Question: Suppose a firm's total cost (TC) function is given by TC = 100 + 5Q + 0.

1Q^2, where Q is the

quantity of output produced. Calculate the average variable cost (AVC) and average total cost
(ATC) when the firm produces 50 units of output.
Answer: To calculate AVC, we divide the total variable cost (TVC) by the quantity produced (Q).
TVC = 5Q + 0.1Q^2, so when Q = 50, TVC = 5(50) + 0.1(50^2) = 250 + 250 = 500. Thus, AVC = TVC /
Q = 500 / 50 = $10 per unit.
To calculate ATC, we divide the total cost (TC) by the quantity produced (Q). TC = 100 + 5Q +
0.1Q^2, so when Q = 50, TC = 100 + 5(50) + 0.1(50^2) = 100 + 250 + 250 = $600. Thus, ATC = TC /
Q = 600 / 50 = $12 per unit.
Question: In a perfectly competitive market, a firm's marginal cost (MC) is given by MC = 2Q, where Q
is the quantity of output. If the market price is $8, how many units of output should the firm
produce to maximize profit?
Answer: To maximize profit, the firm should produce where MC equals the market price (P). So, 2Q
= 8, which implies Q = 4 units of output.
Question: Explain the concept of price elasticity of demand (PED) and calculate it for a product with the
following demand function: Q = 100 - 2P.
Answer: Price elasticity of demand (PED) measures the responsiveness of quantity demanded to changes
in price. The formula for PED is: PED = (% Change in Quantity Demanded) / (% Change in Price).
For the given demand function Q = 100 - 2P, we can calculate the PED as follows: PED = (dQ/dP) * (P/Q),
where dQ/dP is the derivative of Q with respect to P.
Taking the derivative of Q with respect to P: dQ/dP = -2.
So, PED = (-2) * (P/Q) = (-2) * (P / (100 - 2P)).
For a specific price, you can plug in the values to calculate the PED.
Question: A monopolist faces a demand curve given by P = 100 - 2Q and has a total cost function TC = 50Q +
10. Calculate the profit-maximizing level of output and price.
Answer: To maximize profit, a monopolist should equate marginal cost (MC) to marginal revenue (MR).
First, calculate MR from the demand curve: MR = d(TR)/dQ = d(P*Q)/dQ = (100 - 2Q) + Q(-2) = 100 - 4Q.
Set MC equal to MR: 50 = 100 - 4Q.
Solve for Q: 4Q = 100 - 50, Q = 12.5.
To find the price (P), plug the quantity (Q) back into the demand curve: P = 100 - 2Q = 100 - 2(12.5) = $75.
Question: Calculate the consumer surplus and producer surplus when the market is in equilibrium with the following
supply and demand functions: Qd = 50 - 2P and Qs = 3P - 10.
Answer: Consumer surplus (CS) is the area between the demand curve and the price, while producer surplus
(PS) is the area between the supply curve and the price.
Equate Qd and Qs to find the equilibrium price and quantity: 50 - 2P = 3P - 10.
Solve for P: 5P = 60, P = $12.
Plug P back into either Qd or Qs to find the equilibrium quantity: Q = 50 - 2(12) = 26 units.
CS = (1/2) * (12 - 10) * 26 = $26. PS = (1/2) * (12 - 10) * 26 = $26.
Question: Explain the concept of the Laffer curve in taxation. How does it relate to tax revenue and tax rates?
Answer: The Laffer curve illustrates the relationship between tax rates and tax revenue. It suggests that there is
an optimal tax rate where tax revenue is maximized. When tax rates are very low, tax revenue is low because the
government collects too little. Similarly, when tax rates are very high, tax revenue is low because high tax rates
discourage economic activity and tax evasion.
The Laffer curve shows that as tax rates increase from zero, tax revenue initially rises because the tax base is
broad enough to compensate for the higher rates. However, at a certain point, higher tax rates start to deter
economic activity and reduce the tax base, causing tax revenue to decline.
Thus, there is an optimal tax rate that maximizes tax revenue, and policymakers must carefully consider the
trade-off between tax rates and revenue.
Question: A firm is a price taker in a perfectly competitive market with a market price of $20. The firm's total cost
function is TC = 5Q^2 + 10Q + 20, where Q is the quantity of output. Calculate the firm's profit-maximizing
quantity of output.
Answer: In a perfectly competitive market, a firm maximizes profit by producing where marginal cost (MC)
equals the market price (P). First, calculate the firm's MC by taking the derivative of TC with respect to Q: MC =
d(TC)/dQ = 10Q + 10.
Set MC equal to the market price (P): 10Q + 10 = 20.
Solve for Q: 10Q = 10, Q = 1.
Therefore, the firm's profit-maximizing quantity of output is 1 unit.
Question: Define and differentiate between explicit and implicit costs in the context of accounting and economic
profit.
Answer: Explicit costs are the actual out-of-pocket expenses incurred by a firm in its production process.
These costs are easily quantifiable and include items like wages, rent, utilities, raw materials, and other direct
expenses. Explicit costs are explicitly recorded in a firm's accounting records, hence the name.
Implicit costs, on the other hand, represent the opportunity costs associated with using resources in a
particular way instead of their next best alternative. These costs are not reflected in a firm's accounting records
but are crucial in economic analysis. Implicit costs include the value of the owner's time and capital that could
have been invested elsewhere.
Accounting profit is calculated by subtracting only explicit costs from total revenue, while economic profit
considers both explicit and implicit costs. Economic profit provides a more comprehensive view of a firm's
profitability because it accounts for the full cost of resources, including the opportunity cost of the owner's
time and capital.
THank you