Question

equilibrium quantity

1. The profits of Du Pont de Nemours and Company in 1997 were
about $24 billion Does this mean that Du Pont’s economic profit equaled $24
billion? Why or why not?

2. If the demand curve for wheat in the United States is P =
124 – 4QD where P is the farm price of wheat (in dollars per bushel) and QD is
the quantity of wheat demanded (in billions of bushels), and the supply curve
for wheat in the United States is P = -26 + 2QS, where QS of the quantity of
wheat supplied (in billions of bushels), what is the equilibrium price of
wheat? What is the equilibrium quantity of wheat sold? Must the actual price
equal the equilibrium price? Why or why not?

3. The Mineola Corporation hires a consultant to estimate
the relationship between its profits and its output The consultant reports
that the relationship is

π = -10 – 6Q + 55Q2 – 2Q3 + 025Q4

a The consultant says that the firm should set Q equal to 1
to maximize profit Is it true that dπ/dQ = 0 when Q=1? Is π
at a maximum when Q = 1?

b Mineola’s executive vice president says that the firm’s
profit is a maximum when Q=2 Is this true?

c If you are the chief executive officer of the Mineola
Corporation, would you accept the consultant’s estimate of the relationship
between profit and output as correct?

Answer 1

1. Ans - NO

The profits of Du Pont de Nemours and Company in 1997 were about $24 billion but this does not mean that Du Pont’s economic profit equaled $24 billion. It is so because the profit that is calculated is usually accounting profit so here $24 billion is an accounting profit not economic profit.

Economic profit = Accounting profit - implicit cost. While this $24 billion does not include the implicit cost because of lack of knowledge of exact price of those goods that are used in business by the owner or some other way that does not charging them anything like own place ( so rent does not counted), own capital ( so interest is not counted on this amount )etc.

2. Ans -

Equilibrium the Market Demand is equal to Market Supply.

124 - 4Q = -26 + 2Q

6Q = 150

Q = 25

Hence the equilibrium quantity is 25 billion bushels.

P = 124 - 4*25 = $24

Equilibrium price is $24 per bushel.

The actual price will be equal to equilibrium price if this is a perfect competition but this market does not exist in reality. So, the actual price may not be equal to the equilibrium price as the market is not perfectly competitive. This may be due to monopoly power, cartel, monopsony power, government regulation, shortage of supplly in the market etc.

** we are only allowed to answer 1st question, however i answer 2 questions. Please post other question separately**