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CHAPTER 1—INTRODUCTION

MULTIPLE CHOICE

1. Business profit is:

|a. |the residual of sales revenue minus the explicit accounting costs of doing business. |

|b. |a normal rate of return. |

|c. |economic profit. |

|d. |the return on stockholders' equity. |

ANS: A

2. Value maximization is broader than profit maximization because it considers:

|a. |total revenues. |

|b. |total costs. |

|c. |real-world constraints. |

|d. |interest rates. |

ANS: D

3. The return to owner-provided inputs such as financial capital is an:

|a. |implicit cost. |

|b. |economic rent. |

|c. |entrepreneurial profit. |

|d. |explicit cost. |

ANS: A

4. The value of a firm is equal to:

|a. |the present value of tangible assets. |

|b. |the present value of all future revenues. |

|c. |the present value of all future cash flows. |

|d. |current revenues less current costs. |

ANS: C

CHAPTER 2—BASIC ECONOMIC RELATIONS

MULTIPLE CHOICE

5. Which of the following short run strategies should a manager select to obtain the highest degree of sales?

|a. |maximize revenues. |

|b. |minimize average costs. |

|c. |minimize total costs. |

|d. |maximize profits. |

ANS: A

6. Total revenue is maximized at the point where:

|a. |marginal revenue equals zero. |

|b. |marginal cost equals zero. |

|c. |marginal revenue equals marginal cost. |

|d. |marginal profit equals zero. |

ANS: A

7. If P = $1,000 - $4Q:

|a. |MR = $1,000 - $4Q |

|b. |MR = $1,000 - $8Q |

|c. |MR = $1,000Q - $4 |

|d. |MR = $250 - $0.25P |

ANS: B

8. Average cost minimization occurs at the point where:

|a. |MC = 0 |

|b. |MC = AC |

|c. |AC = 0 |

|d. |Q = 0 |

ANS: B

9. Marginal profit equals:

|a. |the change in total profit following a one-unit change in output. |

|b. |the change in total profit following a managerial decision. |

|c. |average revenue minus average cost. |

|d. |total revenue minus total cost. |

ANS: A

10. If average profit increases with output marginal profit must be:

|a. |decreasing. |

|b. |greater than average profit. |

|c. |less than average profit. |

|d. |increasing. |

ANS: B

11. At the profit-maximizing level of output:

|a. |marginal profit equals zero. |

|b. |marginal profit is less than average profit. |

|c. |marginal profit exceeds average profit. |

|d. |marginal cost equals average cost. |

ANS: A

PROBLEMS

12. Marginal Analysis. Consider the price (P) and output (Q) data in the following table.

|Q |P |TR |MR |AR |

|0 |$35 | | | |

|1 |30 | | | |

|2 |25 | | | |

|3 |20 | | | |

|4 |15 | | | |

|5 |10 | | | |

|6 |5 | | | |

|7 |0 | | | |

|A. |Calculate the related total revenue (TR), marginal revenue (MR), and average revenue (AR) figures. |

| | |

|B. |At what output level is revenue maximized? |

ANS:

|A. | |

| |Q |P |TR=P×Q |MR=ΔTR/ΔQ |AR=TR/Q=P | |

| |0 |$35 |$  0 |-- |-- | |

| |1 |30 |30 |$30 |$30 | |

| |2 |25 |50 |20 |25 | |

| |3 |20 |60 |10 |20 | |

| |4 |15 |60 |0 |15 | |

| |5 |10 |50 |-10 |10 | |

| |6 |5 |30 |-20 |5 | |

| |7 |0 |0 |-30 |0 | |

| | |

|B. |Revenue is maximized at an output level 4, where MR = 0. |

13. Profit Maximization. Fill in the missing data for price (P), total revenue (TR), marginal revenue (MR), total cost (TC), marginal cost (MC), profit (π), and marginal profit (Mπ) in the following table.

|Q |P |TR=P×Q |MR=ΔTR/ΔQ |TC |MC=ΔTC/ΔQ |π=TR-TC |Mπ=Δπ/ΔQ |

|0 |$200 |$    0 |-- |$    0 |-- |$    0 |-- |

|1 |180 |180 |$180 |100 |$100 |80 |$  80 |

|2 | |320 | |175 | | |65 |

|3 | |420 |100 |240 |65 |180 | |

|4 |120 | |60 | |55 |185 |5 |

|5 |100 |500 | |350 |55 |150 |-35 |

|6 |80 |480 |-20 |400 | | |-70 |

|7 |60 | |-60 |450 |50 |-30 |-110 |

|8 | |320 |-100 | |55 |-185 |-155 |

|9 |20 |180 | |570 |65 | |-205 |

|10 |10 | |-80 |750 |180 |-650 |-260 |

|A. |At what output (Q) level is profit maximized? |

| | |

|B. |At what output (Q) level is revenue maximized? |

| | |

|C. |Discuss any differences in your answers to parts A and B. |

ANS:

|A. |Profit increases so long as MR > MC and Mπ > 0. In this problem, profit is maximized at Q = 4 where π = $185 (and TR = |

| |$480). |

|Q |P |TR=P×Q |MR=ΔTR/ΔQ |TC |MC=ΔTC/ΔQ |π=TR-TC |Mπ=Δπ/Q |

|0 |$200 |$    0 |-- |$    0 |-- |$    0 |-- |

|1 |180 |180 |$180 |100 |$100 |80 |$  80 |

|2 |160 |320 |140 |175 |75 |145 |65 |

|3 |140 |420 |100 |240 |65 |180 |35 |

|4 |120 |480 |60 |295 |55 |185 |5 |

|5 |100 |500 |20 |350 |55 |150 |-35 |

|6 |80 |480 |-20 |400 |50 |80 |-70 |

|7 |60 |420 |-60 |450 |50 |-30 |-110 |

|8 |40 |320 |-100 |505 |55 |-185 |-155 |

|9 |20 |180 |-140 |570 |65 |-390 |-205 |

|10 |10 |100 |-80 |750 |180 |-650 |-260 |

|B. |Total Revenue increases so long as MR > 0. In this problem, revenue is maximized at Q = 5 where TR = $500 (and π = $150).|

| | |

|C. |Given a downward sloping demand curve and MC > 0, as is typically the case, profits will be maximized at an output level |

| |that is less than the revenue maximizing level. Revenue maximization requires lower prices and greater output than would |

| |be true with profit maximization. The potential long-run advantage of a revenue maximizing strategy is that it might |

| |generate rapid market expansion and long-run benefits in terms of customer loyalty and future unit cost reductions. The |

| |cost is, of course, measured in terms of lost profits in the short-run (here the loss is $35 in profits). |

O

14. Optimization. Describe each of the following statements as true or false, and explain your answer.

|A. |To maximize the value of the firm, management should always produce the level of output that maximizes short run profit. |

| | |

|B. |Average profit equals the slope of the line tangent to the total product function at each level of output. OMIT |

| | |

|C. |Marginal profit equals zero at the profit maximizing level of output. |

| | |

|D. |To maximize profit, total revenue must also be maximized. |

| | |

|E. |Marginal cost equals average cost at the average cost minimizing level of output. |

ANS:

|A. |False. Value can be maximized by producing a level of output higher than that which maximizes profits in the short run if|

| |the long run future profits derived from greater market penetration and scale advantages are sufficient to overcome the |

| |disadvantage of lost short run profits. |

| | |

|B. |False. Average profit is represented by the slope of the ray running from the origin to the total product function at |

| |each level of output. |

| | |

|C. |True. Marginal profit equals the slope of the line tangent to the total profit function at each level of output. The |

| |slope of the line tangent to the total profit function at its maximum point equals zero. Thus, marginal profit equals |

| |zero at the profit maximizing level of output. |

| | |

|D. |False. Total revenue is maximized at a level of output greater than the level of output that maximizes profit because the|

| |level of output at which MR = 0 is greater than the level of output at which MR = MC > 0 when MR is decreasing. |

| | |

|E. |True. Marginal cost equals average cost at the average cost minimizing level of output. |

15. Profit Maximization: Equations. Woodland Instruments, Inc. operates in the highly competitive electronics industry. Prices for its R2-D2 control switches are stable at $100 each. This means that P = MR = $100 in this market. Engineering estimates indicate that relevant total and marginal cost relations for the R2-D2 model are:

TC = $500,000 + $25Q + $0.0025Q2

|A. |Calculate the output level that will maximize R2-D2 profit. |

| | |

|B. |Calculate this maximum profit. |

ANS:

|A. |To find the profit-maximizing level of output, set MR = MC and solve for Q: |

| | |

| |MR = MC |

| |$100 = $25 + $0.005Q |

| |0.005Q = 75 |

| |Q = 15,000 |

| | |

| |(Note: Profits are decreasing for Q > 15,000.) |

|B. |The total revenue function for Woodland is: |

| | |

| |TR = P × Q = $100Q |

| | |

| |Then, total profit is: |

| | |

| |π = TR - TC |

| | = $100Q - $500,000 - $25Q - $0.0025Q2 |

| | = -$0.0025Q2 + $75Q - $500,000 |

| | = -$0.0025(15,0002) + $75(15,000) - $500,000 |

| | = $62,500 |

16. Average Cost Minimization. Commercial Recording, Inc., is a manufacturer and distributor of reel-to-reel recording decks for commercial recording studios. Revenue and cost relations are:

TR = $3,000Q - $0.5Q2 AND TC = $100,000 + $1,500Q + $0.1Q2

|A. |Calculate output, marginal cost, average cost, price, and profit at the average cost-minimizing activity level. |

| | |

|B. |Calculate these values at the profit-maximizing activity level. |

| | |

|C. |Compare and discuss your answers to parts A and B. |

ANS:

|A. |To find the average cost-minimizing level of output, set MC = AC and solve for Q: |

| | |

| |$1,500 + $0.2Q = [pic] |

| |1,500 + 0.2Q = [pic] + 1,500 + 0.1Q |

| |0.1Q = [pic] |

| |Q2 = [pic] |

| |Q = [pic] |

| |Q = 1,000 |

| | |

| | |

| | |

| |MC = $1,500 + $0.2(1,000) |

| | = $1,700 |

| |AC = [pic] + $1,500 + $0.1(1,000) |

| | = $1,700 |

| | |

| |P = TR/Q |

| | = ($3,000Q - $0.5Q2)/Q |

| | = $3,000 - $0.5Q |

| | = $3,000 - $0.5(1,000) |

| | = $2,500 |

| | |

| |π = |

| | |

| | = $800,000 |

| | |

| |(Note: Average cost is rising for Q > 1,000.) |

|B. |To find the profit-maximizing level of output, set MR = MC and solve for Q: |

| | |

| |MR = MC |

| |$3,000 - $1Q = $1,500 + $0.2Q |

| |1.2Q = 1,500 |

| |Q = 1,250 |

| | |

| | |

| | |

| |MC = $1,500 + $0.2(1,250) |

| | = $1,750 |

| |AC = [pic] + $1,500 + $0.1(1,250) |

| | = $1,705 |

| | |

| |P = $3,000 - $0.5(1,250) |

| | = $2,375 |

| |π = |

| | |

| | = $837,500 |

| | |

| | |

|C. |Average cost is minimized when MC = AC = $1,700. Given P = $2,500, a $800 profit per unit of output is earned when Q = |

| |1,000. Total profit π = $800,000. |

| | |

| |Profit is maximized when Q = 1,250 because MR = MC = $1,750 at that activity level. Because MC = $1,750 > AC = $1,705, |

| |average cost is rising. Given P = $2,375 and AC = $1,750, a $670 profit per unit of output is earned when Q = 1,250. |

| |Total profit π = $837,500. |

| | |

| |Total profit is higher at the Q = 1,250 activity level because the modest $5(= $1,705 - $1,700) increase in average cost |

| |is more than offset by the 250 unit expansion in sales from Q = 1,000 to Q = 1,250 and the resulting increase in total |

| |revenues. |

17. Revenue Maximization. Restaurant Marketing Services, Inc., offers affinity card marketing and monitoring systems to fine dining establishments nationwide. Fixed costs are $600,000 per year. Sponsoring restaurants are paid $60 for each card sold, and card printing and distribution costs are $3 per card. This means that RMS's marginal costs are $63 per card. Based on recent sales experience, the estimated demand curve and marginal revenue relations for are:

P = $130 - $0.000125Q and TC=600,000 +63Q

|A. |Calculate output, price, total revenue, and total profit at the revenue-maximizing activity level. |

| | |

|B. |Calculate output, price, total revenue, and total profit at the profit-maximizing activity level. |

| | |

| | |

ANS:

|A. |To find the revenue-maximizing level of output, set MR = 0 and solve for Q: |

| | |

| |MR = 0 |

| |$130 - $0.00025Q = 0 |

| |0.00025Q = 130 |

| |Q = 520,000 |

| | |

| |P = $130 - $0.000125Q |

| | = $130 - $0.000125(520,000) |

| | = $65 |

| | |

| |TR = PQ |

| | = $65(520,000) |

| | = $33,800,000 |

| |π = TR - TC |

| | = $33,800,000 - $600,000 - $63(520,000) |

| | = $440,000 |

| | |

| |(Note: Revenue is falling when Q > 520,000.) |

|B. |To find the profit-maximizing level of output, set MR = MC and solve for Q: |

| | |

| |MR = MC |

| |$130 - $0.00025Q = $63 |

| |0.00025Q = 67 |

| |Q = 268,000 |

| | |

| |P = $130 - $0.000125(268,000) |

| | = $96.50 |

| |TR = $96.50(268,000) |

| | = $25,862,000 |

| |π = $25,862,000 - $600,000 - $63(268,000) |

| | = $8,378,000 |

CHAPTER 3—STATISTICAL ANALYSIS OF ECONOMIC RELATIONS

MULTIPLE CHOICE

18. Generally speaking, population parameters are not known and must be estimated by the sample:

|a. |mean. |

|b. |mode. |

|c. |median. |

|d. |statistics. |

ANS: D

19. Statistics are:

|a. |descriptive measures for a sample. |

|b. |summary measures for the population. |

|c. |predetermined variables. |

|d. |endogenous variables. |

ANS: A

20. The "middle" observation is the:

|a. |median. |

|b. |average. |

|c. |mean. |

|d. |mode. |

ANS: A

21. If the greater bulk of sample observations are found to the left of the sample mean, then the sample is said to be:

|a. |skewed downward. |

|b. |skewed upward. |

|c. |skewed to the right. |

|d. |symmetrical. |

ANS: A

22. If a distribution is skewed downward, the median:

|a. |is greater than the mean. |

|b. |is less than the mean. |

|c. |is greater than the average. |

|d. |equals the mean. |

ANS: A

PROBLEMS

23. Sample Data Description. Express Mail Services, Inc., delivers small parcels to residential addresses in the Long Beach, California area. To learn more about the efficiency of a new employee, EMS has collected the following data on the number of deliveries per week for a recent six-week sample:

|125 |140 |155 |140 |135 |145 |

|A. |Calculate the mean, median and mode measures of central tendency for the number of deliveries per week. Which measure |

| |does the best job of describing central tendency for this variable? |

| | |

|B. |Calculate the range, variance and standard deviation for this data series. |

ANS:

|A. |The mean, or sample average, is 140 deliveries per week. By inspection of a rank-order from highest to lowest values, the|

| |"middle" or median value is 140 deliveries per week. The mode is also 140 deliveries per week, and is the most commonly |

| |observed value among these six customers. In this instance, the sample distribution is perfectly symmetric. As a result, |

| |either the mean, mode or median can be used as a useful measure of central tendency and the size of the typical |

| |observation. |

| | |

|B. |The range for these six weeks is from 125 to 155 deliveries per week. The sample variance is 100 (deliveries squared), |

| |and the sample standard deviation is 10 deliveries. Given the symmetrical nature of the delivery distribution, perhaps |

| |the sample standard deviation offers the most useful indicator of the magnitude of sample dispersion. |

24. Simple Regression. May Brothers Department Store has conducted a survey to learn the buying intentions of a sample of 62 department store customers. The survey asked each customer their household gross income(in $ thousands), and their number of shopping trips per year.

| | |

| | |

|B. |Interpret the following results for a simple regression over this sample where TRIPS is the dependent Y variable and |

| |INCOME is the independent X-variable: |

| | |

| |The regression equation is: |

| | |

| |TRIPs = 0.5 + 0.1 INCOME |

| | |

| |Predictor |Coef |Stdev |t ratio | |

| |Constant |0.48 |0.30 |1.6 | |

| |INCOME |0.10 |0.05 |2.0 | |

| | |

| |SEE = 0.3 [pic]2 = 64% = 63.4% F statistic = 106.7 |

ANS:

| | |

| | |

|B. |The constant in such a regression typically has no meaning. Clearly, the intercept should not be used to suggest the |

| |number of planned trips for a department customer with zero income!. The INCOME coefficient value of 0.1 implies that a |

| |one-unit (thousand dollar) increase in INCOME results in an average increase of 0.1 units in the TRIPS variable. |

CHAPTER 4—DEMAND AND SUPPLY

MULTIPLE CHOICE

25. If demand increases while supply decreases for a particular good:

|a. |its equilibrium price will increase while the quantity of the good produced and sold is indeterminate. |

|b. |the quantity of the good produced and sold will decrease while its equilibrium price is indeterminate. |

|c. |the quantity of the good produced and sold will increase while its equilibrium price is indeterminate. . |

|d. |its equilibrium price will decrease while the quantity of the good produced and sold is indeterminate. |

ANS: A

26. The supply of a product does not depend on:

|a. |raw material costs. |

|b. |wage rates. |

|c. |consumer incomes. |

|d. |technology. |

ANS: C

27. The equilibrium market price of a service is the:

|a. |price that buyers are willing and able to pay. |

|b. |price where shortages exceed surpluses. |

|c. |price that maximizes profit for sellers. |

|d. |price where the quantity demanded equals the quantity supplied. |

ANS: D

28. If the market price is higher than the equilibrium price a:

|a. |shortage exists and the equilibrium price will rise until it equals the market price and the shortage is eliminated. |

|b. |surplus exists and the market price will fall until it equals the equilibrium price and the surplus is eliminated. |

|c. |surplus exists and the equilibrium price will rise until it equals the market price and the surplus is eliminated. |

|d. |shortage exists and the market price will fall until it equals the equilibrium price and the shortage is eliminated. |

ANS: B

PROBLEM

29. Demand and Supply Curves. The following relations describe demand and supply conditions in the oil industry:

|QD = 525,000 - 7,500P |(Demand) |

| | |

|QS = -150,000 + 15,000P |(Supply) |

where Q is quantity measured in millions of barrels and P is price in dollars.

|A. |Complete the following table: |

| | |

| | |Quantity |Quantity |Surplus (+) or | |

| |Price |Supplied |Demanded |Shortage (-) | |

| |(1) |(2) |(3) |(4) = (2) - (3) | |

| |$35 | | | | |

| |30 | | | | |

| |25 | | | | |

| |20 | | | | |

| |15 | | | | |

ANS:

|A. | |

| | |Quantity |Quantity |Surplus (+) or | |

| |Price |Supplied |Demanded |Shortage (-) | |

| |(1) |(2) |(3) |(4) = (2) - (3) | |

| |$35 |375,000 |262,500 |+112,500 | |

| |30 |300,000 |300,000 |0 | |

| |25 |225,000 |337,500 |-112,500 | |

| |20 |150,000 |375,000 |-225,000 | |

| |15 |75,000 |412,500 |-337,500 | |

30. Demand Analysis. The demand for automobiles is often described as highly cyclical, and very sensitive to automobile prices and interest rates. Given these characteristics, describe the effect of each of the following..

|A. |A decrease in auto prices |

| | |

|B. |A fall in interest rates |

| | |

|C. |A rise in interest rates |

| | |

|D. |A severe economic recession |

| | |

|E. |A robust economic expansion |

ANS:

|A. |A decrease in auto prices will increase the quantity demanded and involve a downward movement along the auto demand |

| |curve. |

| | |

|B. |A fall in interest rates will increase the demand for autos and cause an outward shift of the auto demand curve. |

| | |

|C. |A rise in interest rates will decrease the demand for autos and cause an inward shift of the auto demand curve. |

| | |

|D. |A severe economic recession (fall in income) will decrease the demand for autos and result in an inward shift of the auto|

| |demand curve. |

| | |

|E. |A robust economic expansion (rise in income) will increase the demand for autos and result in an outward shift of the |

| |auto demand curve. |

31. Comparative Statics. Coupon Promotions, Inc., is a coupon book publisher with markets in several southwestern states. CPI coupon books are either sold directly to the public, sold through religious and other charitable organizations, or given away as promotional items. Operating experience during the past year suggests the following demand function for its coupon books:

Q = 10,000 - 5,000P + 0.02Pop + 0.4I + 0.6A

where Q is quantity, P is price ($), Pop is population, I is disposable income per capita ($), and A is advertising expenditures ($).

|A. |Determine the demand curve faced by CPI in a typical market where P = $5, Pop = 1,000,000 persons, I = $35,000 and A = |

| |$10,000. Show the demand curve with quantity expressed as a function of price, and price expressed as a function of |

| |quantity. |

| | |

|B. |Calculate the quantity demanded at prices of $5, $2.50, and $0. |

| | |

|C. |Calculate the prices necessary to sell 10,000, 25,000, and 50,000 units. |

ANS:

|A. |The value for each respective non-price variable must be substituted into the demand function in order to derive the |

| |relevant demand curve: |

| | |

| |Q = 10,000 - 5,000P + 0.02Pop + 0.4I + 0.6A |

| | = 10,000 - 5,000P + 0.02(1,000,000) + 0.4(35,000) + 0.6(10,000) |

| |Q = 50,000 - 5,000P |

| | |

| |Then, price as a function of quantity is: |

| | |

| |Q = 50,000 - 5,000P |

| |5,000P = 50,000 - Q |

| |P = $10 - $0.0002Q |

| | |

|B. |At, |

| |P = $5: |Q = 50,000 - 5,000(5) = 25,000 |

| |P = $2.50: |Q = 50,000 - 5,000(2.5) = 37,500 |

| |P = $0: |Q = 50,000 - 5,000(0) = 50,000 |

| | |

|C. |At, | |

| |Q = 10,000: |P = $10 - $0.0002(10,000) = $8 |

| |Q = 25,000: |P = $10 - $0.0002(25,000) = $5 |

| |Q = 50,000: |P = $10 - $0.0002(50,000) = $0 |

32. Quantity Demanded. Gurgling Springs, Inc. is a bottler of natural spring water distributed throughout the New England states. Five-gallon containers of GSI spring water are regionally promoted and distributed through grocery chains. Operating experience during the past year suggests the following demand function for its spring water:

Q = 250 - 100P + 0.0001Pop + 0.003I + 0.003A

where Q is quantity in thousands of five-gallon containers, P is price ($), Pop is population, I is disposable income per capita ($), and A is advertising expenditures ($).

|A. |Determine the demand curve faced by CPI in a typical market where P = $4, Pop = 4,000,000 persons, I = $50,000 and A = |

| |$400,000. Show the demand curve with quantity expressed as a function of price, and price expressed as a function of |

| |quantity. |

| | |

|B. |Calculate the quantity demanded at prices of $5, $4, and $3. |

| | |

|C. |Calculate the prices necessary to sell 1,250, 1,500, and 1,750 thousands of five gallon containers. |

ANS:

|A. |The value for each respective non-price variable must be substituted into the demand function in order to derive the |

| |relevant demand curve: |

| | |

| |Q = 250 - 100P + 0.0001Pop + 0.005I + 0.003A |

| | = 250 - 100P + 0.0001(4,000,000) + 0.003(50,000) + 0.003(400,000) |

| |Q = 2,000 - 100P |

| | |

| |Then, price as a function of quantity is: |

| | |

| |Q = 2,000 - 100P |

| |100P = 2,000 - Q |

| |P = $20 - $0.01Q |

| | |

|B. |At, |

| |P = $5: |Q = 2,000 - 100(5) = 1,500 |

| |P = $4: |Q = 2,000 - 100(4) = 1,600 |

| |P = $3: |Q = 2,000 - 100(3) = 1,700 |

| | |

|C. |At, |

| |Q = 1,250: |P = $20 - $0.01(1,250) = $7.50 |

| |Q = 1,500: |P = $20 - $0.01(1,500) = $5 |

| |Q = 1,750: |P = $20 - $0.01(1,750) = $2.50 |

33. Demand Curve Analysis. Air California, Inc. is a regional airline providing service between Los Angeles, California and Las Vegas, Nevada. An analysis of the monthly demand for service has revealed the following demand relation:

Q = 45,000 - 250P - 300PC + 250BAI + 10,000S

Where Q is quantity measured by the number of passengers per month, P is the price ($), PC is a price index for connecting flights (1982 = 100.), BAI is a business activity index (1982 = 100) and S, a binary or dummy variable, equals 1 in summer months, zero otherwise.

|A. |Determine the demand curve facing the airline during the winter month of January if P = $100, PC = 150, BAI = 200, and S |

| |= 0. |

| | |

|B. |Calculate the quantity demanded and total revenues during the summer month of July if all price-related variables are as |

| |specified above. |

ANS:

|A. |The demand curve facing Air California during January can be calculated by substituting the appropriate value for each |

| |respective variable into the firm's demand function: |

| | |

| |Q = 45,000 - 250P - 300PC + 250BAI + 10,000S |

| | = 45,000 - 250P - 300(150) + 250(200) + 10,000(0) |

| |Q = 50,000 - 250P |

| | |

| |With price expressed as a function of quantity, the firm demand curve can be written: |

| | |

| |Q = 50,000 - 250P |

| |250P = 50,000 - Q |

| |P = $200 - $0.004Q |

| | |

|B. |During the summer month of July, the variable S = 1. Therefore, assuming that price-related values remain as before, the |

| |quantity demanded during July is: |

| | |

| |Q = 45,000 - 250(100) - 300(150) + 250(200) + 10,000(1) |

| | = 35,000 passengers |

| | |

| |Total July revenue for the company is: |

| | |

| |TR = PQ |

| | = $100(35,000) |

| | = $3,500,000 |

34. Supply Curve Analysis. A review of industry-wide data for the domestic wine manufacturing industry suggests the following industry supply function:

Q = -7,000,000 + 400,000P - 2,000,000PL - 1,500,000PK + 1,000,000W

where Q is cases supplied per year, P is the wholesale price per case ($), PL is the average price paid for unskilled labor ($), PK is the average price of capital (in percent), and W is weather measured by the average seasonal rainfall in growing areas (in inches).

|A. |Determine the industry supply curve for a recent year when P = $80, PL = $10, PK = 12%, and W = 25 inches of rainfall. |

| |Show the industry supply curve with quantity expressed as a function of price and price expressed as a function of |

| |quantity. |

| | |

|B. |Calculate the quantity supplied by the industry at prices of $50, $75 and $100 per case. |

| | |

|C. |Calculate the prices necessary to generate a supply of 10 million, 25 million, and 50 million cases. |

ANS:

|A. |With quantity expressed as a function of price, the industry supply curve can be written: |

| | |

| |Q = -7,000,000 + 400,000P - 2,000,000PL - 1,500,000PK + 1,000,000W |

| | = -7,000,000 + 400,000P - 2,000,000(10) - 1,500,000(12) + 1,000,000(25) |

| | = -20,000,000 + 400,000P |

| | |

| |With price expressed as a function of quantity, the industry supply curve can be written: |

| | |

| |Q = -20,000,000 + 400,000P |

| |400,000P = 20,000,000 + Q |

| |P = $50 + $0.0000025Q |

| | |

|B. |Industry supply at each respective price is: |

| | |

| |P = $50: |Q = -20,000,000 + 400,000(50) = 0 |

| |P = $75: |Q = -20,000,000 + 400,000(75) = 10,000,000 |

| |P = $100: |Q = -20,000,000 + 400,000(100) = 20,000,000 |

| | |

|C. |The price necessary to generate each level of supply is: |

| | |

| |Q = 10,000,000: |P = $50 + $0.0000025(10,000,000) = $75 |

| |Q = 25,000,000: |P = $50 + $0.0000025(25,000,000) = $112.50 |

| |Q = 50,000,000: |P = $50 + $0.0000025(50,000,000) = $175 |

35. Supply Curve Analysis. is a leading Internet retailer of high-performance desktop computers. Based on an analysis of monthly cost and output data, the company has estimated the following relation between its marginal cost of production and monthly output:

MC = $100 + $0.005Q

| |Omit A |

| | |

|B. |Express output as a function of marginal cost. Calculate the level of output at which MC = $1,000, $1,500 and $2,000. |

| | |

|C. |Calculate the profit-maximizing level of output if prices are stable in the industry at $1,500 per unit and, therefore, P|

| |= MR = $1,500. |

| | |

|D. |Again assuming prices are stable in the industry, derive the firm's supply curve. Express price as a function of quantity|

| |and quantity as a function of price. |

ANS:

| | |

| | |

| | | |

| | | |

| | | |

| | |

|B. |When output is expressed as a function of marginal cost: |

| | |

| |MC = $100 + $0.005Q |

| |0.005Q = -100 + MC |

| |Q = -20,000 + 200MC |

| | |

| |The level of output at each respective level of marginal cost is: |

| | |

| |MC = $1,000: |Q = -20,000 + 200(1,000) = 180,000 |

| |MC = $1,500: |Q = -20,000 + 200(1,500) = 280,000 |

| |MC = $2,000: |Q = -20,000 + 200(2,000) = 380,000 |

| | |

|C. |Note from part B that MC = $1,500 when Q = 280,000. Therefore, when MR = $1,500, Q = 280,000 will be the |

| |profit-maximizing level of output. More formally: |

| | |

| |MR = MC |

| |$1,500 = $100 + $0.005Q |

| |0.005Q = 1,400 |

| |Q = 280,000 |

| | |

|D. |Because prices are stable in the industry, P = MR. This means that the company will supply output at the point where: |

| | |

| |MR = MC |

| | |

| |and, therefore, that: |

| | |

| |P = $100 + $0.005Q |

| | |

| |This is the company supply curve, where price is expressed as a function of quantity. When quantity is expressed as a |

| |function of price: |

| | |

| |P = $100 + $0.005Q |

| |0.005Q = -100 + P |

| |Q = -20,000 + 200P |

36. Market Equilibrium. Florida Orange Juice is a product of Florida's Orange Growers' Association. Demand and supply of the product are both highly sensitive to changes in the weather. During hot summer months, demand for orange juice and other beverages grows rapidly. On the other hand, hot dry weather has an adverse effect on supply by reducing the size of the orange crop.

Demand and supply functions for Florida orange juice are as follows:

|QD = 4,500,000 - 1,200,000P + 2,000,000PS + 1,500Y + 100,000T |(Demand) |

| | |

|QS = 8,000,000 + 2,400,000P - 500,000PL - 80,000PK - 120,000T |(Supply) |

where P is the average price of Florida ($ per case), PS is the average retail price of canned soda ($ per case), Y is income (GNP in $billions), T is the average daily high temperature (degrees), PL is the average price of unskilled labor ($ per hour), and PK is the average cost of capital (in percent).

|A. |When quantity is expressed as a function of price, what are the Florida demand and supply curves if P = $11, PS = $5, Y =|

| |$12,000 billion, T = 75 degrees, PL = $6, and PK = 12.5%. |

| | |

|B. |Calculate the surplus or shortage of Florida orange juice when P = $5, $10, and $15. |

| | |

|C. |Calculate the market equilibrium price-output combination. |

ANS:

|A. |When quantity is expressed as a function of price, the demand curve for Florida Orange Juice is: |

| | |

| |QD = 4,500,000 - 1,200,000P + 2,000,000PS + 1,500Y + 100,000T |

| | = 4,500,000 - 1,200,000P + 2,000,000(5) + 1,500(12,000) + 100,000(75) |

| |QD = 40,000,000 - 1,200,000P |

| | |

| |When quantity is expressed as a function of price, the supply curve for Florida Orange Juice is: |

| | |

| |QS = 8,000,000 + 2,400,000P - 500,000PL - 80,000PK - 120,000T |

| | = 8,000,000 + 2,400,000P - 500,000(6) - 80,000(12.5) - 120,000(75) |

| |QS = -5,000,000 + 2,400,000P |

|B. |The surplus or shortage can be calculated at each price level: |

| |Quantity |Quantity |Surplus (+) or |

|Price |Supplied |Demanded |Shortage (-) |

|(1) |(2) |(3) |(4) = (2) - (3) |

|$5: |QS = -5,000,000+2,400,000(5) |QD = 40,000,000-1,200,000(5) |-27,000,000 |

| |= 7,000,000 |= 34,000,000 | |

|$10: |QS = -5,000,000+2,400,000(10) |QD = 40,000,000-1,200,000(10) |  9,000,000 |

| |= 19,000,000 |= 28,000,000 | |

|$15: |QS = -5,000,000+2,400,000(15) |QD = 40,000,000-1,200,000(15) |+9,000,000 |

| |= 31,000,000 |= 22,000,000 | |

|C. |The equilibrium price is found by setting the quantity demanded equal to the quantity supplied and solving for P: |

| | |

| |QD = QS |

| |40,000,000 - 1,200,000P = -5,000,000 + 2,400,000P |

| |3,600,000P = 45,000,000 |

| |P = $12.50 |

| | |

| |To solve for Q, set: |

| | |

| |Demand: |QD = 40,000,000 - 1,200,000(12.50) = 25,000,000 |

| | | |

| |Supply: |QS = -5,000,000 + 2,400,000(12.50) = 25,000,000 |

| | |

| |In equilibrium, QD = QS = 25,000,000. |

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