Market Structures and Pricing Decisions Applied Problems
BUS 640 Managerial Economics
Gail Coates
October 28, 2015
Isabel Wan
Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.
Problem 1.
A. If the demand curve is Q = 5,000 – 25P and the amount of vacuum cleaners in dollars is P = 200 – 0.04Q TR = (P)(Q) = 200Q – 0.04Q2 MR = 200 – 0.08Q TC = 1500 + 20Q + 0.02Q2
Profit is maximized when MR = MC,
MC = 20 + 0.04Q
200 – 0.08Q = 20 + 0.04Q
Which means P* = 200 – (0.4*1500) = 200 – 60 = 140
B. 133500 is the company’s earning a profit the first year.
C. This profit number is very appealing, therefore drawing other companies to consider entering this type of industry. This means an increase in products to customers, which will shift the curve for every company to the left. Lets say these companies were experiencing loss in the short run, and they closed their businesses it will lower the customers’ choices and shifting the demand curve to the right.
Problem 2.
A. The demand in the west market is
Qw =2100 – 6.25Pgw + 3 (2100) + 2100 (1.5) – 1500 (1.2) + 0.2 (60000)
=21,750 – 6.25Pgw
The demand in east market is
Qe = 36620 - 25Pge + 7 (2100) + 1180 (1.5) – 950 (1.2) + 0.085 (30000)
= 54,500 – 25Pge
B.
TRw = Qw*Pgw
= Qw (21750/6.25 - Qw/6.25)
MRw= (21750/6.25 - (2*Qw/6.25))
TRe = Qe*Pge= Qe (54,500/25 - Qe/25),
MRe= (54,500/25 – (2*Qe/25))
TVC=750Q+0.005*Q2,
MC first is derivative of TVC,
MC=750 + 0.010Q
Pgw = $1700, Pge = $920
C.
MR=MC,
West (21750/6.25 - (2*Qw/6.25)) = 755+0.01Q,
Qw = 11,125
Qw = 21,750 – 6.25Pgw,
Pgw = $1,700
East, (54,500/25 – (2*Qe/25)) Qe = 755+0.01Q,
Qe = 31,500.
Qe = 54,500 – 25Pge,
Pge = $920
D.
Elasticity (Western Market) = (dQw/dPw)*(Pw/Qw)
= -6.25*1700/11125
= -0.96
Elasticity (Eastern Market) = (dQe/dPe)*(Pe/Qe)
= -25*920/31500...