Que.

Suppose that your demand schedule for DVDs is as follows:-

Price Quantity Demanded (income = Rupees 10000) 40 Quantity Demanded (income- Rupees 12000)

8 40 50
10 32 45
12 24 30
14 16 20
16 8 12

a) Calculate your price elasticity of demand as the price of

DVD increases from 8 to 10 if

i) Your income is rupees 10000

ii) Your income is rupees 12000

b) Calculate your income elasticity of demand as your income

increases from rupees 10000 to rupees 12000

i) The price is 12

ADITYA VALAND
ii) The price is 16

ans

To calculate the price elasticity of demand, you can use the

following formula:

Price Elasticity of Demand (PED) = (% Change in Quantity

Demanded) / (% Change in Price)

To calculate the income elasticity of demand, you can use the

following formula:

Income Elasticity of Demand (YED) = (% Change in Quantity

Demanded) / (% Change in Income)

Let's calculate the price elasticity of demand and income

elasticity of demand as specified:

a) Calculate your price elasticity of demand as the price of

DVD increases from 8 to 10 if

ADITYA VALAND
i) Your income is rupees 10,000:

% Change in Quantity Demanded = [(32 - 40) / 40] x 100% = -

20%
% Change in Price = [(10 - 8) / 8] x 100% = 25%

Price Elasticity of Demand (PED) = (-20% / 25%) = -0.8

ii) Your income is rupees 12,000:

% Change in Quantity Demanded = [(45 - 50) / 50] x 100% = -

10%
% Change in Price = [(10 - 8) / 8] x 100% = 25%

Price Elasticity of Demand (PED) = (-10% / 25%) = -0.4

b) Calculate your income elasticity of demand as your income

increases from rupees 10,000 to rupees 12,000:

i) The price is 12:

ADITYA VALAND
% Change in Quantity Demanded = [(24 - 40) / 40] x 100% = -
40%
% Change in Income = [(12,000 - 10,000) / 10,000] x 100% =
20%

Income Elasticity of Demand (YED) = (-40% / 20%) = -2

ii) The price is 16:

% Change in Quantity Demanded = [(8 - 16) / 16] x 100% = -

50%
% Change in Income = [(12,000 - 10,000) / 10,000] x 100% =
20%

Income Elasticity of Demand (YED) = (-50% / 20%) = -2.5

The price elasticity of demand is negative, indicating that the

DVDs are inelastic (i.e., quantity demanded is relatively
insensitive to price changes). The income elasticity of
demand is also negative, which suggests that DVDs are an
inferior good for this consumer, as the quantity demanded
decreases as income increases.

ADITYA VALAND
Pharmaceutical drugs have an inelastic demand and
computers have an elastic demand. Suppose that
technological advance doubles the supply of both products
(that is the quantity supplied at each price is twice

what it was)

a) What happens to the equilibrium price and quantity in

each market?

c) Which product experiences a larger change in price? d)

Which product experiences a larger change in quantity?

e) What happens to total consumer spending on each

product?

-ANS:

Let's analyze the effects of a technological advance that

doubles the supply of both pharmaceutical drugs and
computers. We will use the concepts of elasticity, equilibrium,
and supply and demand curves to answer your questions:

ADITYA VALAND
a) What happens to the equilibrium price and quantity in
each market?

1. Pharmaceutical Drugs (Inelastic Demand):

- Inelastic demand means that consumers are relatively
insensitive to price changes, so demand does not change
much when the supply increases significantly.
- When the supply of pharmaceutical drugs doubles, there
will be a substantial increase in quantity supplied.
- Since demand is inelastic, the increase in supply will lead
to a smaller decrease in price and a proportionally larger
increase in quantity demanded.
- Therefore, in the pharmaceutical drug market, the
equilibrium price will decrease, and the equilibrium quantity
will increase.

2. Computers (Elastic Demand):

- Elastic demand means that consumers are sensitive to
price changes, so demand can change significantly with a
change in supply.
- When the supply of computers doubles, there will be a
significant increase in quantity supplied.
- As demand is elastic, the increase in supply will lead to a
more substantial decrease in price and a proportionally
smaller increase in quantity demanded.

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 - In the computer market, the equilibrium price will
decrease significantly, and the equilibrium quantity will
increase to a lesser extent than in the pharmaceutical drug
market.

b) Which product experiences a larger change in price?

Computers experience a larger change in price. This is

because the demand for computers is elastic, so the price
change will be more significant when supply increases,
leading to a larger percentage decrease in price compared to
pharmaceutical drugs, which have inelastic demand.

c) Which product experiences a larger change in quantity?

Pharmaceutical drugs experience a larger change in quantity.

This is because the demand for pharmaceutical drugs is
inelastic, so the quantity demanded is less responsive to price
changes. Even though the supply of pharmaceutical drugs
doubled, the increase in quantity demanded is relatively
more substantial than in the computer market with elastic
demand.

d) What happens to total consumer spending on each

product?

ADITYA VALAND
Total consumer spending depends on the change in both
price and quantity.

1. Pharmaceutical Drugs: With a decrease in price and an

increase in quantity, total consumer spending on
pharmaceutical drugs will increase. The decrease in price
partially offsets the increase in quantity, resulting in a net
gain in consumer spending.

2. Computers: With a significant decrease in price and a

moderate increase in quantity, total consumer spending on
computers will likely increase even more than in the
pharmaceutical drug market. The substantial decrease in
price, driven by the elastic demand, leads to a larger net gain
in consumer spending.

In summary, the impact of the technological advance that

doubles supply is different for pharmaceutical drugs and
computers. Pharmaceutical drugs experience a smaller
change in price but a larger change in quantity, while
computers experience a larger change in price but a smaller
change in quantity. Consumer spending increases in both
markets but is likely to increase more significantly in the
computer market due to the substantial decrease in price.

ADITYA VALAND
Que.3

What is happening to the India real exchange rate in each of

the following situations? Explain. a) The India nominal
exchange rate is unchanged, but prices rise

faster in India than abroad. b) The India nominal exchange

rate is unchanged, but prices rise faster abroad than in India.

c) India nominal exchange rate declines, and prices are

unchanged in India and abroad.

d) India nominal exchange rate declines, and prices rise faster

abroad than in India.

ANS:
The real exchange rate measures the relative price levels
between two countries and is essential in understanding how
changes in exchange rates and price levels affect international
trade and competitiveness. The real exchange rate can be
calculated as follows:

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Real Exchange Rate = (Nominal Exchange Rate * Domestic
Price Level) / Foreign Price Level

Now, let's analyze each of the given situations and their

impact on the India real exchange rate:

a) The India nominal exchange rate is unchanged, but prices

rise faster in India than abroad:

In this scenario, the domestic price level in India is rising

faster than the foreign price level. Since the nominal
exchange rate remains constant, this situation will lead to an
increase in the real exchange rate for India. The relative
increase in domestic prices compared to foreign prices will
make Indian goods and services more expensive in
international markets, reducing their competitiveness.

Example: Suppose the nominal exchange rate is 1 USD = 75

INR, and prices in India are increasing at a faster rate than in
the United States. This would result in a higher real exchange
rate, making Indian products more expensive in international
markets.

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b) The India nominal exchange rate is unchanged, but prices
rise faster abroad than in India:

In this situation, the domestic price level in India is increasing

at a slower rate than the foreign price level. With a constant
nominal exchange rate, the real exchange rate for India will
decrease. Indian goods and services will become relatively
cheaper in international markets, potentially boosting
exports.

Example: If the nominal exchange rate is 1 USD = 75 INR and

prices in India are increasing at a slower rate than in the
United States, the real exchange rate would decrease, making
Indian products more attractive to foreign buyers.

c) India nominal exchange rate declines, and prices are

unchanged in India and abroad:

When the nominal exchange rate for India falls, it means that
the Indian currency has depreciated relative to foreign
currencies. If prices remain unchanged in both India and
abroad, the real exchange rate also remains unchanged. The
depreciation of the nominal exchange rate would primarily
affect the nominal exchange rate, not the real exchange rate.

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d) India nominal exchange rate declines, and prices rise faster
abroad than in India:

In this case, the Indian currency depreciates (the nominal

exchange rate falls), and prices in India are rising at a slower
rate compared to foreign countries. As a result, the real
exchange rate for India decreases. This makes Indian goods
relatively cheaper in international markets, potentially
boosting exports.

Example: If the nominal exchange rate changes to 1 USD = 80

INR due to depreciation, and prices in India are increasing at
a slower rate than in the United States, the real exchange rate
would decrease, making Indian products more attractive to
foreign buyers.

Charts:
To visualize these scenarios, we can use line charts to depict
the movements in real exchange rates in response to
different situations. Each line on the chart represents the real
exchange rate over time for each scenario.

- Scenario a) depicts a rising real exchange rate due to faster

domestic price increases.
- Scenario b) depicts a falling real exchange rate due to faster
foreign price increases.
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- Scenario c) depicts a constant real exchange rate despite a
depreciation in the nominal exchange rate.
- Scenario d) depicts a falling real exchange rate due to both
depreciation and slower domestic price increases compared
to abroad.

Que.4

The following is the output of a firm in a perfectly competitive market.

The firms cost function is given in the following schedule:

OUTPUt TOTAL COST (in rupees).

0 50

10 120

20 170

30 210

40 260

50 330

60 430

Prevailing market price is rupees 7 per unit

a) What is firms profit maximizing output levels?

b) Is the industry in long equilibrium? Justify your answer.

ADITYA VALAND
ANS:
a) To determine the firm's profit-maximizing output level in a
perfectly competitive market, we need to identify the point at
which the firm maximizes its profit. In a perfectly competitive
market, a firm will produce the quantity of output where
marginal cost (MC) equals the market price (P).

Given that the market price is Rs. 7 per unit, we can calculate
the marginal cost at each level of output using the provided
total cost schedule:

- For 0 units of output, TC = Rs. 50.

- For 10 units of output, TC = Rs. 120.
- For 20 units of output, TC = Rs. 170.
- For 30 units of output, TC = Rs. 210.
- For 40 units of output, TC = Rs. 260.
- For 50 units of output, TC = Rs. 330.
- For 60 units of output, TC = Rs. 430.

Now, calculate the marginal cost (MC) at each output level:

MC = Change in Total Cost / Change in Output

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- MC(0-10) = (TC(10) - TC(0)) / (10 - 0) = (Rs. 120 - Rs. 50) / 10
= Rs. 7 per unit.
- MC(10-20) = (TC(20) - TC(10)) / (20 - 10) = (Rs. 170 - Rs. 120)
/ 10 = Rs. 5 per unit.
- MC(20-30) = (TC(30) - TC(20)) / (30 - 20) = (Rs. 210 - Rs. 170)
/ 10 = Rs. 4 per unit.
- MC(30-40) = (TC(40) - TC(30)) / (40 - 30) = (Rs. 260 - Rs. 210)
/ 10 = Rs. 5 per unit.
- MC(40-50) = (TC(50) - TC(40)) / (50 - 40) = (Rs. 330 - Rs. 260)
/ 10 = Rs. 7 per unit.
- MC(50-60) = (TC(60) - TC(50)) / (60 - 50) = (Rs. 430 - Rs. 330)
/ 10 = Rs. 10 per unit.

To maximize profit, the firm will choose the output level

where MC equals the market price (P). In this case, P is Rs. 7
per unit. Based on the calculations, MC equals P at two
output levels: 10 units and 40 units. Therefore, the firm's
profit-maximizing output levels are 10 units and 40 units.

b) To assess whether the industry is in long-run equilibrium,

we need to consider two key conditions:

1. Firms in the industry are making zero economic profit

(profit is equal to zero).

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2. The number of firms in the industry is neither increasing
nor decreasing.

In the given scenario, we observe that at an output level of

10 units, the firm is making an economic loss, and at an
output level of 40 units, the firm is making an economic
profit.

Since there is a possibility of economic profit in the industry

(as shown by the profit at 40 units), the industry is not in
long-run equilibrium. The potential for profit will attract new
firms to enter the industry, increasing competition. This will
eventually drive profits down to zero, at which point the
industry will reach long-run equilibrium.

In conclusion, the firm's profit-maximizing output levels are

10 units and 40 units. The industry is not in long-run
equilibrium, and adjustments are likely to occur as new firms
enter and profits are driven down to zero, aligning with the
conditions of a perfectly competitive market in the long run.

ADITYA VALAND
Below are some data from land of cotton and cheese.

Price of Cotton Quantity Cotton Price of Cheese Quantity Cheese

YEAR (in Rs) (In unit) (in Rs) (In unit)

2010 1 100 2 50
2011 2 200 2 100
2012 3 200 4 100

a) Compute nominal GDP, real GDP and the GDP deflator for each year, using 2010 as the base year.

b) Compute the percentage change in nominal GDP, real GDP and GDP deflator in 2011 and 2012
from the preceding year. For each year. identify the variable that does not change. Justify the result.

c) Did economic well-being rise more in 2011 or 2012? Explain.

ANS:

To compute nominal GDP, real GDP, and the GDP deflator, we

need to use the formula:

Nominal GDP = (Price of Good A in the Current Year *

Quantity of Good A in the Current Year) + (Price of Good B in
the Current Year * Quantity of Good B in the Current Year)

Real GDP = (Price of Good A in the Base Year * Quantity of

Good A in the Current Year) + (Price of Good B in the Base
Year * Quantity of Good B in the Current Year)

ADITYA VALAND
GDP Deflator = (Nominal GDP / Real GDP) * 100

Let's calculate these values for each year:

a) Compute nominal GDP, real GDP, and the GDP deflator for
each year, using 2010 as the base year:

2010:
Nominal GDP = (1 * 100) + (2 * 50) = 100 + 100 = 200
Real GDP = (1 * 100) + (2 * 50) = 100 + 100 = 200
GDP Deflator = (200 / 200) * 100 = 100

2011:
Nominal GDP = (2 * 200) + (2 * 100) = 400 + 200 = 600
Real GDP = (1 * 200) + (2 * 100) = 200 + 200 = 400
GDP Deflator = (600 / 400) * 100 = 150

2012:
Nominal GDP = (3 * 200) + (4 * 100) = 600 + 400 = 1000
Real GDP = (1 * 200) + (2 * 100) = 200 + 200 = 400
GDP Deflator = (1000 / 400) * 100 = 250

ADITYA VALAND
b) Compute the percentage change in nominal GDP, real GDP,
and the GDP deflator in 2011 and 2012 from the preceding
year. For each year, identify the variable that does not
change. Justify the result:

Percentage Change in Nominal GDP (2011): [(600 - 200) /

200] * 100% = 200%
Percentage Change in Real GDP (2011): [(400 - 200) / 200] *
100% = 100%
Percentage Change in GDP Deflator (2011): [(150 - 100) / 100]
* 100% = 50%

Percentage Change in Nominal GDP (2012): [(1000 - 600) /

600] * 100% = 66.67%
Percentage Change in Real GDP (2012): [(400 - 200) / 200] *
100% = 100%
Percentage Change in GDP Deflator (2012): [(250 - 150) / 150]
* 100% = 66.67%

In both 2011 and 2012, real GDP increased by 100%, while

nominal GDP and the GDP deflator increased by different
percentages. The variable that does not change is real GDP.
Real GDP represents the economy's output, adjusted for
changes in prices, and it measures the physical quantity of
goods and services produced. In this case, real GDP remains
constant because it is calculated using 2010 as the base year,
ADITYA VALAND
and the quantities produced in 2011 and 2012 are the same
as in 2010. Nominal GDP and the GDP deflator change
because they account for changes in both prices and
quantities.

c) Did economic well-being rise more in 2011 or 2012?

Explain:

Economic well-being can be evaluated based on the

percentage change in nominal GDP, which reflects the
increase in the total value of goods and services produced in
the economy. In 2012, nominal GDP increased by 66.67%,
while in 2011, it increased by 200%. Therefore, economic
well-being rose more in 2011. However, it's essential to note
that the increase in nominal GDP in 2011 is due to both
increased production and increased prices, as reflected in the
higher GDP deflator. In contrast, the increase in nominal GDP
in 2012 is mainly due to increased production, as prices
increased at a slower rate than in 2011.

In summary, while economic well-being increased more in

2011 in terms of nominal GDP, the increase in 2012 was
driven by increased production, which can be a sign of
sustainable economic growth. The interpretation of which
year was better depends on whether you prioritize economic
growth (2011) or economic stability with a focus on
production (2012).

ADITYA VALAND
Dhama Industries Inc. is a leading manufacturer of treadmill.
The company offers the product to both dealers and retail
customers. The finance manager estimates that each product
costs the company rupees 10,000 in labour and material
expenses. Demand and marginal revenue relations for the
product are Pw 15000-5Qw (wholsale)

MRW ATRW/ AQW= 15.000-10Qw

Pr = 50,000-20Qr (retail) MRr-ATRI AQr-50,000-40Qr

a) What is price discrimination?

b) Assuming that the company can price discriminate

between its two types of customers, calculate the profit
maximizing price. output and profit contribution levels.

c) Calculate point price elasticity for each customer type at

the activity levels identified in part (b). Are the differences in
these elasticities consistent with your recommended price
differences in part (b)? Why or why not?

ADITYA VALAND
Q7 ANS

a) **Price Discrimination**:
Price discrimination is a pricing strategy in which a company
charges different prices for the same product or service to
different groups of customers based on various factors, such
as their willingness to pay, demand elasticity, location, or
other market conditions. The goal of price discrimination is to
maximize the company's total profit by capturing different
consumer surpluses. Price discrimination is legal when it does
not involve unfair or discriminatory practices based on
protected characteristics like race, gender, or ethnicity.

In the case of Dhama Industries Inc., price discrimination is

evident because they are charging different prices to two
distinct groups of customers: wholesale customers (subscript
"w") and retail customers (subscript "r"). Each group is willing
to pay a different price for the same treadmill product.

b) **Profit-Maximizing Price, Output, and Profit

Contribution**:

To calculate the profit-maximizing price, output, and profit

contribution for each customer type (wholesale and retail),
we need to find the point at which marginal revenue (MR)

ADITYA VALAND
equals marginal cost (MC). The profit contribution is the
difference between total revenue and total cost.

**For Wholesale (MRw = MC):**

- Demand and MR for wholesale customers:
- Demand: Pw = 15,000 - 5Qw
- MRw = 15,000 - 10Qw

To find the profit-maximizing output (Qw), set MRw equal to

the cost per unit (MC):
15,000 - 10Qw = 10,000 (MC)
5Qw = 5,000
Qw = 1,000 units

To find the profit-maximizing price (Pw), substitute the

output (Qw) into the demand function:
Pw = 15,000 - 5Qw = 15,000 - 5,000 = Rs. 10,000

Profit contribution for wholesale:

Profitw = (Pw - MC) * Qw = (10,000 - 10,000) * 1,000 = Rs. 0

**For Retail (MRr = MC):**

- Demand and MR for retail customers:
ADITYA VALAND
 - Demand: Pr = 50,000 - 20Qr
- MRr = 50,000 - 40Qr

To find the profit-maximizing output (Qr), set MRr equal to

the cost per unit (MC):
50,000 - 40Qr = 10,000 (MC)
40Qr = 40,000
Qr = 1,000 units

To find the profit-maximizing price (Pr), substitute the output

(Qr) into the demand function:
Pr = 50,000 - 20Qr = 50,000 - 20,000 = Rs. 30,000

Profit contribution for retail:

Profitr = (Pr - MC) * Qr = (30,000 - 10,000) * 1,000 = Rs.
20,000,000

c) **Point Price Elasticity and Price Differences**:

Price elasticity measures the responsiveness of quantity

demanded to changes in price. The formula for point price
elasticity (E) is:

ADITYA VALAND
E = (% Change in Quantity Demanded) / (% Change in Price)

For both customer types, point price elasticity at the activity

levels identified in part (b) is as follows:

**For Wholesale (Ew):**

Ew = [(Qw - Qw_initial) / Qw_initial] / [(Pw - Pw_initial) /
Pw_initial]

**For Retail (Er):**

Er = [(Qr - Qr_initial) / Qr_initial] / [(Pr - Pr_initial) / Pr_initial]

The results indicate that price elasticity for both wholesale

(Ew) and retail (Er) customers is zero at the profit-maximizing
prices and quantities identified in part (b).

The differences in these elasticities are consistent with the

recommended price differences in part (b). In price
discrimination, the company charges different prices to
different customer groups based on their willingness to pay.
When elasticity is zero (perfectly inelastic), it means that
customers are not responsive to price changes at these profit-
maximizing price levels.

ADITYA VALAND
In this case, the company successfully charges the highest
possible price to retail customers (less price-sensitive) and
the lowest possible price to wholesale customers (more
price-sensitive), aligning with the principles of price
discrimination and profit maximization.

ADITYA VALAND
Q8 ANS

a. Compute total revenue, total cost and profit at each quantity What equity would a profit
maximizing manufacturer choose? What price would it charge?

To compute total revenue, total cost, and profit at each

quantity for The GoldMine Company, we will use the
provided demand schedule and cost information. Total
revenue (TR) is the product of price and quantity demanded,
total cost (TC) includes both fixed costs and variable costs,
and profit (π) is calculated as the difference between total
revenue and total cost.

The given information is as follows:

- Fixed Costs (FC) = Rs. 60,000

- Variable Cost per Band (VC) = Rs. 15

Now, we will calculate TR, TC, and profit at each quantity:

ADITYA VALAND
 Price (in Quantity TR (in VC (in TC (in Profit (π in
rupees) Demanded rupees) rupees) rupees) rupees)

40 0 0 0 60,000 -60,000

35 10,000 350,000 150,000 210,000 140,000

30 20,000 600,000 300,000 360,000 240,000

25 30,000 750,000 450,000 510,000 240,000

20 40,000 800,000 600,000 660,000 140,000

15 50,000 750,000 750,000 810,000 -60,000

10 60,000 600,000 900,000 960,000 -360,000

5 70,000 350,000 1,050,000 1,110,000 -760,000

0 80,000 0 1,200,000 1,260,000 -1,260,000

ADITYA VALAND
a) **Profit-Maximizing Quantity and Price**:

To determine the profit-maximizing quantity and price for a

monopolist, the firm should produce the quantity at which
marginal cost (MC) equals marginal revenue (MR). The
corresponding price is determined based on the demand
curve at that quantity.

In this case, the profit-maximizing quantity occurs where MR

equals MC. The price associated with this quantity can be
found on the demand curve.

- Profit-Maximizing Quantity: The quantity where MR = MC.

- Price at Profit-Maximizing Quantity: Price on the demand
curve corresponding to the profit-maximizing quantity.

For example, if MR equals MC at 30,000 units, the associated

price can be found on the demand curve.

It's important to note that a profit-maximizing monopolist

may not always earn positive economic profit. Profit is
maximized when marginal cost equals marginal revenue, but

ADITYA VALAND
economic profit can be positive, negative, or zero depending
on the cost structure and demand conditions.

The profit-maximizing manufacturer should choose the

quantity and price that correspond to the intersection of MR
and MC.

In the given data, at a quantity of 20,000 units, MR equals MC

(MR = Rs. 15,000), and the price corresponding to this
quantity is Rs. 30.

So, the profit-maximizing manufacturer would choose to

produce and sell 20,000 bands at a price of Rs. 30.

b. Compute marginal revenue. How does marginal revenue compare to the price? Explain

To compute marginal revenue (MR), we need to calculate

how total revenue changes as the quantity increases by one
unit. MR is generally lower than the price because, in a
monopoly, reducing the price to sell more units results in
lower marginal revenue for each additional unit sold.

ADITYA VALAND
We can calculate MR at each quantity change using the
provided demand schedule. Let's calculate MR for a few
quantity changes:

1. When the quantity increases from 0 to 10,000 bands:

- TR1 (initial total revenue) = Price x Quantity = 40 x 0 = Rs.
0
- TR2 (new total revenue) = 35 x 10,000 = Rs. 350,000
- MR1 to MR2 = (TR2 - TR1) / (Q2 - Q1) = (350,000 - 0) /
(10,000 - 0) = Rs. 35

2. When the quantity increases from 10,000 to 20,000 bands:

- TR1 (initial total revenue) = 35 x 10,000 = Rs. 350,000
- TR2 (new total revenue) = 30 x 20,000 = Rs. 600,000
- MR1 to MR2 = (TR2 - TR1) / (Q2 - Q1) = (600,000 -
350,000) / (20,000 - 10,000) = Rs. 25

You can calculate MR in a similar manner for other quantity

changes. In each case, MR represents the change in total
revenue due to selling one additional unit.

How MR Compares to the Price:

- MR is generally less than the price because, in a monopoly,
to sell more units, the monopolist must reduce the price.
ADITYA VALAND
When the monopolist reduces the price to sell an additional
unit, it earns less revenue not only on that additional unit but
also on all the units sold before that, as the price reduction
applies to all units.

- When the demand is downward-sloping (as in this case), MR

decreases as quantity increases. This is because to sell more
units, the monopolist must lower the price, which results in
lower marginal revenue for each additional unit sold.

- MR can be zero or negative when the demand curve is

inelastic (price-insensitive). If MR is negative, it indicates that
increasing the quantity sold would reduce total revenue, and
the monopolist should reduce production to maximize profit.

So, in summary, MR is typically less than the price, and the

gap between MR and price widens as quantity increases. This
difference between MR and price is essential for a
monopolist to understand how their pricing decisions impact
revenue and profit.

c. Graph the marginal revenue, marginal cost and demand curves.

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-At what quantity do the marginal revenue and marginal cost curves intersect? What does this
signify? d. In your graph, shade in the dead weight loss. Explain in words what this means

The point at which the marginal revenue (MR) and marginal

cost (MC) curves intersect is the profit-maximizing quantity
for the monopolist. This quantity is where the monopolist
should produce to maximize their profit. The specific quantity
at which MR equals MC is an important decision point for the
monopolist.

In a graph, you would typically find this intersection point,

which signifies the profit-maximizing quantity, by locating the
point where the MR and MC curves cross.

Now, let's discuss deadweight loss:

d) **Shading the Deadweight Loss**:

Deadweight loss occurs in a monopoly when the price is set

higher and the quantity produced is lower than the perfect
competition level. It represents the inefficiency in resource
allocation due to the monopoly's pricing power. Deadweight
loss is the area between the demand curve and the MC curve
below the equilibrium quantity.

ADITYA VALAND
In the graph, you should shade the area below the MC curve
and above the MR curve from the profit-maximizing quantity
to the quantity where MR equals zero. This area represents
the deadweight loss, which signifies the lost consumer and
producer surplus due to the monopoly's pricing power.

Explanation in words:

Deadweight loss occurs because the monopolist restricts the

quantity produced compared to what would occur in a
perfectly competitive market. The monopolist sets a higher
price and produces a lower quantity, resulting in both
underproduction and higher prices. This leads to a loss of
consumer surplus (the difference between what consumers
are willing to pay and what they actually pay) and a decrease
in overall economic welfare.

Shading this area on the graph illustrates the loss of potential

gains from trade that could occur in a more competitive
market. In a perfectly competitive market, resources are
allocated efficiently, and consumer and producer surpluses
are maximized. Deadweight loss represents the misallocation
of resources, and it's a key concern when analyzing the
economic impact of monopolies.

ADITYA VALAND
. e. If the fixed cost rise to rupees 70000, how would this affect the
Certainly, let's use some numerical data to illustrate the
effects of an increase in fixed costs to Rs. 70,000 on a
monopolist's decision-making.

Initial Scenario:
- Fixed Costs (FC) = Rs. 60,000
- Price (P) = Rs. 30
- Variable Cost per Band (VC) = Rs. 15
- Original Profit-Maximizing Quantity (Q1) = 20,000
- Original Profit (Profit1) = Total Revenue (TR1) - Total Cost
(TC1)

In the initial scenario, let's calculate the original profit:

TR1 = P x Q1 = Rs. 30 x 20,000 = Rs. 600,000

TC1 = FC + (VC x Q1) = Rs. 60,000 + (Rs. 15 x 20,000) = Rs.

60,000 + Rs. 300,000 = Rs. 360,000

Profit1 = TR1 - TC1 = Rs. 600,000 - Rs. 360,000 = Rs. 240,000

Now, in the changed scenario with increased fixed costs:

ADITYA VALAND
- New Fixed Costs (FC_new) = Rs. 70,000
- Price (P) = We'll assume the price remains the same at Rs.
30.
- Variable Cost per Band (VC) = Rs. 15
- Profit-Maximizing Quantity (Q_new) - This will change due
to the higher fixed costs.

Let's calculate the new profit:

TR_new = P x Q_new

To find Q_new, we must determine where MR equals MC.

Now, calculate the MC and MR curves for the new scenario:

MC = VC = Rs. 15

MR_new = MR - FC_new = (P x Q_new) - FC_new

Since P is Rs. 30, we can find the MR curve:

ADITYA VALAND
MR_new = 30Q_new - 70,000

To find Q_new where MR equals MC:

30Q_new - 70,000 = 15

Now, we can solve for Q_new:

30Q_new = 15 + 70,000
30Q_new = 70,015

Q_new = 70,015 / 30
Q_new ≈ 2,333.83 (approximately)

Now, calculate the new total revenue (TR_new) and total cost
(TC_new):

TR_new = P x Q_new = Rs. 30 x 2,333.83 ≈ Rs. 70,014.9

TC_new = FC_new + (VC x Q_new) = Rs. 70,000 + (Rs. 15 x

2,333.83) ≈ Rs. 70,000 + Rs. 35,007.45 ≈ Rs. 105,007.45

ADITYA VALAND
Now, calculate the new profit (Profit_new):

Profit_new = TR_new - TC_new ≈ Rs. 70,014.9 - Rs.

105,007.45 ≈ -Rs. 34,992.55

In this scenario with increased fixed costs, the monopolist is

operating at a higher quantity (approximately 2,333.83
bands), but they are incurring a loss of approximately -Rs.
34,992.55 due to the higher fixed costs. The price remains
the same, and the monopolist has adjusted production to
cover the increased fixed costs, but they are not earning a
profit. This is an example of how changes in fixed costs can
impact the monopolist's profit and production decisions.

ADITYA VALAND