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

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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119 views

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

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.

Uploaded by

ha
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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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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