Group Assignment: II. Workout

GROUP ASSIGNMENT
Group Members ID no.

1. Kaleab kindu ugr/8121/12
2. Robera tarekegn ugr/1655/12
3. elias abera ugr/2399/12
4. Abenezer ABERA ugr/5014/12
5. HAYAT EBRAHIM ugr/1897/12
6. SELAMAWIT ADAMSIE UGR/0022/12
7. ABIGIYA SIMON UGR/1057/12
8. EDEN H/MARIAM UGR/7610/12
9.
10.
SUBMITTED TO: Dr. Urgaia R. (PhD)

SUBMISSION DATE: / /2021 G.C
II. Workout: Clearly show the necessary steps (1 point mark each).
Referring to the following table below, answer to 1 to 2 and the total fixed cost is 30.
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Output 0 1 2 3 4 5
Total Variable 0 3 41 49 58 70
Cost
Total Cost 30 33 71 79 88 100
th
1. What is the 5 level of marginal cost and average fixed cost, respectively?
100−88
MC 5= =12
5−4
TFC 30
AFC 5= = =6
Q5 5
th th
2. Find the average total costs in the 4 and 5 level, respectively
TFC +TVC 4 30+58
ATC 4= = =22
Q4 4
TFC +TVC 5 30+70
ATC5 = = =20
Q5 5
Answer to 3–5, by referring the demand and marginal cost functions of a firm is given by
Q ( P )=P−0.8 and marginal cost, MC (Q )=10−1 /4 Q , respectively.
3. What is the point price elasticity of demand?
dQ P dQ
Ed = × , where Q ( P )=P−0.8 and =(−0.8 × P−1.8 )
dp Q dP
dQ P P
Ed = × =(−0.8× P−1.8 ) × −0.8 =−0.8× P−1.8 × P1.8
dP Q P
Ed =−0.8
4. Calculate marginal revenue.

∂TR
MR= where TR=Q × P(Q)
∂Q
Q ( P )=P−0.8 ∧P (Q )=Q−1.25 , by calculating the inverse of Q( P)
TR=P ( Q ) ×Q=Q−1.25 × Q=Q −0.25

∂TR
=−0.25 ×Q −1.25
∂Q
MR=−0.25 ×Q −1.25
5. What is the optimal level of output that maximizes profit?

Let π beprofit, then π =TR−TC
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dπ d2 π
π is maximised when =0 , First order condition (FOC) and <0, Second order
dQ d Q2
condition (SOC)
π=TR−TC , where TR=Q × ( P ( Q ) )=Q ( Q −1.25 )=Q−0.25

TC=∫ MCdQ=∫ ( 10−0.25Q ) dQ=10 Q−0.125 Q 2
π=TR−TC=Q−0.25−( 10Q−0.125 Q 2 )=0.125 Q 2 +Q−0.25−10 Q
dπ
=0.25 Q−0.25 Q−1.25 −10
dQ
0.25 Q−0.25Q−1.25−10=0
Q−Q−1.25=40
Q=40.00933
d2 π
Checking the SOC <0
d Q2
d2 π −2.25
2
=0.25+ 0.3125Q then we evaluate the equation at Q=40.00933
dQ
d2 π
At Q=40.00933 =0.2500> 0 which does not satisfy the SOC hence Q=40.00933
d Q2
Is not a profit maximizing output level.
For whatever value of Q the SOC is not satisfied hence the firm will not gain any profit for
any output level. Therefore, the maximizing output level for the firm is Q=0.
Answer to 6–9, by referring the demand and marginal cost functions of a firm is given by
Q ( P )=¿P−0.4Q and marginal cost, MC (Q )=10−1 /2 Q , respectively.
6. What is the point price elasticity of demand?
dQ P dQ
Ed = × , where Q ( P )=P−0.4 and =1
dp Q dP
dQ P P
Ed = × =1 ×
dP Q P−0.4
P
Ed =
P−0.4
7. Calculate marginal revenue.
∂TR
MR= where TR=Q( P)× P(Q)
∂Q
Q ( P )=P−0.4∧P ( Q )=Q+ 0.4 , by finding calculating the inverse of Q( P)
TR=P ( Q ) ×Q=( Q+ 0.4 ) ×Q=Q 2+ 0.4 Q
∂TR
=2Q+ 0.4
∂Q
MR=2 Q+ 0.4
8. What is the optimal level of output that maximizes profit?

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 Let π beprofit, then π =TR−TC
dπ d2 π
π is maximised when =0, First order condition (FOC) and <0, Second order
dQ d Q2
condition (SOC)
π=TR−TC , where TR=Q × ( P ( Q ) )=Q ( Q+0.4 )=Q 2 +0.4 Q
TC=∫ MCdQ=∫ ( 10−0.5Q ) dQ=10 Q−0.25 Q 2
π=TR−TC=Q 2+ 0.4 Q−( 10 Q−0.25 Q 2 )=1.25 Q 2−9.6 Q
dπ
=2.5 Q−9.6
dQ
2.5 Q−9.6=0
Q=3.84
d2 π
Checking the SOC <0
d Q2
d2 π d2 π
=2.5 which means for whatever value of Q =2.5> 0
d Q2 d Q2
Since Q=3.84 does not satisfy the SOC it is not a profit maximizing output level. For
whatever value of Q the SOC is not satisfied hence the firm will not gain any profit for any
output level. Therefore, the maximizing output level for the firm is 0.
9. Given that a manufacturer’s cost function C ( Q ) =100+20 Q+ Q(1+ Q)1 /2, then what is
the marginal cost at the quantity produced Q =3?
dC (Q)
MC= =20+(1+Q)1/ 2+ 0.5Q(1+Q)−0.5 , then we evaluate MC ( Q ) at Q=3
dQ
MC (3 )=20 +(1+3)1 /2 +0.5 ×3 ×(1+3)−0.5=22.75
MC(3)=22.75
10. Using the following demand schedule of goods X and Y, answer the following
questions,
Poin Px Py Qy Qx
t
A 2 3 13 18
B 3 5 9 12
C 5 6 4 10
a. What is the cross elasticity of demand for commodity X as you move from point A to B?
ΔQ x P yo ΔQ x P A
E xy = × ¿ point A ¿ B E xy = ×
Δ P y Q xo Δ P y QA
12−18 3
E xy = × =−0.5
5−3 18
E xy=−0.5
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b. What do you think about the type of commodities given in question number a?
 The cross – price elasticity of demand is negative therefore the good is complementary
goods
12. Given the following demand function for a good Q=20−0.5 P, and if the price of the
good is Birr 10. Find:
a. the price elasticity of demand in the absolute value.
dQ P P
Ed = × =−0.5× , then we evaluate the equation at P=10
dP Q 20−0.5 P
Ed =¿−0.33333∨¿
¿ Ed ∨¿ 0.33333
b. marginal revenue and average revenue.
dTR
MR= where TR=Q× P ( Q )
dQ
P ( Q )=40−2 Q which isthe inverse demand function thenTR=Q ( 40−2 Q )
dTR
MR= =40−( 4 ×Q ) , where Q=Q (10 )=20−0.5× 10=15
dQ
MR=40−( 4 ×15 )=−20
MR=−20
TR PQ
AR= = =P , since the price is constant
Q Q
AR=10
c. What is the nature of the quantity demanded?
 Since 0  || 1, the quantity demand is inelastic and the product is necessity.
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GROUP ASSIGNMENT

Group Members ID no.

SUBMITTED TO: Dr. Urgaia R. (PhD)

4. Calculate marginal revenue.

TR=P ( Q ) ×Q=Q−1.25 × Q=Q −0.25

5. What is the optimal level of output that maximizes profit?

π=TR−TC , where TR=Q × ( P ( Q ) )=Q ( Q −1.25 )=Q−0.25

8. What is the optimal level of output that maximizes profit?

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