Hans Christopher D.

Sanchez - Ma2
Good day Ma'am! The ones in bold text po are either questions or answers.

1. A manager makes the statement that output should be expanded as long as average revenue exceeds average cost. D

I agree with the manager, the implications between average revenues/cost and marginal revenue/cost are very similar sin
Basically the average values are the more general information about costs and revenue while the marginal values are the m
point the firm earns the most.

2. The original revenue function for the microchip producer is R = 170Q - 20Q^2 . Derive the expression for marginal reve
Confirm that this is greater than the firm’s profit-maximizing output, and explain why.

Inverse demand equation (P) = 170 - 20Q Explanation:

Demand Equation (Q) = 8.5 - 0.05P Marginal profit = 0 = profit-maximizing output
If MR = 0 then Marginal profit would not be 0 since you still have to
dR/dQ or Marginal Revenue = 170 - 40Q Meaning that Q = 4.25 is not the profit maximizing output since it m
0 = 170 - 40Q gain get to the optimum level of output.
Q = 4.25, maximum

3. Because of changing demographics, a small, private liberal arts college predicts a fall in enrollments over the next five
How would it apply marginal analysis to plan for the decreased enrollment? (The college is a nonprofit institution, so thi

Since it is a nonprofit institution, marginal analysis could help by offering them the optimal time to open up the enrollmen
It could also become a tool for the organization to sort out the costs and benefits of opening up the school despite the dec
in enrollment. Marginal analysis will also help the organization in knowing what the optimum number of employees be, th
with each hire of an employee can be numerically calculated by marginal analysis, and by this the school could cut off cost
necessary because of the lowered enrollment of students.

4. Suppose a firm’s inverse demand curve is given by P = 120 - .5Q and its cost equation is C = 420+ 60Q + Q^2 .
a. Find the firm’s optimal quantity, price, and profit (1) by using the profit and marginal profit equations and (2) by setting

Revenue = 120Q - .5Q^2

Cost = 420 + 60Q +Q^2
dR/dQ = 120 - Q
dC/dQ = 60 + 2Q
120 - Q = 60 + 2Q
Q = 20, optimal quantity
Profit = [120(20)-.5(20)^2]-[420+60(20)+(20)^2 = P180
Price = 120 - .5(20) = P110
b. Suppose instead that the firm can sell any and all of its output at the fixed market price P = 120. Find the firm’s optimal

P = 120
120 = 120 - .5Q
.5Q = 0
Q=0

5. a. As in Problem 4, demand continues to be given by P = 120, but the firm’s cost equation is linear: C = 420 + 60Q.
Graph the firm’s revenue and cost curves. At what quantity does the firm break even, that is, earn exactly a zero profit?

P = 120
R = 120Q
C = 420 + 60Q
Profit = 0
0 = 120Q - 420 - 60Q
Q=7

b. In general, suppose the firm faces the fixed price P and has cost equation C = F + cQ, where F denotes the firm’s fixed
Write down a formula for the firm’s profit. Set this expression equal to zero and solve for the firm’s break-even quantity

P = fixed price
R = PQ
C = F + cQ
0=R-C
Profit = PQ - [F+cQ]
0 = PQ - F - cQ
F = (PQ) - (cQ)
F = P-c(Q)
F/(P-c) = Q, break-even quantity
Since we set the profit equation to zero, then this is the point where there is no profit for the company since revenue is ex

C. In this case, what difficulty arises in trying to apply the MR = MC rule to maximize profit? By applying the logic of mar

It is hard to solve for the optimal output if values of significant variables are missing, in the case where it's hard to solve fo
Marginal profit = 0, we first determine the profit equation and from there, we get the deverivative of it then equate it to 0

6. A television station is considering the sale of promotional videos. It can have the videos produced by one of two supp
supplier B has no set-up fee and will charge $4 per DVD. The station estimates its demand for the DVDs to be given by Q
(The price equation is P = 8 - Q/200)

a. Suppose the station plans to give away the videos. How many DVDs should it order? From which supplier?

Since they will not sell it, P = 0 How many DVDs should it order from which su
so optimal output is Q = 1600 - 200(0) 1,600 DVDS from Supplier A
Q = 1600
For Supplier A For Supplier B
Cost = 1200 + 2(1600) Cost = 4(1600)
Cost = 4400 Cost = 6400

Since they can save if they buy from supplier A, they should choose supplier A.

b. Suppose instead that the station seeks to maximize its profit from sales of the DVDs. What price should it charge? How m

For Supplier A For Supplier B How many DVDs should it order from
C = 1200 + 2Q C = 4Q 1,000 DVDs from supplier A, since c
R = 8Q - Q^2/200 R = 8Q - Q^2/200
P = 1200+8Q+2Q-Q^2/200 P = 12Q - Q^2/200 What price should it charge?
dP/dQ = 10 - 2Q/200 dP/dQ = 12 - 2Q/200 P = 8 - Q/200
0 = 10 - 2Q/200 0 = 12 - 2Q/200 P = 8 - 1000/200
2Q/200 = 10 2Q/200 = 12 P = $3
Q = 1000, optimal output Q = 1200, optimal output

Cost = 1200 + 2(1000) Cost = 4(1200)

Cost = 3200 Cost = 4800

7. The college and graduate-school textbook market is one of the most profitable segments for book publishers. A best-s
P = 150 - Q, where Q denotes yearly sales (in thousands) of books. (In other words, Q = 20 means 20 thousand books.) Th
and the publisher pays a $10 per book royalty to the author. Finally, the publisher’s overall marketing and promotion sp

a. Determine OS’s profit-maximizing output and price for the accounting text.

Q = 150 - P Price = 150 - 2.419

MC = 60Q Price = $147.59
R = 150Q - Q^2
MR = 150 - 2Q
MR = MC
150 - 2Q = 60Q
62Q = 150
Q = 2.419 or 2,419 books

b. A rival publisher has raised the price of its best-selling accounting text by $15. One option is to exactly match this pric
preserve your level of sales. Do you endorse this price increase? (Explain briefly why or why not.)

Absolutely. If the price hike wouldn't affect the amount sales, it would mean that the demand curve would shift to the righ

c. To save significantly on fixed costs, Old School plans to contract out the actual printing of its textbooks to outside ven
printing cost per book (than in part a) from the outside vendor (who marks up price above its cost to make a profit). Ho
decisions in part (a)?

It would lower the optimal quantity of the value in letter a, having higher costs makes the divisor in the equation larger. An
price go up as well.
8. Firm Z is developing a new product. An early introduction (beating rivals to market) would greatly enhance the compa
intensive development effort needed to expedite the introduction can be very expensive. Suppose total revenues and co
product's introduction are given by R = 720 - 8t and C = 600 - 20t + .25t^2, where t is the introduction date (in months fro
have argued for an expedited introduction date 12 months from now (t = 12).Do you agree? What introduction date is m

P = 720 - 8t - [600 - 20t +.25t^2] Explanation:

P = 120 + 12t - .25t^2 I don't agree with the argued date. The reason being, optimal date could be cal
Marginal P = 12 - .5t analysis and based on the calculations, the suggested date by the executives w
.5t = 12 optimal introduction would be 24 months from now.
t = 24

9. As the exclusive carrier on a local air route, a regional airline must determine the number of flights it will provide per
operating and fuel costs, airport charges, and so on, the estimated cost per flight is $2,000. It expects to fly full flights (1
Finally, the airline’s estimated demand curve is P = 120 - .1Q, where P is the fare in dollars and Q is the number of passe

a. What is the airline’s profit-maximizing fare? How many passengers does it carry per week, using how many flights? Wha

Cost = 2000 + 20Q What is the airline’s profit-maximizing fare?

Q = 100 Fare = 120 - .1(500)
P = 120 - .1Q Fare = $70
Q = 1200 - 10P
R = 120Q - .1Q^2 How many passengers does it carry per week, using how many flights?
500 passengers and 5 flights.
MR 120 - .2Q
MC 20 What is its weekly profit?
120 - .2Q = 20 P = 120(500) - .1(500)^2 - (2000 + 20Q)
.2Q = 100 P = $23,000
Q = 500

b. Suppose the airline is offered $4,000 per week to haul freight along the route for a local firm. This will mean replacing
with a freight flight (at the same operating cost). Should the airline carry freight for the local firm? Explain.

No. Because from its normal weekly operations alone it can generate more profit, a whooping $23,000 per week and sacri
loss for the company.

10. A producer of photocopiers derives profits from two sources: the immediate profit it makes on each copier sold and
selling toner and other supplies. The firm estimates that its additional profit from service and supplies is about $300 ove
about the implication of this. One group argues that this extra profit (though significant for the firm’s bottom line) shoul
A second group argues that the firm should maximize total profit by lowering price to sell additional units (even though

My take on this is that neither view is accurate. In the situation given there were no marginal cost disclosed, which means
In marginal analysis, we need to know both the marginal cost and marginal revenue to determine whether such additional
I think I would credit the first one more. This view suggests that there is no effect in the optimal output and price, which w
Solely lowering the price to sell aditional units doesn't guarantee an addition to profit, as the law of demand states, if all fa
so even if they do lower the price to increase quantity demanded they still sacrifice the price for an uncertain profit additio
11. Suppose the microchip producer discussed in this chapter faces demand and cost equations given by Q = 8.5 - .05P a
Choosing to treat price as its main decision variable, it writes profit as P = -423 + 10.4P -.05P^2. Derive an expression for
Marginal profit = 0 to find the firm’s optimal price. Your result should confirm the optimal price found earlier in the chap

Margiinal profit = 10.4 - .10P

0 = 10.4 - .10P
.10P = 10.4
P = 104

12. Modifying a product to increase its “value added” benefits customers and can also enhance supplier profits. For exam
improved version of a product increases customer value added by $25 per unit. (In effect, the demand curve undergoes

a. If the redesign is expected to increase the item’s marginal cost by $30 should the company undertake it?

No. This is proven by the formula of optimal output which is Mp = 0, so if MP is <0 or >0 then it is not the best. In this case
the product since in the first place, the marginal cost is larger than the marginal revenue or simply, modifying will only resu

b. Suppose instead that the redesign increases marginal cost by $15. Should the firm undertake it, and (if so) how should

Yes, the firm should do it since there is still benefit in modifying the product. The proof is that if they modify the product it
which means they can still modify the product until marginal profit hits zero.

13. Suppose a firm’s inverse demand and cost equations are of the general forms P = a - bQ and C = F +cQ, where the par
and the parameters F and c are the firm’s fixed and marginal costs, respectively. Apply the MR = MC rule to confirm that
Provide explanations for the ways P and Q depend on the underlying economic parameters.

Step 1 Step 2
R = aQ - bQ^2 P = a - b(a - c/2b)
C = F + cQ P = a - [(b)(a-c)/2b] Cancel b
MR = a - 2bQ P = a - (a-c)/2 LCD
MC = c P = 2a - (a-c)/2 Distribute negative sign and combine like terms
MC = MR P = (a+c)/2
c = a - 2bQ
2bQ = a - c
Q = (a - c)/2b

14. Under the terms of the current contractual agreement, Burger Queen (BQ) is entitled to 20 percent of the revenue ea
is the Slopper (it slops out of the bun). BQ supplies the ingredients for the Slopper (bun, mystery meat, etc.) at cost to th
(including ingredients, labor cost, and so on) is $.80. At a particular franchise restaurant, weekly demand for Sloppers is

a. If BQ sets the price and weekly sales quantity of Sloppers, what quantity and price would it set? How much does BQ rece

20%R for BQ P = 3 - 7.5/800 What quantity and price would it se

MC = .80Q P=3 Quantity = 7.5 and Price = $3
R = .2[3Q - Q^2/800]
R = .6Q - .2Q^2/4000
MR = .6 - 4Q/4000
MR = MC
.6 - .4Q/4000 = .8Q
.8Q + .4Q/4000 = .6
.8001Q = .6
Q = 7.5
Profit = How much does BQ receive?
R = .2[3(7.5) - (7.5)^2/800]
R = $4.49 approx $4.50
What is the franchisee’s net profit?
R = .8[3(7.5) - (7.5)^2/800] = $17.99
NP = 18 - (7.5).8 = $12

b. Suppose the franchise owner sets the price and sales quantity. What price and quantity will the owner set?
How does the total profit earned by the two parties compare to their total profit in part (a)?

R = 3Q - Q^2/800 P = 3 - 3.73/800 What quantity and price will the ow

C = .8Q P = 2.995 approx $3 Quantity = 3.73 and Price = $3
MR = 3 - 2Q/800
MR = MC How does the total profit earned by
3 - 2Q/800 = .8Q Their profit in b is much lower than
3 = .8025Q the franchise and BQ to go with stip
Q = 3.73

c. Now, suppose BQ and an individual franchise owner enter into an agreement in which BQ is entitled to a share of the fra
Will profit sharing remove the conflict between BQ and the franchise operator? Under profit sharing, what will be the price
(Does the exact split of the profit affect your answer? Explain briefly.) What is the resulting total profit?

P = .5[3 - Q/800] Explanation:

P = 1.5 - Q/1600 The profit sharing would not totally remove the conflict, because even if they s
MR = 1.5 - 2Q/1600 equitably there are still conditions like if they share equitably the franchise nee
MC = .8Q all. The price would be $1.5/slopper and a quantity of 1.87. Total profit comes t
1.5 = .80125Q
Q = 1.87
P = $1.50
Profit = [(1.87)(1.5)] - .8(1.87)
Profit = $1.309

d. Profit sharing is not widely practiced in the franchise business. What are its disadvantages relative to revenue sharing?

One disadvantage is that profit sharing can be more is that it can affect employees/franchise productivity since they
would now focus more on profit rather than quality. Whereas in revenue sharing, it is more secure in a sense since in
profit sharing the fluctautions of a company may affect the personal earnings of the employees. Also, in profit sharing
people would get their share of profit regardless of the effort or contribution to work. This could make the company
more vulnerable with poor perfomance.

15. Suppose a firm assesses its profit function as

Profit = -10 - 48Q + 15Q^2 - Q^3

a. Compute the firm’s profit for the following levels of output: Q = 2, 8, and 14.

For Q=2 For Q=8

Profit = -10 - 48(2) + 15(2)^2 - (2)^3 Profit = -10 - 48(8) + 15(8)^2 - (8)^3
Profit = -54 Profit = 54

b. Derive an expression for marginal profit. Compute marginal profit at Q = 2, 8, and 14. Confirm that profit is maximized a

Marginal profit = -48 + 30Q - 3Q^2

For Q=2 For Q=8

Marginal Profit = -48 + 30(2) - 3(2)^2 Marginal Profit = -48 + 30(8) - 3(8)^2
Marginal Profit = 0 Marginal Profit = 0

Explanation:
If there are two quantities with the same level of profit we need to choose the larger of the two quantities. This is because
profit, you should continue until marginal profit really becomes zero and although in this case there are two quantities tha
still pick the larger of the two quantities since it is beyond the smaller one.
e exceeds average cost. Does this strategy make sense? Explain.

e/cost are very similar since average revenue minus the average cost equals profit earned.
e marginal values are the more specific ones but at the end of the day, they both compute at what

pression for marginal revenue, and use it to find the output level at which revenue is maximize

e 0 since you still have to deduct the marginal cost(for this problem it was not given).
ximizing output since it makes marginal profit negative which means you can still decrease the output to

llments over the next five years.

onprofit institution, so think broadly about its objectives.)

to open up the enrollment to students.

the school despite the decrease
mber of employees be, the costs associated
e school could cut off costs that aren't really

420+ 60Q + Q^2 .

uations and (2) by setting MR equal to MC. Also provide a graph of MR and MC
0. Find the firm’s optimal output

linear: C = 420 + 60Q.

arn exactly a zero profit?

F denotes the firm’s fixed cost and c is its marginal cost per unit.
firm’s break-even quantity (in terms of P, F, and c). Give an intuitive explanation for this break-even equation.

mpany since revenue is exactly equal to the cost.

applying the logic of marginal analysis, state the modified rule applicable to this case.

where it's hard to solve for maximum output using the MR = MC rule we use the
ve of it then equate it to 0.

duced by one of two suppliers. Supplier A will charge the station a set-up fee of $1,200 plus $2 for each DVD
the DVDs to be given by Q = 1,600 - 200P, where P is the price in dollars and Q is the number of DVDS.

ich supplier?

uld it order from which supplier?

ce should it charge? How many DVDs should it order from which supplier?

y DVDs should it order from which supplier?

Ds from supplier A, since cost is cheaper.

e should it charge?

r book publishers. A best-selling accounting text— published by Old School Inc (OS)—has a demand curve:
ns 20 thousand books.) The cost of producing, shipping and handling each additional book is about $40,
rketing and promotion spending (set annually) accounts for an average cost of about $10 per book.

to exactly match this price hike and so exactly

urve would shift to the right implying a bigger profit.

textbooks to outside vendors. OS expects to pay a somewhat higher

cost to make a profit). How would outsourcing affect the output and pricing

r in the equation larger. And having a lower quantity would make

reatly enhance the company’s revenues. However, the
pose total revenues and costs associated with the new
uction date (in months from now). Some executives have
hat introduction date is most profitable? Explain.

optimal date could be calculated using marginal

d date by the executives was not optimal. The

flights it will provide per week and the fare it will charge. Taking into account
xpects to fly full flights (100 passengers), so its marginal cost on a per passenger basis is $20.
Q is the number of passengers per week.

ng how many flights? What is its weekly profit?

how many flights?

m. This will mean replacing one of the weekly passenger flights

rm? Explain.

23,000 per week and sacrificing that money for a mere $4,000 is a

s on each copier sold and the additional profit it gains from servicing its copiers and
supplies is about $300 over the life of each copier sold. There is disagreement in management
e firm’s bottom line) should have no effect on the firm’s optimal output and price.
tional units (even though this reduces its profit margin at the point of sale). Which view (if either) is correct?

st disclosed, which means we cannot accurately assess whether of the views is correct.
e whether such additional product or service is beneficial or not. But if I were to choose,
output and price, which would lead them to look into the matter deeper. While the later for me, is incorrect.
w of demand states, if all factor remain equal, quantity demanded and price are inversely related to each other
an uncertain profit addition that may even make them less profitable.
s given by Q = 8.5 - .05P and C = 100 + 38Q.
. Derive an expression for marginal profit. Then set
e found earlier in the chapter.

e supplier profits. For example, suppose an

demand curve undergoes a parallel upward shift of $25.)

undertake it?

is not the best. In this case theres is no benefit in modifying

ly, modifying will only result to a negative marginal profit.

e it, and (if so) how should it vary its original output and price?

they modify the product it will result to a positive marginal profit

d C = F +cQ, where the parameters A and B denote the intercept and slope of the inverse demand function
= MC rule to confirm that the firm’s optimal output and price are: Q = (a - c)/2b and P = (a + c)/2.

Explanation:
So, based on the equations, P and Q's values depends on the parameters.
If a is increased, P and Q will also increase.
If b is increased, Q will decrease but it wont affect P.
If c is increased, Q will decrease but P will increase.
In summary, a has a direct relationship with P and Q, b has a direct relationship with Q
but no relationship with P, and c has an inverse relationship with Q and direct relationship
with P.

percent of the revenue earned by each of its franchises. BQ’s best-selling item
ry meat, etc.) at cost to the franchise. The franchisee’s average cost per Slopper
ly demand for Sloppers is given by P = 3 - Q/800

t? How much does BQ receive? What is the franchisee’s net profit?

ntity and price would it set?

= 7.5 and Price = $3
h does BQ receive?
.5) - (7.5)^2/800]
approx $4.50

he franchisee’s net profit?

.5) - (7.5)^2/800] = $17.99 approx $18
(7.5).8 = $12

he owner set?

ntity and price will the owner set?

= 3.73 and Price = $3

s the total profit earned by the two parties compare to their total profit in part (a)?
fit in b is much lower than it is in a. With that, it is beneficial for both
hise and BQ to go with stipulation a.

ntitled to a share of the franchisee’s profit.

ring, what will be the price and quantity of Sloppers?

ict, because even if they share the profits

quitably the franchise needs to work overtime and
f 1.87. Total profit comes to 1.309.

ative to revenue sharing?

oductivity since they

re in a sense since in
Also, in profit sharing
make the company

For Q=14
 Profit = -10 - 48(14) + 15(14)^2 - (14)^3
Profit = -486

that profit is maximized at Q = 8. (Why is profit not maximized at Q = 2?)

For Q=14
Marginal Profit = -48 + 30(14) - 3(14)^2
Marginal Profit = -216

quantities. This is because as the rule of optimal output in marginal

ere are two quantities that equated marginal profit to zero, we should