, the sales manager of the dealership estimates the following inverse demand
equation for cars:

PC = 40 – 0.05QC

In this equation, QC is the number of cars sold per year and PC is the price per car (in thousands of Euros).

The inverse demand function estimated for trucks is as follows:

 PT = 30 – 0.1QT

In this equation, QT is the number of trucks sold per year and PT is the price per truck (in thousands of Euros).

According to the dealership agreement, the dealership pays €10,000 for each car and €8,000 for each truck
bought from Renault.

a. Calculate the dealership’s profit-maximizing quantity and price for cars and trucks. Also, calculate the
dealership’s total profit.

b. Re-calculate the quantities, prices and total profit from part (a) assuming that the dealership’s capacity is
limited to a total of 260 vehicles (cars + trucks) per year.

3. For each of the following scenarios, show graphically (with demand and supply curves) how the event
described in the scenario would increase the price of potatoes in the Turkish market.

a. The Ministry of Agriculture and Forestry announces that exports of potato to the Middle East countries
were 30% higher than expected.

b. As a result of unusually dry climate conditions this year, the Ministry expects the size of the potato harvest
to be much lower than expected.

c. The better climate conditions in the neighboring countries increases the potato harvest in these countries
and also increases Turkey’s dependence on potato imported from the neighbors.

4. You observe in the market that while the price of grapes is increasing, the quantity of grapes sold is
increasing as well. Use demand and supply curves to show two separate scenarios that may explain such
changes.

5. A group of women in the Buldan region manage a small firm that produces pure silk and pure cotton fabrics.
Their total cost (Z) per day (in TL) equals the following:

Z = 5X2 – 2XY + 8Y2

In this equation, X equals the number of cotton fabric rolls produced per day and Y equals the number of silk
fabric rolls produced per day. As a result of the group's commitments to retail stores that sell the fabrics to
consumers, every day they must produce a combination of 60 rolls from the two types of fabrics.

a. The group wants to minimize the cost of production without violating their commitment to the retail stores.
Using the Lagrangian method, calculate the number of cotton and silk rolls they should produce daily.

b. Interpret the Lagrangian multiplier.

6. Demonstrate the consumer preferences described in the following statements by drawing indifference
curves.

a. I like both lahmacun (Turkish pizza) and ayran (yogurt drink) and always get the same additional satisfaction
from one lahmacun and 2 glasses of ayran.

b. I like lahmacun, but neither like nor dislike ayran.

c. I like lahmacun, but dislike ayran.

d. I like lahmacun and ayran, but I always want 2 glasses of ayran with each lahmacun that I eat.

7. Surgical instruments are mostly made out of titanium along with other alloys. Consider the following
demand and supply relationships in the market for surgical instruments:

Qd = 90 − 2P − 2T

Qs = −9 + 5P − 2.5R

In these equations, T is the price of titanium and R is the price of other alloys.

a. If R = 2 and T = 10, calculate the equilibrium price and quantity for surgical instruments.

b. At the equilibrium values, calculate the price elasticity of demand and the price elasticity of supply.

c. At the equilibrium values, calculate the cross-price elasticity of demand for surgical instruments with respect
to the price of titanium. What does the sign of this elasticity tell you about whether surgical instruments and
titanium are substitutes or complements? Explain.