In the name of Allah who is the most benificient and the most mercifull

Managerial Economics
Assignment
Name: Shahroz Khan
Id# 113314

Question 1) A consumer spends all her income on food and clothing. At the current prices of
price of food = Rs. 10 and price of cloth = Rs. 5, she maximizes her utility by purchasing 20
units of food and 50 units of clothing.(Hint: Take food on x-axis and cloth on y-axis)

1- What is the consumer’s income?

Solution:
Income = 10 * 20 + 5 * 50 = 450

2-What is the consumer‘s marginal rate of substitution of food for clothing at the equilibrium

Solution:
The consumer’s marginal rate of substitution of food for clothing at the equilibrium is
MRS = Px / Py = 10/5 = 2
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Question 2) Ali’s budget line relating good X and good Y has intercept of 50 unit of good X and
20 units of good Y. if the price of good X is 12, what is Ali’s income? What is the price of good
Y? What is then slope of budget line?

Solution:
If a budget line relating good X and good Y has intercept Ox = 50unit of good X and Qy = 20
units of good X and Px = 12, then the Ali’s income is:
I = Px*Qx + Py*Qy
When the budget line has the intercept Qx = 50 and Px = 12,

Then I = 12*50 + 0*20 = 600, so the Ali's income is I = 600.

The price of good Y can be found from the income equation in the point of interception with the
X-axis:
600 = 12*50 + Py*20,
Px = $1
The slope of budget line is:
600 = 1*Qx + 0*Qy
Qy = 600 - 1Qx
Qy = 599Qx + 30, so the slope of budget line is -1.5.
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Question 3) Colgate sells its standard size toothpaste for Rs. 25. Its sales have been on an
average 8000 units per month over the last year. Recently, its competitor Sparkle reduced the
price of its same standard size toothpaste from Rs. 35 to Rs. 30. As a result Colgate sales
declined by 1500 units per month.

i) Calculate the cross elasticity between the two products.

Solution:

Cross elasticity (Exy) tells us the relationship between two products. it measures the sensitivity
of quantity demand change of product X to a change in the price of product Y.

Cross elasticity formula: Exy = percentage change in Quantity demanded of X / percentage

change in Price of Y.

Let Colgate be c and sparkle be s

Thus Cross Elasticity Ecs = [(1500−8000)/8000∗100)] / [(30−35)/35∗100)][(1500-

8000)/8000*100)]/[(30-35)/35*100)][(1500−8000)/8000∗100)]/[(30−35)/35∗100)]

Ecs=−81.25/−14.29Ecs=-81.25/-14.29Ecs=−81.25/−14.29

Ecs=5.7Ecs=5.7 Ecs=5.7

i) What does your estimate indicate about the relationship between the two?

Solution:
Normally, if the Exy > 0, the quantity demanded of X and Price of Y are directly related. X and
Y are substitutes.
Thus Colgate and Sparkle are close substitutes.

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Question 4) you are given the following marginal utilities of goods X and Y obtained by a
consumer. Given that price of X = Rs. 2.5, price of Y = Rs. 1 and income = Rs. 11, find out the
optimal combination of goods

No. of unit Marginal utilities Marginal

consumed of X utilities of
of a Y
commodity
1 15 10
2 12.5 9
3 10 8
4 7.5 7
5 5 6
6 2.5 5
7 0.5 4

Solution:

PX=2.5
Py= 1
I=11
2.5x+y=11
MUx / PX = Muy / py
MUx = 2.5 MUy
x=2
y=6
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Question 5) Suppose the market demand for playing cards is given by the equation

Q = 600 – 100P
Where Q is the no. of decks of cards demand each year and P is the price in Rupee. For a price
increase from Rs. 2 to Rs. 3 per deck, what is the price elasticity?

Solution:

Find Q:

P=2

Q=600−100×P=600−100×2=400

P=3

Q=600−100×P=600−100×3 = 300

Price elasticity

E (DP) =%ΔQ%ΔP=−25/ 50 = - 0.5

%ΔQ=300−400 / 400 * 100 = - 25

%ΔP=3−2 / 2 * 100 = 50

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Question 6) A publishing company plans to publish a book. From the sales data of other
publisher of similar books, it works out the demand function for the book as:

Q = 5000 – 5P

Find out

i) Demand curve

Solution:
Assume initial price of book (P) = Rs. 10
Demand (Q) 5000 – 5P
Q= 5000 – 5 * 10
Q = 4940
When, P = Rs. 14
Q = 5000 – 5 P
Q = 5000 – 5 * 12
Q = 4950
When, P = Rs 16
Q =5000 – 5 P
Q = 5000 – 5 * 16
Q = 4320
When, P = Rs. 18
Q = 5000 – 5 P
Q = 5000 – 5 * 18
Q = 4910

ii) Number of book sold at P = Rs. 25

Solution:
Number of book sold at p = Rs. 25
Let,
Q = 5000 – 5 P
Q = 5000 – 5 * 25
Q = 5000 – 125
Q = 4875 Books.

iii) Price for selling 2500 copies

Solution:
Price for selling 2500 copies
Q = 250 copies
P = Rs.
Q = 5000 – 5 P
2500 = 5000 – 5 P
5 P = 2500
P = 2500 / 5
P = 500

iv) Price for zero sales

Solution:
Price for zero sales
Demand (Q) = 0
Q = 5000 – 5 P
0 = 5000 – 5 P
5 P = 5000p = 1000
v) Elasticity for fall in price from Rs. 25 to Rs. 20.

Solution:
Elasticity for fall in price from Rs. 25 to 20
Let’s,
P = Rs. 25
P1 = Rs. 20
∆p = P – P1
∆p = 25 – 20
∆p = 5
Demand fall:
If the price of book = Rs. 25
Therefore,
Q = 5000 – 5 P
Q = 5000 – 5 * 25
Q = 4875
If there price of book = Rs. 20
Therefore,
Q = 5000 – 5 P
Q = 5000 – 5 * 20
 Q = 5000 – 100
Q = 4900
Demand Falls = 4900 – 4875
Demand Falls = 25
Demand fall % = 25 / 4875 * 100
Demand Falls % = 0.51 %
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Question 7: Given production function:

U = X 3/4. Y1/4
Find out the optimal quantities of the two commodities using Lagrangian method, if it is
given that price of X is Rs.3 and price of capital is Rs.6 and total cost is equal to Rs.120.

Solution:
MUx= 3/ 4 (y/x) 1/4
MUy= ¼ (x/y) 3/4
MUx / px = Muy/ Py
y=1.5 x
2x+1.5x=40
x=11.4
y=17.1

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Question 8: Formulate the demand equations and estimate Qd for P=33 by using the following
data:

Price Quantity
level Demand

38 200

36 500

34 800

32 900

30 1000
 28 1400

Solution
The formula for demand equation:

y−y1=m (x−x1)

Y is the dependent variable which is price

X is the independent variable which is the quantity demanded

m is the slope

m = y2 – y1 / x2 – x1

Let us take two points from the given data:

y1=P1=36

x1=Q1=500

y2=P2=32

x2=Q2=900

m = P2 – P1 / Q2 – Q1

m=32 – 36 / 900 – 500

m= -4 400 = - 0.01
A negative slope means the negative relationship between quantity demand and price

P−P1=m (Q−Q1)

P−36=−0.01 (Q−500)

P−36=−0.01Q+5

P=41−0.01Q is the demand equation

When P=33,

33=41−0.01Q

Q= 33 – 41 / -0.01

Q=800

When price is 33, quantity demanded is 800 units

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Question 9: Given the following cost function:

TC = 1500 + 15Q – 6Q2 + Q3

Determine the total fixed cost for producing 1000 units of output and 500 units of output.

Solution:
Total fixed cost

at Q=1000

FC = 1500

at Q=500

FC = 1500

What is AFC at?

AFC =FC / Q
a) 1000 units of output

Solution:
Q = 1000
AFC=1500 / 1000 = 1.5
b) 500 units of output

Solution:

Q = 500

AFC=1500 / 500 = 3

iii. Determine TVC, AVC, MC and AC at 50 units of output.

Solution
TVC = Tc – FC = 15 Q – 6 Q2 + Q3
AVC = TVC / Q = 15 – 6 Q + Q2
AC = TC / Q = 1500 / Q + 15 - 6Q + Q2
MC = dTC / dQ = 15 – 12Q + 3Q2
Q = 50
TVC = 15 (50) – 6 (50) 2 + (50) 3
= 750 – 15000 +_ 125000
= 110750
AVC = TVC / Q
110750 / 50 = 2215
AC = 1500 / 50 + 15 – 6 (50) + 50 2
= 2245
MC = 15 – 12 (50) + 3 (50) 2
= 6915
TVC = 110750
AVC = 2215
MC = 6915
AC = 2245
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Question 10: The demand function equation faced by PTCL for its computers is given by:
 P = 50,000 – 4Q

i. Write the marginal revenue equation

Solution:
Let's first find the total revenue:

TR=PQ
TR= (50000−4Q) Q=50000Q−4Q2.
In order to find the marginal revenue, we need to take the derivative:

MR= dTR / dQ = d / dQ (50000Q – 4Q2) = 50000 – 8Q.

ii. At what price and quantity marginal revenue will be zero?

Solution:
Let's first find the quantity at which the marginal revenue would be zero:

MR=0
50000-8Q
Q = 50000 / 8 = 6250
Finally, we can find the price at which the marginal revenue would be zero by substituting QQ into
the demand function:

P=50000-4.6250 = 25000
iii. At what price and quantity will total revenue be maximized?

Solution:
The marginal revenue equals zero when the total revenue curve has reached its maximum value (in
other words, the total revenue is maximized). Thus, the total revenue will be maximized at price
25000 and quantity 6250.

i) MR=50000-8Q
ii) P=25000, Q=6250
iii) P=25000, Q=6250
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Question 11: Suppose the following demand and supply function:
Qd = 750 – 25P
Qs = -300 + 20 P
 i. Find equilibrium price and quantity

Solution:
Equilibrium price
Qd = Qs
750 – 25P = - 300 + 20P
750 + 300 = 20P + 25P
1050 = 45P
1050 / 45 = P
P = 23.333
Equilibrium Quantity:
Qd = 750 – 25* 23.3 = 166. 6
Qs = - 300 + 20 * 23.3 = 166
ii. Find consumer and producer surplus
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Question 12: Given production function:
Q = L 3/4. K1/4
Find out the optimal quantities of the two factors using Lagrangian method, if it is given that
price of labor is Rs.6 and price of capital is Rs.3 and total cost is equal to Rs.120.
Solution:
Minimize Lagrangian = wL + rK + λ (Q−L3/4K1/4)
Now differentiating with respect to L and K, and putting equal to zero,

We get d Lagrangian / d labor =w+3/4λK1/4L−1/4

In the above two equations, put w= $6 and r=$3
And we get 2L=3K
And we know wL+rK=cost
6L+3K=120, putting 2L=3K
Then L=120 / 8 = 15 and k=10
And for the capital we get r+1/4λL3/4K−3/4
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Question 13: Given the cost function is
TC = 6L + 3K
Find out the optimal quantities of the two factor using Lagrangian method, if it is given that
output is equal to 13.46 = L3/4. K1/4.

Solution:
Using Lagrangian method
L*= Minimize lost subject to output constraint
L* = 6L + 3K – λ (L3/4K1/4 – 13.46)
σL* / σL = 6 - λ (3 / 4 L3/4K1/4) = 0
6 (4) / 3 L3/4K1/4) = λ
8 (L/K) ¼= λ
σL* / σL = 3 - λ (1 / 4 L3/4K-3/4) = 0
3 (4) / L3/4K-3/4) = λ
12 (k/l) 3/4) = λ
Equating λ’s 1 & 2
8( L / K) ¼ = 2(L / K) 3/4)
8 L = 12K
L=6/4K=3/2K
L = 1.5 K
13.46 = L3/4K1/4
13.46 = (1.5 K) 3/4K1/4
13.46 / (1.5) ¾ = K
K* = 9.93 ≈ 10 units
L* = 1.5 K* =1.5(10)
L* = 15 units
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Question 14: Suppose that the production function of the firm is:
Q = 100L1/2.K1/2
K= 100, P = $1, w = $30 and r = $40. Determine the quantity of labor that the firm should hire
in order to maximize the profits. What is the maximum profit of this firm?

Solution:
The production function of the firm is given by
Q=100L0.5K0.5
Where Q is the total output produced by the firm, L is the amount of labor employed in the firm,
K is the amount of capital employed in the firm and k=100k=100
The cost function for the given firm is
C=wL+rK
Where w is the wage rate, $30 and r is the interest rate $40 .
So now the cost function is given by;
C=30L+40K
C=30L+40(100)
C=30L+4000
Where K=100
The market price is given as p=$1

So the revenue function of the firm is given as;

R=P×Q
=1×100L0.5 (100)0.5
Put the value of
K (100)
R=100L0.5 (10)22

R=100L×L0.5
So now the profit function of the firm is given by;

π=R−C
Put the values of the revenue function (R) and the cost (c)
π=100L0.5−30L−4000
Firm has to maximize its profit

To maximize profit, the First Order Condition (F.O.C) must be satisfied. For the F.O.C, take the
differentiation with respect to 'L'

µπ / µl 1000 / 2 L – 1 / 2
= − 30
F.O.C: µl / µπ = 0

500 L – 1 / 2 30 = 0
–

⟹ 500 / L0.5 = 30 ⟹ 30L0.5 = 500

Squaring both sides of the equation;

900 L = 250,000 ….. L = 277.777 ≈ 278

The quantity of labor that the firm should hire in order to maximize the profits is
L=278 units
The quantity of labor that the firm should hire in order to maximize the profits is
L=278 units

Π = 1000 L 0.5 - 30 l – 4000

Put the value of L=278

π=139,000−8,340−4,000⟹π=126,660
π=126,660
The maximum profit of the firm is
π=126,660
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Question 15: Solve the above problem for w = $50.
Solution:
C=30L+50K
C=30L+50(100)
C=30L+5000
Where K=100
The market price is given as p=$1

So the revenue function of the firm is given as

R=P×Q
=1×100L0.5 (100)0.5
Put the value of
K (100)
R=100L0.5 (10)22

R=100L×L0.5
So now the profit function of the firm is given by

π=R−C
Put the values of the revenue function (R) and the cost (c)
π=100L0.5−30L−5000
Firm has to maximize its profit

To maximize profit, the First Order Condition (F.O.C) must be satisfied. For the F.O.C, take the
differentiation with respect to 'L'

µπ / µl 1000 / 2 L – 1 / 2
= − 30
F.O.C: µl / µπ = 0

500 L – 1 / 2 30 = 0
–

⟹ 500 / L0.5 = 30 ⟹ 30L0.5 = 500

Squaring both sides of the equation;

900 L = 250,000 ….. L = 277.777 ≈ 278

The quantity of labor that the firm should hire in order to maximize the profits is
L=278 units
The quantity of labor that the firm should hire in order to maximize the profits is
L=278 units

Π = 1000 L 0.5 - 30 l –5000

Put the value of L=278

π=139,000−8,340−5,000⟹π=126,660
π=126,660
The maximum profit of the firm is
π=126,660
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Question 16: Given TC = 100 + 60Q – 12Q2 + Q3. Find

a. The equations of the TVC, AVC, and MC functions.

Solution:
From the Total cost TC; If Q=0, TC=100 and TFC=100
Therefore TVC=60Q-12Q2+Q3
AVC= TVC / Q = (60Q−12Q2+Q3) / Q
AVC=60-12Q+Q2
MC= d (TC) / dq = d (60Q−12Q2+Q3) dq
MC=60-24Q+3Q2

b. The level of output at which AVC and MC are minimum, and prove that the AVC and
MC curves are U-shaped.

Solution:
For Minimum Output AVC d (AVC) / dq =0
d (AVC) / dq =-12 +2Q=0
Q=6
Hence AVC is minimum when output, Q=6
For Minimum output MC; 60-24Q+3Q2
d (MC / dQ ) =-24+6Q=0
Q=4
Hence MC is minimum when output, Q=4
To prove that AVC and MC curves are U shaped;
d (MC / d2 (Q)) =-24+6Q
d2 (MC) / d2 (Q) = 6 > 0 , hence the curves are U shaped.
 c. Find the AVC and MC for the level of output at which the AVC curve is minimum.

Solution:
AVC=60 - 12Q+Q2
60-12(6) +62
60-72+36
=24
The output level Q=6 at which AVC function is minimum, AVC and MC is 24.
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Question 17: Answer the same questions as in the above problem if:
TC = 120 + 50Q – 10Q2 + Q3

Solution:
From the Total cost TC; If Q=0, TC=120 and TFC=120
Therefore TVC=50Q-10Q2+Q3
AVC= TVC / Q = (50Q−10Q2+Q3) / Q
AVC=50-10Q+Q2
MC= d (TC) / dq = d (50Q−10Q2+Q3) dq
MC=50-20Q+3Q2
b)

Solution:
For Minimum Output AVC d (AVC) / dq =0
d (AVC) / dq =-10 +2Q=0
Q=5
Hence AVC is minimum when output, Q=6
For Minimum output MC; 50-20Q+3Q2
d (MC / dQ ) =-20+5Q=0
Q=15
Hence MC is minimum when output, Q=15
To prove that AVC and MC curves are U shaped;
d(MC / d2 (Q)) =-20+5Q
d2 (MC) / d2 (Q) = 5 > 0, hence the curves are U shaped.

C
Solution:
AVC=50 - 10Q+Q2
50-10(5) +52
50-50+25
=25
The output level Q=6 at which AVC function is minimum, AVC and MC is 25
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Question 18: If the demand function faced by a firm is:
Q = 90 – 2P
TC = 2 + 57Q – 8Q2 + Q3

Determine the level of output at which the firm maximizes the profit.

Solution:
The firm will maximize profits at a point where MR = MC
TR = PQ = (45 - Q/2)× Q
=> MR = 45 - Q
TC = 2 + 57Q - 8Q2 + Q3
=> MC = 57 - 16Q + 3Q2
MR = MC
=> 45 - Q = 57 - 16Q + 3Q2
=> 3Q2 - 15Q + 12 = 0
=> Q2 - 5Q + 4 =0
=> Q2 - Q - 4Q + 4 =0
=> Q (Q-1) -4(Q-1) = 0
=> Q = 4 or Q = 1
Thus, the Q = 4
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Question 19: Determine the best level of output for the above question by the MR and MC
approach.

Solution:
Q = 90 – 2P
P=45−1/2Q
MR=dP/dQ=−1/2
MC=dTC/dQ=57−16Q+3Q2
Now MC=MR
57−16Q+3Q2=−1/2
6Q2−32Q+115=0
On solving quadratic ally,
Q1=2.67and Q2=2.67=2.67
So 2.67 is the best level of output
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Question 20: Determine the best level of output for a perfectly competitive firm that sells its
product at P = $4 and faces TC = 0.04Q 3 – 0.9Q2 + 10Q + 5. Will the firm produce this level of
output? Why?

Solution:
Total Revenue (TR) =Price × Q
TR=4Q
Profit =Total Revenue (TR) - Total Costs (TC)
Profit =4Q–(0.04Q3–0.9Q2+10Q+5)
Profit =–0.04Q3+0.9Q2–6Q–5
Dp /dQ =–0.12Q2+1.8Q–6
Dp / dQ =0
–0.12Q2+1.8Q–6
Q (–Q+10) −5 (10–Q) =0
(Q–5)(Q–10)=0
(Q=5) and (Q=10)
For Q=5; Profit= –0.04(5)3+0.9(5)2–6(5)–5
= –17.5
For Q=10; Profit =–0.04(10)3+0.9(10)2–6(10)–5
= –15

The firm would be operating at a loss hence the firm should not produce this level of output
evidenced by the sell of the firm’s output at $4 per unit gives negative profits.
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Question 21: Suppose that the production function is given as follows:
TPL = 10L + 5L2 + L3
Find the total product, Marginal product and average product when L = 5.

Solution:
TPL=10L+5L2+L3
MPL=dLdTPL=10+10L+3L2
APL=LTPL=10+5L+L2
When L=5;
TPL= 10(5) +5(5)2+ (5)3
TPL=50+125+125
TPL=300
MPL=10+10(5)+3(5)2
MPL=10+50+75
MPL=135
APL=10+5(5) + (5)2
APL=60
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Question 22: Find the optimum level of output and profit from the cost function
TC = 50 + 6Q2
And price
P = 100 – 4Q
Also derive marginal cost and marginal revenue.

Solution:
TC=50+6Q2
P=100−4Q
MC=d (TC / dQ)=0+12Q=12Q
At profit max point; 100−4Q=12Q
=100=12Q+4Q
=100 / 16 =Q
Optimal level of output; Q=6.25
Total Revenue =Price* Quantity
At Q=6.25
TR= [100(4×6.25)]×6.25
=468.75
Total cost (TC) =50+6(6.25)2
=284.375
Therefore; profit=TR−TC
=468.75−284.375
Profit=184.375
Deriving Marginal cost and Marginal Revenue.
Given that; P=100−4Q
Multiply both sides by QQ
PQ=TR=100Q−4Q2
=MR=d (TR / dQ)= (100×1) − (4×2) Q2−1
MR=100−8Q
MC=d (TC) / dQ =0+12Q=12Q
MC=12Q.
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Question 23: Suppose the discriminating monopolist is selling a product in two separate markets
in which demand function are
P1 = 80 – 2.5Q1
P2 = 180 – 10Q2
The monopolist total cost function is
TC = 50 + 40Q
Determine the price to be charged in the two markets and amount of output to be sold in each
market so that profit is maximized. Also find the total profit to be made from the strategy of
price discrimination.

Solution:
P1 = 80 – 2.5 Q1
P2 = 180 – 10 Q2
TC = 50 + 40 Q
MC = 40
---TR = P * Q = 80 Q1 – 2.5 Q1
--- MR = 80.5 Q1
MR1 = MC1
µo = 80 – 5 Q1
Q>8
For MK2
P2 = 180 – 10 Q2, MC2 = µo
TR = PxQ ---- 189 Q2 – 10 Q2
MR = 180 – 20 Q2
MR = MC
180 – 20 Q , µo --- Q2 = 7
Total Quantity Q1 + Q2
8+ 7
.e= 15

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