ECON130 Tutorial 05

Part 1: Multiple Choice

MC1. Suppose that demand changes, and the (inverse) demand curve moves from P = 164 -1Q to P =
180.4 -1Q. This change could be explained by

(a) a change in the tastes of consumers, reflecting that they now prefer good X less.

(b) an increase in the price of an input used to produce good X.

(c) the introduction of an indirect tax on good X, such as a sales tax.

(d) an increase in the incomes of consumers.

MC2. Assume that a particular commodity has a downward-sloping demand curve and upward
sloping supply curve. If a tax by quantity is imposed on this commodity and there is no shift in the
demand curve, in equilibrium the price will increase by

(a) more than the amount of the tax.

(b) the amount of the tax.

(c) less than the amount of the tax.

(d) (b) or (c).

Name: Fuatino Tina Lia ID#: 300590119

Part 2: Structured Questions

Q0: Refresher- Profit maximising output

1. In a diagram, draw a total cost and total revenue curve for a firm in a perfectly competitive
market. Explain what each of the curves represents.
-The sales value of a corporation is TR (P x q). A business that takes part in a perfectly
competitive (PC) market, or one whose price is fixed, is known as a price taker. TC stands for
the costs of production inputs. These can be separated into two categories in the short term:
fixed costs (FC) and variable costs (VC); add these two together and they will equal to Total
Cost (TC). For a PC company, TR is an output-dependent constant function (shown by a
straight line). A firm with a positive FC should have a positive intercept on the TC curve. The
shape of the TC curve is governed by the assumptions made about the applicability of
economies of scale; it is a simple quadratic, as shown in the picture below.

2. Discuss the relationship between: (a) total revenue and marginal revenue; (b) total cost and
marginal cost.
a. The money made from selling a product is known as total revenue (P * Q), while marginal
revenue is the additional money made from selling one additional unit of the product. the
difference in revenue because of a sold extra unit (difference in total revenue/difference in
quantity). The marginal function determines the slope of the total function.
b. Total cost is the sum of Fixed Cost and Variable Cost while a unit of output's marginal cost
is the additional expense associated with producing it. The higher the change in total cost
the higher the change in marginal cost.

3. Explain how a firm chooses a profit-maximising level of output. Illustrate this level on an
appropriate diagram.

-Where Marginal Cost = Marginal Revenue is the profit-maximizing rule.

A perfectly competitive film will create the amount of output at which MC equals price, or at the
level of output where profits are maximized. The difference between the proceeds from the sale of a
product and the prices of all inputs used, as well as any opportunity costs, is known as an economic
profit or loss. Opportunity expenses and explicit costs are subtracted from earned revenues to
determine economic profit. In the graph below, revenue is greater than costs (economic profit (EP))
and so shows the profit maximising bundle.

Name: Fuatino Tina Lia ID#: 300590119

 4. Show and explain how an increase in the wage that the firm pays its workers would affect
the firm’s profit-maximising level of output. Assume that demand for the firm’s product
remains constant.
- An increase in wage will solely affect the variable cost because the demand for the
company's goods will remain the same. The graph's representation of it is the partial
shift of the Total cost curve to the left (TC1). Higher costs lead to less output being
supplied and this is shown by how the curve got steeper.

Q1: Surplus in a perfectly competitive market

Hint: refer to Excel tool #5d on Blackboard to assist with this question. For guidance on how to
identify the equilibrium price and quantity, see Renshaw and Norman (2021) Maths for economics -
section 3.13 Demand and supply for a good and sub-section: Market equilibrium.

Consider the market for good X. Assume that the market is perfectly competitive. Q is the market
quantity of good X and P is the market price. The equations for the curves are:

• (inverse) demand curve (D0): P = 300 − 20QX

• (inverse) supply curve (S0): P = 150 + 10QX

Name: Fuatino Tina Lia ID#: 300590119

 1. Plot the demand curve in a diagram for the range Q=[0,10].
2. On the same diagram, plot the supply curve for the range Q=[0,10].
3. What is the equilibrium perfectly competitive price and output? Mark this on your diagram.
- Refer to graph below
-Equilibrium price is $200 and Equilibrium quantity is 5.

4. What areas represent consumers’ surplus (CS) in the perfectly competitive situation? Mark and
label this on your diagram. Calculate the value of CS.

1
- ¿ ∗5∗100
2
Answer- ¿ 250

5. What areas represent producers’ surplus (PS) in the perfectly competitive situation? Mark and
label this on your diagram. Calculate the value of PS.

1
- ¿ ∗5∗50
2
Answer - ¿ 125

6. What is the value of total surplus (TS) in equilibrium?

- ¿ CS+ PS

- ¿ 250+125

Answer- ¿ 375

Answer to Questions 1-6

Price

P*

Quantity

Q*

Name: Fuatino Tina Lia ID#: 300590119