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Supplemental Problem For Class #2: Solution: Part A
Supplemental Problem For Class #2: Solution: Part A
Supplemental Problem For Class #2: Solution: Part A
Let’s assume that demand for a product is linear and can be described by the function
P = 50-0.2Q
If total costs are 1,125, what are profits if
a) We can only charge one price and P = 25
b) If can charge three prices, P = 40, P = 25 and P = 10
Solution: Part a
P = 50-0.2Q; Q = 250-5P
When P = 25, Q = 125. TR = 125*25 = 3,125
TC= 1,125
Profits = 3,125-1,125 = 2,000
Supplemental Problem for Class #2
Solution: Part b
Q = 250-5P
When P = 40, Q = 250-5*40 = 250-200 = 50
So, we know 50 units will be sold at P = 40
Luckily, for us, both demand and supply functions are linear.
We know that for a price of 100 per session, 20 students are willing to teach.
For a price of 200 per session, 40 students are willing to teach
We know at if tutoring is offered for free, 180 students would be willing to avail of tutoring
services. However, at a price of 200, only 100 students would be willing to pay that fee for
tutoring.
Let’s also assume that the quality of services is exactly the same!
Shift in Demand and Supply Functions
First, let’s determine the linear functions and, like all good economists, draw a graph!
Supply function is Qs = 0.2P. Demand function is Qd = 180-0.4P
0 180 0
50 160 10
100 140 20
150 120 30
200 100 40
250 80 50
300 60 60
350 40 70
400 20 80
Shift in Demand and Supply Functions
Shift in Demand and Supply Functions
What if the institute decided that it would create an incentive by offering tutors an additional
150 per session, in addition to what students pay.
This would change the supply function to Q = 30+0.2P
0 180 0 30
50 160 10 40
100 140 20 50
150 120 30 60
200 100 40 70
250 80 50 80
300 60 60 90
350 40 70 100
400 20 80 110
Shift in Demand and Supply Functions
What is the NEW equilibrium?
0 180 210 0
50 160 190 10
100 140 170 20
250 80 110 50
300 60 90 60
350 40 70 70
400 20 50 80
Shift in Demand Function
Various Scenarios
1) IIT Bhu provides luxurious rooms for the tutoring to be held, including
free tea and samosas (for students AND tutors) ☺
2) A wealthy alum starts her own tutoring service and offers it for free.
3) The institute now provides easy to follow lecture notes that makes it
easier to understand class material.
4) In an effort to improve quality, the institute makes the course more
difficult.
Extra Credit Assignment
There are many buses, trains and taxis that take passengers between the cities of Mumbai and
Pune. There is currently an equilibrium point where market demand for busses is equal to
market supply of busses.
In each of the following scenarios, determine if there will be a temporary (short-term) shift in the
demand function or the supply function (or both) for BUSSES. Mention if the shift will be to the
RIGHT or to the LEFT. Then decide if the price will increase or fall and if equilibrium quantity will
increase or decrease. You’re welcome to provide a brief explanation, but not necessary.