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Finance
38. The McNight Company is a major producer of steel. Management estimates that the demand for the company’s steel is given by the equation:
Qs = 5,000 – 1,000Ps + 0.1I + 100Pa
Where Qs is steel demand in thousands of tons per year, Ps is the price of steel in dollars per pound, I is income per capita, and Pa is the price of aluminum in dollars per pound. Initially, the price of steel is $1 per pound, income per capita is $20,000, and the price of aluminum is $0.80 per pound.
(a) How much steel will be demanded at the initial prices and income?
(b) What is the point income elasticity at the initial values?
(c) What is the point cross elasticity between steel and aluminum? Are steel and aluminum substitute or complements?
(d) If the objective is to maintain the quantity of steel demanded as computed in part (a), what reduction in steel prices will be necessary to compensate for a $0.20 reduction in the price of aluminum?
Qs = 5,000 – 1,000Ps + 0.1I + 100Pa
Where Qs is steel demand in thousands of tons per year, Ps is the price of steel in dollars per pound, I is income per capita, and Pa is the price of aluminum in dollars per pound. Initially, the price of steel is $1 per pound, income per capita is $20,000, and the price of aluminum is $0.80 per pound.
(a) How much steel will be demanded at the initial prices and income?
(b) What is the point income elasticity at the initial values?
(c) What is the point cross elasticity between steel and aluminum? Are steel and aluminum substitute or complements?
(d) If the objective is to maintain the quantity of steel demanded as computed in part (a), what reduction in steel prices will be necessary to compensate for a $0.20 reduction in the price of aluminum?
Finance
39. The Inquiry Club at Jefferson University has compiled a book, which expose the private lives of many of the professors on campus. Economics majors in the club estimate that total revenue from sales of books is given by the equation
TR = 120Q – 0.1Q3
i) Over what output range is demanded elastic?
ii) Initially, the price is set at $71.60. To maximize total revenue, should the price be increased or decreased? Explain.
TR = 120Q – 0.1Q3
i) Over what output range is demanded elastic?
ii) Initially, the price is set at $71.60. To maximize total revenue, should the price be increased or decreased? Explain.
Finance
40. The demand equation for a product is given by P = 30 – 0.1Q2
i) Write an equation for the point elasticity as a function of quantity.
ii) At what price is demand unitary elastic?
i) Write an equation for the point elasticity as a function of quantity.
ii) At what price is demand unitary elastic?
Finance
41. The demand equation for a product is given by
Q = (20I) / (P), where I is income and P is price.
i) Write an equation for the point price elasticity. For what values of I and P demand is unitary elastic? Explain.
ii) Write an equation for the point income elasticity. For what values of I and P is the good a necessity? Explain.
Q = (20I) / (P), where I is income and P is price.
i) Write an equation for the point price elasticity. For what values of I and P demand is unitary elastic? Explain.
ii) Write an equation for the point income elasticity. For what values of I and P is the good a necessity? Explain.
Finance
42. Consider a world in which there are only two goods. An individual has an income of $9,000, the price of deodorant is $3 per bottle, and the price of mouthwash is $2 per bottle.
i) Expressing deodorant as the dependent variable, where the equation for the budget constraint.
ii) What is the slope of the budget constraint?
iii) If the price of mouthwash increases to $4, write the new equation for the budget constraint.
i) Expressing deodorant as the dependent variable, where the equation for the budget constraint.
ii) What is the slope of the budget constraint?
iii) If the price of mouthwash increases to $4, write the new equation for the budget constraint.
Finance
43. Assume that the budget constraint is given by the equation Q1 = 1,000 – 5Q2, where Q1 and Q2 represent quantities of two goods. Normally, indifference curves are convex to the origin, but assume in this case that they are linear with a constant slope of –2.
i) Graph the budget constraint (with Q1 on the vertical axis).
ii) Draw in a set of indifference curves and label the utility-maximizing point.
iii) Where would the utility-maximizing point have been if the indifference curves had a constant slope of –6?
i) Graph the budget constraint (with Q1 on the vertical axis).
ii) Draw in a set of indifference curves and label the utility-maximizing point.
iii) Where would the utility-maximizing point have been if the indifference curves had a constant slope of –6?
Finance
19. Given the total cost function
TC = 150 Q – 3Q2 + 0.25Q3
Complete the following table by computing the total, average, and marginal costs associated with each quantity indicated.
Quantity Total Cost Average Cost Marginal Cost
1
2
3
4
5
6
TC = 150 Q – 3Q2 + 0.25Q3
Complete the following table by computing the total, average, and marginal costs associated with each quantity indicated.
Quantity Total Cost Average Cost Marginal Cost
1
2
3
4
5
6
Finance
17. Given the following supply and demand equations
QD = 100 – 5P
QS = 10 + 5P
a) Determine the equilibrium price and quantity.
b) If the government sets a minimum price of $10 per unit, how many units would be supplied and how many would be demanded?
c) If the govt. sets a maximum price of $5 per unit, how many units would be supplied and how many would be demanded?
d) If the demand increases to
Q’D = 200 – 5P
Determine the new equilibrium price and quantity.
QD = 100 – 5P
QS = 10 + 5P
a) Determine the equilibrium price and quantity.
b) If the government sets a minimum price of $10 per unit, how many units would be supplied and how many would be demanded?
c) If the govt. sets a maximum price of $5 per unit, how many units would be supplied and how many would be demanded?
d) If the demand increases to
Q’D = 200 – 5P
Determine the new equilibrium price and quantity.
Finance
14. Consider an independent businessperson who has an MBA degree and is considering investing $100,000 in a retail store that she would manage. There are no other employees. The projected income statement for the year as prepared by an accountant is as below
Sales $90,000
Less: Cost of Goods Sold 40,000
Gross Profit 50,000
Less: Advertising 10,000 Depreciation 10,000
Utilities 3,000
Property Tax 2,000
Miscellaneous Expenditure 5,000
Sub total 30,000
Net Accounting Profit is 50,000 - 30,000 = 20,000
As an Economist you recognize other costs, defined as implicit costs. What are they? If you include them in the above statement will you show profit or loss? Illustrate with your own implicit costs.
Sales $90,000
Less: Cost of Goods Sold 40,000
Gross Profit 50,000
Less: Advertising 10,000 Depreciation 10,000
Utilities 3,000
Property Tax 2,000
Miscellaneous Expenditure 5,000
Sub total 30,000
Net Accounting Profit is 50,000 - 30,000 = 20,000
As an Economist you recognize other costs, defined as implicit costs. What are they? If you include them in the above statement will you show profit or loss? Illustrate with your own implicit costs.
Finance
13. Suppose that the demand and supply equations have been estimated and that the demand and supply curves are given by Qd = 14 - 2P & Qs = 2+ 4P; Determine the equilibrium price and quantity
