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    Practice Problems

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    AgA
    Here are the answers to your questions: 1) DeBeers's total revenue at a price of $200 is $800 (from selling 4 diamonds). Its marginal revenue from each additional diamond sold is the price of that diamond. So the marginal revenue from the first diamond is $200, the second is $200, the third is $200, and the fourth is $200. 2) The marginal revenue from an additional diamond sale is less than the price because each additional customer has a lower willingness to pay. So additional sales only come from customers with a lower maximum willingness to pay. 3) If DeBeers lowers the price from $200 to $100, the price effect is a decrease of $100

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    Practice Problems

    Uploaded by

    AgA
    26 views14 pages
    Here are the answers to your questions: 1) DeBeers's total revenue at a price of $200 is $800 (from selling 4 diamonds). Its marginal revenue from each additional diamond sold is the price of that diamond. So the marginal revenue from the first diamond is $200, the second is $200, the third is $200, and the fourth is $200. 2) The marginal revenue from an additional diamond sale is less than the price because each additional customer has a lower willingness to pay. So additional sales only come from customers with a lower maximum willingness to pay. 3) If DeBeers lowers the price from $200 to $100, the price effect is a decrease of $100

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    Here are the answers to your questions: 1) DeBeers's total revenue at a price of $200 is $800 (from selling 4 diamonds). Its marginal revenue from each additional diamond sold is the price of that diamond. So the marginal revenue from the first diamond is $200, the second is $200, the third is $200, and the fourth is $200. 2) The marginal revenue from an additional diamond sale is less than the price because each additional customer has a lower willingness to pay. So additional sales only come from customers with a lower maximum willingness to pay. 3) If DeBeers lowers the price from $200 to $100, the price effect is a decrease of $100

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    26 views14 pages

    Practice Problems

    Uploaded by

    AgA
    Here are the answers to your questions: 1) DeBeers's total revenue at a price of $200 is $800 (from selling 4 diamonds). Its marginal revenue from each additional diamond sold is the price of that diamond. So the marginal revenue from the first diamond is $200, the second is $200, the third is $200, and the fourth is $200. 2) The marginal revenue from an additional diamond sale is less than the price because each additional customer has a lower willingness to pay. So additional sales only come from customers with a lower maximum willingness to pay. 3) If DeBeers lowers the price from $200 to $100, the price effect is a decrease of $100

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    Practice Problems

    Complete the following table round each answer to the nearest whole
    number.

    Output Total Fixed Variable Marginal Averag Average Average


    Cost Cost Cost Cost e Cost Variable Fixed
    cost Cost
    0 30 30 0 0 0 0
    1 35 30 5 5 35 5 30
    2 60 30 30 25 30 15 15
    3 110 30 80 50 36.6 27 10
    4 200 30 170 90 50 42.5 7.5
    5 320 30 290 120 64 58 6
    6 600 30 570 280 100 95 5
    Demand and Supply
    Price Quantity demanded per year D’

    10 4000 5200
    20 3200 400
    30 2400 3600
    40 1600 2800
    50 800 2000
    60 0 1200
    Price Quantity supplied per year S’

    10 400 1600
    20 800 2000
    30 1200 2400
    40 1600 2800
    50 2000 3200
    60 2400 3600
    Questions
    • Using the above data graph the demand and supply curves.
    • What is the equilibrium price and quantity?
    •  Suppose the price of cotton (a production input for sweatshirts) falls such that at
    each price, quantity supplied changes by 1200 units. Complete the column of the
    supply table labeled S'. Graph the new supply curve in Figure 1. Label it S'.
    •  What is the new equilibrium price and quantity?
    •  Starting with the original demand and supply figures, suppose that the price of
    sweatpants ( a compliment consumption good to sweatshirts) falls. As a result, the
    quantity of MSU sweatshirts demanded changes by 1200 at each price. Complete
    column D' of the demand table. Graph the new demand curve in Figure 1. Label it D'.
    • What is the new equilibrium price and quantity?
    Answer the below questions
    Number of Average Marginal
    Mechanics Productivity Productivity

    1 5

    2 7

    3 10

    4 11

    5 10

    6 9
    Q2.
    • (a) Complete the above table.
    • At which mechanic the Law of Diminishing Marginal Productivity
    starts operating?—Explain using a suitable diagram.
    Perfect Competition
    • Consider a perfectly competitive market in the short run. Assume that market demand is and
    market supply is P=Qs. Denoting firm level quantity by q, assume TC=50+4q+2q 2 so that
    MC=4+4q. 100 4 D P Q
    • a) What is the market equilibrium price and quantity?
    • b) How many firms are in the industry in the short run?
    • c) Do firms make a profit or loss in the short run, and how much are these profits/losses?
    • d) What is the equilibrium price in the long run? What will be equilibrium profit in the long
    run? How many firms will there be in the long run? Hint, for the last part of the question,
    assume that there can be fractional firms, if necessary – if the numbers of firms are in units
    of 10,000, for example, the answer will be fine. Moreover, assume the entry or exit in the
    industry will cause the supply curve to shift, while the demand curve does not shift.
    Therefore, industry output can be found by taking the long-run price and plugging it into the
    demand curve.
    Q3.
    Suppose these two players are firms A and B, selling homogenous product in the
    same market. They have two choices: either charging low price or high price to have
    better profitability. If both A and B adopt high price strategy, they will earn a profit
    of Rs 2 lakh each; if both adopt low price strategy, they will have a profit of Rs 1
    lakh each; and if one adopts low price and the other adopts high price, then the low
    price charging firm will have a profit of Rs 3 lakh and the other one will have a loss
    of Rs 1 lakh.
    • (i) Construct the payoff matrix for the interaction of above two firms, A and B.
    • (ii) Identify and explain the Nash equilibrium and the best cooperative equilibrium.
    Consumer Surplus and Producer Surplus
    • Suppose that De Beers is a single-price monopolist in the market for
    diamonds. DeBeers has five potential customers: Raquel, Jackie, Joan,
    Mia, and Sophia. Each of these customers will buy at most one
    diamond - and only if the price is just equal to, or lower than, her
    willingness to pay.
    •  Raquel’s willingness to pay is $400; Jackie’s, $300; Joan’s, $200; Mia’s,
    $100; and Sophia’s, $0. DeBeers’s marginal cost per diamond is $100.
    •  This leads to the demand schedule for diamonds shown in the
    accompanying table.
    Questions
    • Calculate DeBeers’s total revenue and its marginal revenue.
    • Explain why the marginal revenue from an additional diamond sale is
    less than the price of the diamond.
    • Suppose DeBeers currently charges $200 for its diamonds. If it lowers
    the price to $100, how large is the price effect? How large is the
    output effect?

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