Extra Session-Numerical Problems With Calculus
Extra Session-Numerical Problems With Calculus
Solved Problems
Consider a market with Demand curve q = 16 10p and Supply curve q = 8 + 20p. (Here q is in millions of pounds per day and p is in dollars per pound.) (a) Determine the market equilibrium price and quantity and the total revenue in this market. (b) Calculate the price elasticity of demand and the price elasticity of supply at the market equilibrium.
Solved Problems
Consider a market with Demand curve q = 16 10p and Supply curve q = 8 + 20p. (Here q is in millions of pounds per day and p is in dollars per pound.) (a) Determine the market equilibrium price and quantity and the total revenue in this market. Simultaneously solving the demand and supply equations: p = $0.80 per pound and q = 8 million pounds per day. Total revenue is: p x q = 0.8 x 8 = $6.4 million per day. (b) Calculate the price elasticity of demand and the price elasticity of supply at the market equilibrium. The slope of the demand curve is 10, so the price elasticity of demand at the market equilibrium is 10.(0.8/8) = 1. Similarly, the slope of the supply curve is 20, so the price elasticity of supply at the market equilibrium is 20.(0.8/8)= 2.
Solved Problems
(c) Imagine that the government imposes a $0.60 per-unit tax on the buyers. Write down the new market supply and demand curves, and find the new market equilibrium price and quantity. How much of the tax burden is borne by the buyers, and how much by the sellers? Calculate the ratio of these tax burdens, and compare with the ratio of the elasticities calculated above.
Solved Problems
(c) Imagine that the government imposes a $0.60 per-unit tax on the buyers. Write down the new market supply and demand curves, and find the new market equilibrium price and quantity. How much of the tax burden is borne by the buyers, and how much by the sellers? Calculate the ratio of these tax burdens, and compare with the ratio of the elasticities calculated above.
A tax of $0.60 on the buyers will change the demand curve to q = 16 10(p + 0.6), i.e., q = 10 10p. But, the supply curve is still q = 8 + 20p, so the new market equilibrium is at p = $0.60 per pound and q = 4 million pounds per day. Therefore, the buyers end up paying (P + T) =0.60 + 0.60 = $1.20 per pound. The sellers get $0.60 per pound (Amount buyers pay). Note: The original equilibrium was at a price of $0.80 per pound, so the buyers pay $0.40 more and the sellers end up getting $0.20 less. The ratio of these tax burdens is (.40 /.20) = 2.
Solved Problems
(d) Now imagine that the government instead decides to impose a $0.60 per-unit tax on the sellers. How will this change things? Write down the new market supply and demand curves, find the new market equilibrium price and quantity, and compare with your answer from above (where the tax is on the buyer)
Some variations
Sales Tax on Buyers and Sellers case: Consider a world with 300 consumers, each with demand curve q = 252p, and 500 suppliers, each with supply curve q = 5 + 3p. The government decides to impose a 50% sales tax on the sellers. Find the new market equilibrium price and quantity.
Some variations
Sales Tax on Buyers and Sellers case: Consider a world with 300 consumers, each with demand curve q = 252p, and 500 suppliers, each with supply curve q = 5 + 3p. The government decides to impose a 50% sales tax on the sellers. Find the new market equilibrium price and quantity.
Solution: With a 50% sales tax on the sellers, the market supply curve becomes q = 2500+1500(.5p),i.e., q = 2500 + 750p. The demand curve is, as originally, q = 7500 600p. So the new equilibrium is at: p = 500 / 135 $3.70 q 5278.
Solution:
In the competitive market, the shut down condition is when Price (P) = Minimum Average Variable Cost But Profit maximization theory require P =MC MC =dTVC / dQ = 150 -40Q +3Q2 AVC = TVC /Q = (150Q 20Q2 +Q3) / Q = 150 -20Q +Q2 Equating, both equations: MC = AVC or 150 -40Q +3Q2 = 150 -20Q +Q2 Or, 2Q2 20Q = 0 or 2Q (Q 10) = 0 Or, Q = 0 and Q = 10 Substituting Q = 10 into marginal cost, P = MC = 150 40(10) + 3 (100) = $50 Similarly, substituting Q = 0 in the marginal cost, P = $150 Therefore, if the price falls below $50, the firm shuts down.
Profit maximizing is possible when MRI = MRII =MC So, for Market I: 14 -4QI = 2. Therefore, QI = 3 For Market II: 10 2QII = 2. Therefore, QII = 4
Substituting values of QI and QII in PI and PII, we have PI = 8 and PII = 6
More Practice questions: 1) Studies indicate that the price elasticity of demand for cigarettes is 0.4. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent: a) By how much (percentage) should it increase the price? b) What would be the price of a pack of cigarettes after the increase in price (use midpoint method to calculate the price)
Answer : 1) Studies indicate that the price elasticity of demand for cigarettes is 0.4. If a pack of cigarettes currently costs $2 and the government wants to reduce smoking by 20 percent: a) By how much (percentage) should it increase the price? (Ans: 50%) b) What would be the price of a pack of cigarettes after the increase in price (use midpoint method to calculate the price) (Ans: $3.33)
(2)
Price
($) 60 80 100 120
Demand
(millions) 22 20 18 16
Supply
(millions) 14 16 18 20
Calculate the price elasticity of demand when the price is $80 Calculate the price elasticity of supply when the price is $80 What is the equation for the demand curve? What is the equation for the supply curve?
(2)
Demand (millions) 22 20 18 16
Supply (millions) 14 16 18 20
Calculate the price elasticity of demand when the price is $80 (Ans. : - 0.4 ) Calculate the price elasticity of supply when the price is $80 (Ans. : 0.5) What is the equation for the demand curve? (Ans.: Q = 28 - 0.1p) What is the equation for the supply curve? (Ans.: Q = 8+0.1p)
(3)
For the following equations determine whether the demand is elastic, inelastic or unitary elastic at the given prices. (5+5)
Q = 100 4P and P = $20 Q = 1500 - 20P and P = $5
(3)
For the following equations determine whether the demand is elastic, inelastic or unitary elastic at the given prices. (5+5)
Q = 100 4P and P = $20 (Ans.: Elastic) Q = 1500 - 20P and P = $5 (Ans. : Inelastic)
(4)
Assume that in the short run, a firm is operating in a competitive market for computer keyboard at a price level of Rs. 22 each. The firms marginal cost curve is given by MC=2+4Q where Q is the firms output. Average fixed costs are given by 20/Q and average variable costs by 2+2Q. a) what level of output does the firm maximize profits? b) At this profit maximizing output level, calculate average total costs and the value of maximum profit. c) Below what price would the firm shut down in the short run and in the long run?
(4)
Assume that in the short run, a firm is operating in a competitive market for computer keyboard at a price level of Rs. 22 each. The firms marginal cost curve is given by MC=2+4Q where Q is the firms output. Average fixed costs are given by 20/Q and average variable costs by 2+2Q. a) what level of output does the firm maximize profits? (Ans. Q = 5) b) At this profit maximizing output level, calculate average total costs and the value of maximum profit. (Ans. ATC = ATC + AFC = Rs. 16) c) Below what price would the firm shut down in the short run and in the long run? (Ans. Short run (AVC) = Rs. 12; Long run (ATC) = Rs. 16)
(5)
Consider the following table of long-run total cost for three different firms:
QUANTITY Firm A Firm B Firm C 1 $60 11 21 2 $70 24 34 3 $80 39 49 4 $90 56 66 5 $100 75 85 6 $110 96 106 7 $120 119 129
(5)
QUANTITY Firm A Firm B Firm C 1 $60 11 21 2 $70 24 34 3 $80 39 49 4 $90 56 66 5 $100 75 85 6 $110 96 106 7 $120 119 129
Does each of these firms experience economies of scale or diseconomies of scale? Firm A: Economies of Scale ATC falling Firm B: Diseconomies of Scale ATC rising Firm C: Economies and then Diseconomies of Scale
Utility Function
Utility is an abstract measure of the satisfaction that a consumer receives from a bundle of goods. Indifference Curve and Utility are closely related.
Because the consumer prefers points on higher indifference curves, bundles of goods on higher indifference curves provide higher utility.
LK = 4 or K = 4L-1 dK rate of substitution = - 4L-2 (Marginaltwo goods L and K) (MRS) The slope of this between indifference curve, dL
An individual with a utility level of 2 who currently has L and K goods would be willing to trade up to 4L2 pieces of K in order to gain an extra L. Such a substitution would leave the individual on the same indifference curve, and therefore with the same utility.
U L U K Marginal utility of L (MUL =U / L), the extra utility the individual would get from an additional L
MRS=
Marginal utility of cake (MUK =U / K), the extra utility the individual would get from an additional K
Therefore, the equation for this Isoquant is L1/2K1/2 = 2 Squaring both sides by 2 and rewriting the equation:
LK = 4 or K = 4L-1
A firm with an output target of 2 which currently has L units of labor and K units of capital would be willing to trade up to - 4L-2 units of capital in order to gain an extra unit of labor. Such a substitution would leave the firm on the same isoquant, and therefore with the same output.
Marginal product of capital (MPK = f / K) the extra output the firm would get from an additional unit of capital.
MRTS =
f L f K
(keeping L constant)
Average Product of Labour (APL) = TPL / L Average Product of Capital (APK) = TPL / K If the Production Function is Q = AKL then,
Marginal Product of Labour (MPL) = dQ / dL = AKL-1 Marginal Product of Capital (MPK) = dQ / dK = AK-1L Value of Marginal Product of Labour (VMPL) = P x MPL
More Formulae
Marginal Revenue Product (MRPL): Value of the extra unit of labour hired. It determines how much labour is hired. Thus the labour is hired until MRPL equals the wage rate (w). That is, MRPL = w Similarly, the in case of capital, capital could be employed until MRPK equals the price of the capital (r). That is, MRPK = r Similarly, MRPL = MR . MPL If Price P is constant, then P = MR. In that case, MRPL = P. MPL We know, MR = TR /Q and MPL = Q / L Therefore, MRPL = MR . MPL = ( TR /Q).( Q / L) = TR / L MRPL = d (TR) / dL
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