Marginal and Total Costs Worksheet

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ECON 5005 – Quantitative Economic Analysis
Fall 2021
Assignment 1
1. The following relations describe monthly demand and supply for a computer support service
catering to small business.
???? = 3,000 ? 10??
???? = ?1,000 + 10??
where Q is the number of businesses that need services and P is the monthly fee, in dollars.
a. (2 points) At what monthly fee would demand equal zero?
b. (2 points) At what monthly fee would supply equal zero?
c. (3 points) Plot the demand and supply curves in Excel.
d. (4 points) What is the equilibrium price/quantity? Solve for equilibrium algebraically and label
it on the graph in part c.
e. (4 points) Suppose the demand increases and leads to a new demand curve:
???? = 3500 ? 10??
What is the new equilibrium price/quantity?
f. (3 points) Plot the new demand curve on the graph in part c. Label the new equilibrium.
g. (4 points) Suppose new suppliers enter the market due to the increase in demand, so the new
supply curve is
???? = ?500 + 10??
What is the new equilibrium price/quantity? (Use the new demand curve in part e.)
h. (3 points) Plot the new supply curve on the graph in part c. Label the new equilibrium.
2. A travel company has hired a management consulting company to analyze demand in twentysix regional markets for one of its major products: a guided tour to a particular country. The
consultant uses data to estimate the following equation.
?? = 1,500 ? 4?? + 5?? + 10?? + 3????
where Q = amount of the product demanded
P = price of the product in dollars
A = advertising expenditures in thousands of dollars
I = income in thousands of dollars
???? = price of some other travel products offered by a competing travel company
a. (10 points) Calculate the amount demanded for this product using the following data:
?? = $400
?? = $20,000
?? = $15,000
???? = $500
b. (10 points) Suppose the competitor reduced the price of its travel product to $400 to match the
price of this firm’s price. How much would this firm have to increase its advertising in order to
1
ECON 5005 – Quantitative Economic Analysis
Fall 2021
counteract the drop in its competitor’s price? (Hint: Plug in the competitor’s new price and the
quantity in part a to find the advertising expenditures.)
c. (5 points) What other variables might be important in helping estimate the demand for this travel
product?
3. (25 points) Given the demand function ?? = 15 ? 2??, calculate all the numbers necessary to fill
in the following table. Plot total revenue and marginal revenue as functions of quantity on the same
graph. (Hint: Put quantity on the horizontal axis, total revenue and marginal revenue on the vertical
axis.)
Price
$7.00
$6.50
$6.00
$5.50
$5.00
$4.50
$4.00
$3.50
$3.00
$2.50
Quantity
Arc Elasticity
—-
Point Elasticity
Total Revenue
Marginal Revenue
—-
4. Manning Inc., is the leading manufacturer of garage doors. Demand for residential garage door
sales depends, of course, on the rate of new house building activity, which in turn depends on
changes in income per capita. During 2019, Manning sold 10,000 garage doors at an average price
of $1,500 per door. In 2020, disposable income per capita is expected to increase from $32,000 to
$34,000. Without any price change, Manning expects sales in 2020 to rise to 12,000 units.
a. (10 points) Calculate the arc income elasticity of demand.
b. (10 points) The company economist estimates that in 2020, if the price of doors is increased by
$100, they could sell 11,500 doors. What is the arc price elasticity and what would be the
company’s total revenue? (Hint: Assume income per capita in 2020 is still $34,000 and use the
2020 quantities to calculate price elasticity.)
c. (5 points) Should they raise the price even more?
2
Price
0.5
1
1.5
2
2.5
3
3.5
4
Demand Curve
4.5
4
3.5
3
Price
# of Students who are willing to buy
2.5
2
1.5
1
0.5
0
0
0.2
0.4
0.6
# of students who are willing to buy
Demand Curve
0.6
0.8
students who are willing to buy
1
1.2
Price
5
4
3
2
1
0.5
Supply Curve
6
5
4
Price
# of Students who are willing to sell
3
2
1
0
0
0.2
0.4
0.6
# of students who are willing to sell
Supply Curve
0.6
0.8
students who are willing to sell
1
1.2
Qs
1
2
3
4
5
6
7
8
Qd
140
160
Market Equilibrium
280
260
9
8
7
6
Price
Price
5
4
3
2
1
0
0
50
100
150
Quantity
200
Qs
Qd
250
300
Qd
1
2
3
4
5
6
7
8
*add 60 units
Qd’
280
260
240
220
200
180
160
140
Shift in Demand
9
8
7
6
Price
Price
5
4
3
2
1
0
0
50
100
150
Quantity
200
Qd
Qd’
250
300
Qs
1
2
3
4
5
6
7
8
*subtract 60 units
Qs’
140
160
180
200
220
240
260
280
Shift in Supply
9
8
7
6
Price
Price
5
4
3
2
1
0
0
50
100
150
Quantity
200
250
Qs
Qs’
250
300
Qs
1
2
3
4
5
6
7
8
Qs’
140
160
180
200
220
240
260
280
* add 60 units to D
* subtract 60 units from S
Qd
80
Qd’
280
260
240
220
200
180
160
140
340
Shift in EQ
Price
Price
9
8
7
6
5
4
3
2
1
0
0
100
Shift in EQ
Qs
Qd’
Qd
Qs’
200
Quantity
300
400
Price
Qd
1
2
3
4
5
6
7
8
280
260
240
220
200
180
160
140
Module 1A
SUPPLY AND DEMAND CURVES
OBJECTIVE:
This program is designed to graphically illustrate the principle of supply and demand equilibrium,
particularly how equilibrium changes when supply and demand curves change.
INPUTS (will appear in blue ):
As constructed here, this module allows for two straight line
demand and supply curves.
1) Up to ten prices should be entered in cells A32 to A41.
2) Demand curves: The demand curves are in the form q=a-bp.
Two coefficients are required:
a: The intercepts for the demand curves should be
entered in cells D44 and D46.
b: The slopes should be entered in cells F44 and F46.
3) Supply curves: The supply curves are in the form q=a+bp.
Two coefficients are required:
a: The intercepts for the supply curves should be
entered in cells D49 and D51.
b: The slopes should be entered in cells F49 and F51.
GRAPH:
A graph can be viewed by pressing GRAPH (located at the bottom of the screen).
Sample data have been entered as an example.
PRICE
0
1
2
3
4
5
6
7
8
9
CASE 1
DEMAND SUPPLY
CASE 2
DEMAND
SUPPLY
DEMAND COEFFICIENTS:
CURVE 1
a
CURVE 2
a
50
60
b
b
5
5
SUPPLY COEFFICIENTS:
CURVE 1
a
10
b
5
CURVE 2
a
20
b
5
Demand Vs Supply
10
9
8
7
Price
6
5
4
3
2
1
0
0.0
0.2
0.4
0.6
Quantity
0.8
1.0
1.2

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