Question

5. John the plumber has the following weekly demand for repairs by his business:

Q = 2,000 – 10(P)

Q = quantity of repairs demanded by customers per week.

P = average price per repair.

John chooses the price to charge to his customers (cause). The result (effect) will be the total number of repairs his customers want per week.

A.      Draw the demand curve faced by John the plumber. Numerically label its two end points.

B.      Create the table of numbers: P Q TR MR

P = average price per repair. You may skip numbers for price changes by $10 at a time.

TR = Total Revenue = PQ

MR = Marginal Revenue = (change in TR)/(change in Q)

Draw the MR curve on the diagram, as well/

C.      The MC (Marginal Cost) to John per repair is $20. What price (P) will be charged per repair, and how many repairs (Q) per week? Show it on your diagram with solved numbers.

D.      Label the Consumer Surplus on your diagram. Define Consumer Surplus, as well.

Answer 1

Q= 2000-10P or P= (2000-Q)/10

Answer A) For drawing the demand curve

• X intercept (keeping P=0) = 2000

• Y intercept ( Keeping Q=0) = 200

Answer B) Total Revenue= P*Q

TR= [(2000-Q)/10 ]Q

TR = 200Q- Q^2/10

MR= ∆TR/∆Q

MR= 200-(Q/5)

For drawing MR curve

• X intercept ( keeping MR=0) = 1000

• Y intercept ( Keeping Q=0) = 200

Answer C) MC= 20

At profit maximisation MR=MC

200-(Q/5)= 20

180= Q/5

Q*= 900

P*= (2000-Q*)/10 = 110

Answer D) Consumer surplus is the area above the price line and below the demand curve.It is the difference between the willingness to pay and actual amount paid.

• In the diagram Consumer surplus= Area of triangle ABC

Area of triangle ABC=(1/2)*base*height

base=900

height= 200-110= 90

Consumer surplus= (1/2)*90*900= 40500

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