Problem 1. At the current €310 fare, 200 coach seats are sold.

If the airline
cut its price to €300, 220 seats would be demanded. What is the price elasticity
level?

To determine the price elasticity of demand, we can use the following

formula:

Price Elasticity of Demand = ((Q2 - Q1) / ((Q2 + Q1)/2)) / ((P2 - P1) / ((P2
+ P1)/2))

Where:

 Q1 = initial quantity demanded = 200

 Q2 = new quantity demanded = 220
 P1 = initial price = €310
 P2 = new price = €300

Using these values, we can calculate the price elasticity of demand as

follows:

Price Elasticity of Demand = ((220 - 200) / ((220 + 200)/2)) / ((300 - 310) /

((300 + 310)/2))

Price Elasticity of Demand = (20 / 210) / (-10 / 305)

Price Elasticity of Demand = -0.92

Based on this calculation, we can say that the price elasticity of demand for
this airline's coach seats is -0.92, which indicates a relatively elastic demand. This
means that a decrease in price is likely to result in a larger increase in quantity
demanded.

Problem 2. The market demand and supply equations for a product are

QD =120– 4P
QS =54 + 2P

where Q is quantity and P is price. Determine the equilibrium price and

quantity.

To find the equilibrium price and quantity, we need to set the quantity
demanded equal to the quantity supplied and solve for P:

QD = QS
 120 - 4P = 54 + 2P

120 - 54 = 2P + 4P

66 = 6P

P = 11

Now that we have the equilibrium price, we can substitute it back into either
the demand or supply equation to find the equilibrium quantity:

QD = 120 - 4(11)

QD = 76

QS = 54 + 2(11)

QS = 76

Therefore, the equilibrium price is €11 and the equilibrium quantity is 76

units.

Problem 3. Given the price function P=50–Q, and MC=220+4Q. Calculate

the profit-maximizing price and output.

To find the profit-maximizing price and output, we need to set marginal cost
(MC) equal to marginal revenue (MR), which is equal to the price (P) in perfect
competition. So:

MC = P

220 + 4Q = 50 - Q

5Q = -170

Q = -34

Since this result is negative, it does not make sense in this context. Therefore,
we can conclude that there is no profit-maximizing price and output for this
market under the given conditions.

Problem 4. The marginal cost (MC) of the production company is 300€ .

From the past market analysis, the price elasticity was taken approximated to be 2.
Calculate the optimal price.
 To calculate the optimal price using the price elasticity of demand, we can
use the formula:

Price Elasticity of Demand = (% Change in Quantity Demanded) / (%

Change in Price)

We know that the price elasticity of demand is 2, which means that a 1%

change in price will lead to a 2% change in quantity demanded. We also know that
the marginal cost is 300€.

To find the optimal price, we need to set the price where marginal revenue
equals marginal cost:

MR = P * (1 + (1 / Price Elasticity of Demand))

Setting MR equal to MC and solving for P, we get:

P * (1 + (1 / 2)) = 300 P * (3 / 2) = 300 P = 200

Therefore, the optimal price for the production company is 200€.

Problem 5. An individual seller’s monthly supply of downloadable e-books is

given by the equation
S
Qeb =−80+28 × P eb−5 ×W .

where QSeb is number of e-books supplied each month, Peb is price of e-books in
euros, and W is the hourly wage rate in euros paid by e-book sellers to workers.
Assume that the price of e-books is €12 and the hourly wage is €11.

1) Determine the number of e-books supplied each month.

2) Determine the inverse supply function for an individual seller.
3) Determine the slope of the supply curve for e-books.
4) Determine the new vertical intercept of the individual e-book supply
curve if the hourly wage were to rise to €14 from €11.

1) QSeb = -80 + 28(12) - 5(11)

S
Qeb = -80 + 336 - 55
S
Qeb = 201
Therefore, the seller will supply 201 e-books each month.
2) The supply function is given by:
S
Qeb = -80 + 28P_eb - 5W
To find the inverse supply function, we need to solve for Peb in terms of QSeb:
S
Qeb= -80 + 28 Peb- 5W
 28 Peb= QSeb+ 5W + 80
Peb= (QSeb + 5W + 80)/28
Therefore, the inverse supply function is:
Peb^S = (QSeb + 5W + 80)/28

3) The slope of the supply curve for e-books is the coefficient of the price of e-
books ( Peb) in the equation for the supply curve.
S
Qeb = -80 + 28 × Peb^- 5 × W

S
Qeb= -80 + 28 × 12 - 5 × 11

S
Qeb= -80 + 336 - 55

S
Qeb= 201

Therefore, at a price of €12 and an hourly wage of €11, the monthly supply of e-
books is 201 units.

At a given wage rate of W = €11 and a price of e-books of Peb= €12, we have:
S
Qeb= -80 + 28 × 12 - 5 × 11 = 201

dQSeb/d Peb= 28

Therefore, the slope of the supply curve for e-books is 28. This means that for
every €1 increase in the price of e-books, the quantity supplied will increase by 28
units.

4) If the hourly wage rate paid to workers is €14 and the price of e-books is €12,
the supply equation for e-books would be:
S
Qeb = -80 + 28 × Peb - 5 × 14

S
Qeb= -80 + 28 × 12 - 5 × 14

S
Qeb= 186

Therefore, at a price of €12 and an hourly wage of €14, the monthly supply of e-
books is 186 units.

Since the slope of the supply curve remains the same, the new vertical intercept of
the individual e-book supply curve is still -80 + 28 × 12 - 5 × 14 = 56. This means
that at a price of €0, the quantity supplied would be 56 units. However, this
negative quantity does not have economic meaning and should be interpreted as
the quantity supplied when the price is so low that it is not profitable to produce
any e-books.

Problem 6. In the local market for e-books, the aggregate demand is given by
the equation

Qd=1200−250× Peb +0 , 3 × I +90 Phb.

and the aggregate supply is given by the equation

QS =−340+180 Peb −42 ×W

where Q is quantity of e-books, Peb is the price of an e-book, I is household

income, W is wage rate paid to e-book laborers, and Phb is the price of a
hardbound book. Assume I is €1980, W is €12, and Phb is €24. Determine the
equilibrium price and quantity of e-books in this local market.

To find the equilibrium price and quantity of e-books in this local market, we
need to set the aggregate demand equal to the aggregate supply:

Qd = Qs

Substituting the given values for I, W, and Phb:

Qd = 1200 - 250 Peb + 0.3(1980) + 90(24) = 1200 + 594 + 2160 - 250 Peb=
2954 - 250 Peb

Qs = -340 + 180 Peb- 42(12) = -340 + 180 Peb- 504 = -844 + 180 Peb

Setting Qd = Qs:

2954 - 250 Peb= -844 + 180 Peb

430 Peb= 3798

Peb= 8.83

Therefore, the equilibrium price of e-books is €8.83.

To find the equilibrium quantity, we can substitute the equilibrium price into
either the demand or supply equation. Let's use the supply equation:

Qs = -340 + 180 Peb- 42W

Qs = -340 + 180(8.83) - 42(12)

 Qs = 751.4

Therefore, the equilibrium quantity of e-books in this local market is 751.4 or

approximately 751 e-books.

Problem 7. The managers of the XYZ Company are in a position to organize

production Q in a way that will generate the following two net income streams,
where π i , j designates the ith production process in the jth production period.
π 1 ,1 ( Q )=€ 100; π 1 ,2 ( Q )=€ 330;
π 2 ,1 ( Q )=€ 300; π 2 ,2 ( Q )=€ 121;
For example, π 1 ,2 ( Q )=€ 330 indicates that net income from production process
1 in period 2 is €330. If the anticipated discount rate for both production periods is
10%, which of these two net income streams will generate greater net profit for the
company?

To determine which net income stream will generate greater net profit for the
company, we need to calculate the present value of each income stream and
compare them.
PV = FV / (1 + r)^n
Where PV is the present value, FV is the future value, r is the discount rate,
and n is the number of periods.
For production process 1:
PV_1 = π_1,1 / (1 + 0.1)^1 + π_1,2 / (1 + 0.1)^2
PV_1 = 100 / 1.1 + 330 / 1.21
PV_1 = 90.91 + 272.73
PV_1 = 363.64
For production process 2:
PV_2 = π_2,1 / (1 + 0.1)^1 + π_2,2 / (1 + 0.1)^2
PV_2 = 300 / 1.1 + 121 / 1.21
PV_2 = 272.73 + 100
PV_2 = 372.73
Therefore, production process 2 will generate greater net profit for the
company as it has a higher present value of net income.

Problem 8. The firm’s profit equation:

2
π=−100+ 132Q−20Q

The marginal profit at Q=3 is €12 thousand per lot. Determine the firm’s profit-
maximizing level of output.

We know that marginal profit (Mπ) is the derivative of the profit function with
respect to Q. Therefore, we can take the derivative of the profit function π with
respect to Q and set it equal to 12 to find the profit-maximizing level of output.
π = -100 + 132Q - 20Q^2

Mπ = dπ/dQ = 132 - 40Q

Setting Mπ equal to 12 and solving for Q:

132 - 40Q = 12

40Q = 120

Q=3

Therefore, the profit-maximizing level of output is Q = 3.