MGEC Group Assignment - 2

Section J

Study Group J13

Charanjeet Singh 62110642

Ashutosh Kumar Singh 62111023
Priyanshi Batra 62110034
Surbhi Mittal 62110085
Siddhant Jain 62110890
Problem 1.

a) Given Qd= 160 – 4P

P = (160 - Qd )/4 …..(1)

TC= 6Q2 + 15Q + 5 …..(2)

Differentiating (2) w.r.t Q to get MC

MC = 12Q + 15 …..(3)

TR = Price * Quantity

Multiplying (1) with Q to get TR

TR = 40Qd - Qd2/4 …..(4)

Differentiating (4) w.r.t Q to get MR

MR = 40 - Qd/2 …..(5)

Profit is maximized at MC = MR

Equating (3) and (5)

12 Qd + 15 = 40 - Qd/2

Qd = 2 (Profit maximizing level of output)

Substituting above calculated profit maximizing level of output in the demand equation

Qd= 160 – 4P

2 = 160 – 4P

P (Price at which profit is maximized) = 39.5

TR = P * Q

TR = 39.5 * 2
TR = 79
TC = 6Q2 + 15Q + 5
TC = 6*(2)2 +15* 2 + 5
TC = 59
Profit = TR – TC
Profit = 79 – 59
Profit = 20

b) Given Market price = 27

MR = P = 27

MC = 12Q + 15 (From (3))

For profit maximizing level of output

MC = MR
 12Q + 15 = 27

Q (short-run profit maximizing level of output) = 1

Profit = TR – TC

Profit = P*Q – (6Q2 + 15Q + 5)

Profit = 27*1 –(6*12 + 15*1 + 5)

Profit = 1

c) Given Market Price = 75 = MR

MC = 12Q + 15 (From (3))

Profit maximizing output –

MC = MR

75 = 12Q + 15

12Q = 60

Q=5

Profit = TR – TC

Profit = P*Q – (6Q2 + 15Q + 5)

Profit = 75*5 –(6*52 + 15*5 + 5)

Profit = 375 – 230

Profit = 145

At market price of 75, the profit will be increased to 145. Consequently, with no barriers to entry,
more firms will enter the market to exploit the profits and increase the supply until there are no
profits/loses as no firm under perfect competition makes any economic profits or losses leading to
the price drop.

Problem 2

a) Given, Qs = 10PB − 5PR QD = 100 − 15PB + 10PK

PR = 1 PK= 5

Qs = 10PB – 5

QD = 100 − 15PB + 50

At equilibrium, Qs = QD

10PB – 5 = 100 − 15PB + 50

PB = 155/25 = 6.2
PB = 6.2

Putting Value of PB in equation of QS

Q = 10*6.2 – 5 = 57

Q = 57

Producer Surplus = ½ *5.7*67

Producer Surplus = 162.45

Consumer Surplus = 1/2*57*3.8

Consumer Surplus = 108.3

b) Qs = 10PB – 5PR

QD = 100 − 15PB + 10PK

Given, PR = 2 PK= 5

At equilibrium, Qs = QD

10PB – 10 = 100 − 15PB + 50

25PB = 160

PB = 6.4

Qs = 10PB – 10

Qs = 10*6.4 -10

Q = 54
c) Given PR = 1 PK= 3

At equilibrium, Qs = QD

10PB – 5 = 100 − 15PB + 30

25PB = 135

PB = 5.4

Q = 10PB – 5

Q = 10*5.4 -5

Q = 49

d) Given PR = 1 PK= 5 PB = 5

Qs = 10PB − 5PR

QS = 10*5 – 5*1

QS = 45

QD = 100 − 15PB + 10PK

QD = 100 – 15*5 + 10*5

QD = 75

Shortage = QD – QS

Shortage = 75 – 45

Shortage = 30
Problem 3.

Demand Curve: P = 40 - 2Q …..(1)

a) Total Revenue = Price * Quantity

Multiplying (1) by Q to get the total revenue

TR = 40Q – 2Q2 …..(2)

Differentiating (2) w.r.t Q to get the marginal revenue

MR = 40 – 4Q …..(3)

AR = TR/Q = (P * Q)/Q

AR = 40 - 2Q

b) Profit maximising price and quantity

Given – Average cost = Q

Total Cost = AC * Q

TC = Q2 …..(4)

Differentiating (4) w.r.t Q to get the marginal cost

MC = 2Q

From (3) MR = 40-4Q

Profits are maximized at MC = MR

2Q = 40 - 4Q

Q = 6.6

Now substituting Q in demand curve to get P,

P = 40 - 2Q

P = 40 – 2*6.6

P = 26.6

Problem 4.

a) For Profit maximising price - MRA = MRM = MC

Afternoon section -

QA = 800 – 2P

MC = 30

Inverse demand curve

P = 400 - QA/2

TR = Price*Quantity
TRA = 400QA - QA2/2

Differentiating TR w.r.t QA to get MR

MRA = 400 - QA

To maximise profit we will equate MA to MC

400 - QA = 30

QA = 370

Substituting QA = 370 in demand curve to get P

QA = 800 – 2P

PA = 215

Morning section

QM = 920 – 4P

MC = 30

Inverse demand curve

P = 230 – QM/4

TR = Price*Quantity

TR = 230QM – QM2/4

Differentiating TR w.r.t QM to get MR

MRM = 230 – QM/2

To maximise profit we will equate MRM to MC

230 – QM/2 = 30

QM = 400

Substituting QM = 400 in demand curve to get P

QM = 920 – 4P

PM = 130

b) Calculating elasticity of demand for both the section

QA = 800 – 2P

eD = (ΔQA/ΔP) * (P/QA)

= - (800/400) * (215/370)

eD = -1.16 - Afternoon batch

QM = 920 – 4P
eD = (ΔQM/ΔP) * (P/QB)

= - (920/230) * (130/400)

eD = -1.30 – Morning Batch

Morning section’s demand is more elastic as compared to afternoon section because they have more
substitutes available to have lunch at, since their class time does not coincide with the lunch time.

Whereas, for the afternoon section the demand is comparatively less elastic since they have class
right after lunch time hence have constraints and fewer options/preferences available and would
prefer goel dining hall.

Problem 5

2000-05:

Since the calcium markets are in perfect competition, we can assume that market is in equilibrium at
P = Rs 200.

At long run equilibrium -

1. There are no economic profits, therefore is no reason to enter or exit the markets.
2. Firms maximize profits when MR = MC. Here firms will sell at point where Price (=Marginal
Revenue=Average Revenue) = Long Run Marginal Cost (Here the Long Run Average cost is at
the minimum).

DEMAND AND SUPPLY CURVES COST CURVES

Market Scenario: 2000-2005

2006 (Increase in Prices)

As mentioned in the problem, technology and input prices are constant. We assume therefore other
factors like expectations, number of producers in the market, other factors etc. are affecting the
changes in supply in market.

Changes in demand can be because of factors like changes in the price of related goods, changes in
income, changes in population etc.

In perfectly competitive markets, when the price rises, it can be because of the following
combination of changes in demand and supply curves.

1. Increase in Demand with no change in Supply

2. Decrease in Supply with no change in Demand
3. Increase in Demand and Decrease in Supply simultaneously
4. Increase in Demand and Relatively less increase in supply
5. Decrease in Supply and Relatively less decrease in demand

In the below graph, we are demonstrating the effect on factor 1 (Increase in Demand with no change
in Supply

Market Scenario – First 3 months of 2006

 DEMAND AND SUPPLY CURVES COST CURVES

2006-2008: Price decline

Price has now increased to Rs 400. Now since it’s perfectly competitive markets, there are no
barriers to entry and exit.

Sellers will enter the calcium markets to exploit the increase in price and continue doing so till the
point there are no economic profits left. This explains why the price started to decline from Rs 400 in
2006 to Rs 200 in 2008.

Market Scenario – 2006-08

 DEMAND AND SUPPLY CURVES COST CURVES

From 2008-2013: Stability - The market has reached equilibrium similar to the phase from 2000-05
and will continue doing so till 2013.

Is it likely that there will more producers in 2013 than in 2000?

It is likely that, in 2013, the number of producers is more than the number of producers in 2000. This
is because when markets are at equilibrium there are no economic profits and no motivation to
enter or exit. Therefore, when prices increase and there is scope of earning economic profits, there
are sellers who will continue entering. They will continue doing so when prices decline to the point
when there are no economic profits.

Problem 6 –

Marginal Cost of Air India (MC) = c

Demand Function for Winter (DW) PW = a1 – bQ

Demand Function for Summer (DS) PS = a2 – bQ

Where a2 > a1

Marginal Revenue = D(Total Revenue)/DQ

Total Revenue(TR) = P*Q)

Total RevenueW = Q*( a1 – bQ)

Total RevenueS = Q*( a2 – bQ)

Marginal Revenue (MRW) = D(Q*( a1 – bQ))/DQ = a1 – 2bQ

Marginal Revenue (MRS) = D(Q*( a2 – bQ)/DQ = a2 – 2bQ

In Monopoly Equilibrium quantity is calculated at a point where Marginal Revenue = Marginal Cost.
This is the profit maximization point.

For winter season, MRW = MC

a1 – 2bQ = c

Therefore, Q = (a1 – c)/2b

Subsituting the value of Q in DW

PW = a1 – b((a1 – c)/2b)

PW = (a1 + c)/2

For Summer season,

MRS = MC

a2 – 2bQ = c

Q = (a2 – c)/2b

Subsituting the value of Q in DS

PS = a2 – b((a2 – c)/2b)

PS = (a2 + c)/2

Problem 7.

Labor Supply Curve: Ls = 10W-1000 …..(1)

Labor Demand Curve: Ld = 3000-10W …..(2)

a) When market is competitive, equilibrium exist when Ls = Ld.

10W-1000=3000-10W
20W=4000
W = Rs. 200 per day
Market clearing wage = Rs. 200 per day
Ls = 10W=1000
Ls = 10*200-1000
Ls = 1000
Number of workers employed (employment at equilibrium) =1000
b) Current minimum wage = Rs. 180 per day
Since wages at equilibrium (200) is greater than minimum wage (180), there will be no
impact on supply and demand of labor in market.
c) Proposed minimum wage = Rs. 220 per day
 Ls = 10W-1000
Ls = 10*220-1000
Ls = 1200

Ld = 3000-10W
Ld = 3000-10*220
Ld = 800

Number of workers available in market is more than number of workers required at

minimum wage of Rs. 220 per day. Number of people unemployed will increase if minimum
wage price is changed to Rs. 220 per day.

d) Market clearing wage rate = Rs. 200 per day

Producer Surplus = Area of triangle between the Equilibrium Price and Supply curve
Producer Surplus = ½*(100*1000) = 50000

Proposed Minimum wage = Rs. 220

Producer Surplus = ½*(120+40)*800 = 64000
e) As proposed minimum wage is more than equilibrium wage, availability of labor will be more
than demand.
Net effect on unskilled workers = Number of workers unemployed will increase (400)
Effect on individual worker = Overall economic conditions of employed labor will improve.
f) In case of Minimum Support price, government buys back farmer’s produce as it can be
stored in warehouse. On the other hand in case minimum wage is more than wages at
equilibrium, excess supply of labor will led to deadweight loss. No change in answer to part
(d).

g) Both policies are inefficient from an economist’s point of view. Minimum support
price/wage policy can restrict supply or demand. Market is most efficient when supply and
demand are in equilibrium (market clearing wages).