Question

Ahmad is an entrepreneur of a furniture firm producing tables, chair and some other products. Furniture industry is so competitive and Ahmad is having many business

2

rivals. In his firm, the cost of production is given by C = 200 + 2q , where q is the level of output and C is total cost. (The marginal cost of production is 4q; the fixed cost is RM200.)

i. If the price of a chair is RM100, how many cloth should Ahmad’s firm produce to maximize profit?

ii. What will the profit level be?

b) Sabri’s involves in shoe industry. His firm has a competitive marginal cost of producing output q is given by MC(q) = 3 + 2q. Assume that the market price of the firm’s product is RM9.

i. What level of output will the Sabri’s firm produce?

ii. What is the Sabri’s firm surplus (producer surplus)?

iii. Draw the graph to indicate level of price, quantity of demand and consumer surplus respectively.

c) Suppose the market for widgets can be described by the following equations:

Demand: P = 10 – Q

Supply: P = Q – 4

where P is the price in dollars per unit and Q is the quantity in thousands of units. Then:

i. What is the equilibrium price and quantity?

ii. Suppose the government imposes a tax of $1 per unit to reduce widget consumption and raise government revenues. What will the new equilibrium quantity be? What price will the buyer pay? What amount per unit will the seller receive? (

Answer 1

2a)i) The profit Maximizing quantity of competitive firm is where,

MR=MC

P=MC{ because firm is orice taker so P=MR}

Given MC=4q

P=100

So Profit Maximizing quantity;,,

100=4q

Q=25

ii) Profit=TR-TC

TR=p*q=100*25=2500

TC=200+2*q^2=200+2*25*25=1450

Profit=2500-1450=1050

B)i) Sabri will produce Profit Maximizing quantity,which is at where p=MC

3+2q=9

Q=6/2=3

ii) produer surplus/ Profit=1/2*3*(9-3)=9

iii)

C)

i) market EQUILIBRIUM is at where market demand EQUALS to market supply

10-Q=Q-4

14=2Q

Q=7

P=10-7=3

ii)After 1 $ tax supply function will change as seller has to pay tax to goverment.

P=Q-4+1=Q-3

New EQUILIBRIUM,

Q-3=10-Q

2Q=13

Q=13/2=6.5

New equilibrium p=10-6.5=3.5

Price CONSUMER is paying=new market EQUILIBRIUM price=3.5

Price seller is getting=Market price -Tax=3.5-1=2.5$