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    The Cross-Price Elasticity of Demand For The Two Is Calculated

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    The document contains questions and solutions related to microeconomics concepts. Question 1 calculates the cross-price elasticity of demand between petrol and scooters to be -1.67, indicating they are complements. Question 2 determines the price elasticity of demand for a good is inelastic when price decreases, so reducing price would not increase total revenue. Question 3 finds demand is inelastic when price increases and advertising rises, so this would increase total revenue. Question 4 provides the formulas and calculations for total, average, and marginal costs given a total cost function and quantity produced.

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    The Cross-Price Elasticity of Demand For The Two Is Calculated

    Uploaded by

    ha
    99 views3 pages
    The document contains questions and solutions related to microeconomics concepts. Question 1 calculates the cross-price elasticity of demand between petrol and scooters to be -1.67, indicating they are complements. Question 2 determines the price elasticity of demand for a good is inelastic when price decreases, so reducing price would not increase total revenue. Question 3 finds demand is inelastic when price increases and advertising rises, so this would increase total revenue. Question 4 provides the formulas and calculations for total, average, and marginal costs given a total cost function and quantity produced.

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    The document contains questions and solutions related to microeconomics concepts. Question 1 calculates the cross-price elasticity of demand between petrol and scooters to be -1.67, indicating they are complements. Question 2 determines the price elasticity of demand for a good is inelastic when price decreases, so reducing price would not increase total revenue. Question 3 finds demand is inelastic when price increases and advertising rises, so this would increase total revenue. Question 4 provides the formulas and calculations for total, average, and marginal costs given a total cost function and quantity produced.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    99 views3 pages

    The Cross-Price Elasticity of Demand For The Two Is Calculated

    Uploaded by

    ha
    The document contains questions and solutions related to microeconomics concepts. Question 1 calculates the cross-price elasticity of demand between petrol and scooters to be -1.67, indicating they are complements. Question 2 determines the price elasticity of demand for a good is inelastic when price decreases, so reducing price would not increase total revenue. Question 3 finds demand is inelastic when price increases and advertising rises, so this would increase total revenue. Question 4 provides the formulas and calculations for total, average, and marginal costs given a total cost function and quantity produced.

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    The document discusses concepts related to price elasticity of demand including cross-price elasticity and how changes in price and advertising affect a firm's revenue.

    The cross-price elasticity of demand between petrol and scooters is -1.67, indicating they are complements.

    No, dropping the price to 2.5 would not be beneficial since demand is inelastic, meaning a price decrease would reduce total revenue.

    QUESTION 1:

    The cross-price elasticity of demand for the two is calculated:-

    % Change∈the price of good Y


    = E=
    % Change∈the demand for good X

    Let, Petrol -› Good X

    Scooter -› Good Y.

    % Change in the demand for petrol, due to the increase in petrol demand from 500 to 600
    barrels:-

    600−500
    % Change in the demand for petrol ¿ x100=20%
    500

    If the increase in the demand for petrol is due to a decrease in the price of scooters from.
    25,000 to Birr. 22,000,

    22,000−25,000
    % Change in the price of Scooters¿ ∗100=−12 %═:>
    25,000

    Eps=−12%20%=−1.67

    The two goods are complements since the cross-price elasticity of demand is negative.

    Q.2

    Q= 1000–3000P+10A

    Q = Quantity demanded

    P = Product Price

    A = Advertisement expenditure

    Assume that P = 3 and A = 2000

    Suppose the firm drops the price to Birr. 2.50 would this be beneficial?

    Price elasticity of demand: when Price reduced from 3 to 2.5


    ΔQ
    ∗Pˉ
    Ed= Δ p
    Qˉ

    From demand equation (DD) is: Q=1,000−3,000P+10A

    Δ Q = −3,000
    ¿≫
    Δp

    @ P1 = 3 and A = 2,000, the quantity demand is:-

    Q1=1,000−3,000 (3) +10(2,000) = 12,000

    @ P2= 2.50, the quantity demand changes to:-

    Q2 =1000−3,000 (2.50) +10(2,000) = 12,600

    (3+2.5)/2
    Therefore, Ed=−3,000* =−0.67=≫the demand is inelastic.Implying,
    (12,000+12,600)/2
    reduction in price to. 2.50 will not be beneficial since it will reduce the firm's revenue.

    Q.3Suppose the firm raises the price to Birr. 4.00 While increasing its advertisement
    expenditure by 100 would this be beneficial? Explain

    When the price is increased to 4.00 while increasing its advertisement expenditure by 100,
    the new quantity demanded will be:

    Q2=1,000–3,000(4)+10(2,100)= 20,800

    ( 3+4)/2
    Ed=−3,000* =−0.64=≫the demand is inelastic. Implying, increasing in
    (12,000+12,800)/2
    price to. 4 will be beneficial and will increase the firm's revenue.

    Q.4

    1. Assume a firm’s total cost function is:-TC=12+60Q-15Q2+Q3

    Required: Suppose that the firm produces 20 units of output. Calculate TFC, TVC, ATC,
    AFC, AVC, and MC.

    Answer:

    I. Total fixed cost (TFC) = 12(unrelated to quantity produced(Q


    II. Total variable cost (TVC)= 60Q-15Q2+Q3 when Q= 20 , TVC = 60*20-
    15*202+203 = 3200
    III.
    IV. Average total cost (ATC)= Total fixed cost (TFC) /Q = (12+60Q-15Q 2+Q3)=
    12/Q+60-15Q+Q2 when Q= 20 , ATC = 12/20+60-15*20+202 = 160.6
    V.
    VI. Average fixed cost (AFC )= Total fixed cost (TFC)/Q = 12/Q when Q= 20 AFC
    12/20 = 0.6
    VII. Average variable cost (AVC) = Total variable cost (TVC)/Q = (60Q-15Q 2+Q3
    )/Q= 60 -15Q+Q2 when Q= 20 , AVC = 60-15*20+202 = 160
    VIII.
    IX. Marginal cost (MC)= dTC/ dQ = 60-30Q+3Q2 when Q= 20 MC= 60-
    30*20+3*202 = 660

    0=2q2-18q+40

    calculate Q?

    =2

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