Question

Fill in the blanks in the following table. At which level of output do we obtain maximum profit? What is the relationship between marginal revenue and marginal cost at the profit-maximizing level of output?

Level of Output	Total Revenue	Total Cost	Profit	Marginal Revenue	Marginal Cost	Marginal Profit
20	2400	1900		420	100
21	2800				120
22	3180				140
23	3540				160
24	3880				180
25	4200				200
26	4500				220
27	4780				240
28	5040				260
29	5280				280
30	5500				300

Suppose that you need to buy a refrigerator for your office. You recognize that there are two alternative models in the market that might meet your needs. If you buy model A, you have to pay AZN 1000 but with this model you will decrease your electricity bills by AZN 50 per year for the next 5 years. If you prefer model B, you have to pay AZN 800 but you don’t see any decrease in your electricity bills. If the interest rate is 5%, which model will you buy?

Explain the effect of minimum wage policy on labor market. What are the arguments for supporters and opponents of minimum wage policy?

Suppose the price elasticity of demand for Azercell cards is -2. If Azercell managers want to increase their profits, how should they change the price of Azercell cards? Explain in detail.

Suppose the income elasticity of demand for AZAL flight tickets is 1.75. If the average income level decreases by 6%, what would be the effect of this recession on the demand for AZAL flight tickets? Explain in detail.

Answer 1

Soln:

a)

Level of Output	Total Revenue	Total Cost	Profit	Marginal Revenue	Marginal Cost	Marginal Profit
20	2400	1900	500	420	100	320
21	2800	2020	780	400	120	280
22	3180	2160	1020	380	140	240
23	3540	2320	1220	360	160	200
24	3880	2500	1380	340	180	160
25	4200	2700	1500	320	200	120
26	4500	2920	1580	300	220	80
27	4780	3160	1620	280	240	40
28	5040	3420	1620	260	260	0
29	5280	3700	1580	240	280	-40
30	5500	4000	1500	220	300	-80

At oupput level of 28 units we hare having maximum profit. where 'MC = MR = 260' marginal profit is '0'.

b) If model will by then its total cost after five years will be: model price + interest earn on electriclty bill of 50 for five years each at 5% per annum.

AZN {1000 + (50 x 5 x 5 x (1+2+3+4+5) / 100} = 1000+ 37.5 = AZN 1037.5

If model will by then its total cost after five years will be: model price + electricityb bill for five years

AZN (800 + 250) = AZN 1050.

There fore model A will be more economical to buy.

c) Till the level of minimum wage supply curve may be positive slope as at low income level , high income expectations induce the labour to work more but as level reach a certain level labour will be ready to afford have leisure, hence beyond the level of minimum wages labour prefer to take rest rather than work even at high level of income demand curve of labour shows lesser job oppertunities hence with the effect of minimum wages there will be loss of jobs in the economy: Refer given graph

d) Elascitcy of demand reffer to ration between percentage change in quantity demand and percentage in price level,

Azercell cards has Elasticity of Demand is -2 means with any X% change in Price level, Quantity Demanded will be inversaly effected with by 2X%. so manager should work on minimum price level as at that level sales will be maximum because elasticy of demand is more than unitary elasticy. and any rise in price will reduces the profit level.

e) Income elasticy = percentage change in demand / percentage change in income.

so:

1.75 = percentage in demand / 6 %

Percentage change in demand = 10.50 %