CHAPTER 1—INTRODUCTION
MULTIPLE CHOICE
1. Business profit is:
a. the residual of sales revenue minus the explicit accounting costs of doing business.
b. a normal rate of return.
c. economic profit.
d. the return on stockholders' equity.
ANS: A
2. Value maximization is broader than profit maximization because it considers:
a. total revenues.
b. total costs.
c. real-world constraints.
d. interest rates.
ANS: D
3. The return to owner-provided inputs such as financial capital is an:
a. implicit cost.
b. economic rent.
c. entrepreneurial profit.
d. explicit cost.
ANS: A
4. The value of a firm is equal to:
a. the present value of tangible assets.
b. the present value of all future revenues.
c. the present value of all future cash flows.
d. current revenues less current costs.
ANS: C
CHAPTER 2—BASIC ECONOMIC RELATIONS
MULTIPLE CHOICE
5. Which of the following short run strategies should a manager select to obtain the highest degree of
sales?
a. maximize revenues.
b. minimize average costs.
c. minimize total costs.
d. maximize profits.
ANS: A
6.Total revenue is maximized at the point where:
a. marginal revenue equals zero.
b. marginal cost equals zero.
c. marginal revenue equals marginal cost.
d. marginal profit equals zero.
ANS: A
7. If P = $1,000 - $4Q:
a. MR = $1,000 - $4Q
b. MR = $1,000 - $8Q
c. MR = $1,000Q - $4
d. MR = $250 - $0.25P
ANS: B
8. Average cost minimization occurs at the point where:
a. MC = 0
b. MC = AC
c. AC = 0
d. Q = 0
ANS: B
9. Marginal profit equals:
a. the change in total profit following a one-unit change in output.
b. the change in total profit following a managerial decision.
c. average revenue minus average cost.
d. total revenue minus total cost.
ANS: A
10. If average profit increases with output marginal profit must be:
a. decreasing.
b. greater than average profit.
c. less than average profit.
d. increasing.
ANS: B
11. At the profit-maximizing level of output:
a. marginal profit equals zero.
b. marginal profit is less than average profit.
c. marginal profit exceeds average profit.
d. marginal cost equals average cost.
ANS: A
PROBLEMS
12. Marginal Analysis. Consider the price (P) and output (Q) data in the following table.
Q
0
1
2
3
4
5
6
7
P
$35
30
25
20
15
10
5
0
TR
MR
AR
A. Calculate the related total revenue (TR), marginal revenue (MR), and average revenue (AR)
figures.
B.
At what output level is revenue maximized?
ANS:
A.
Q
0
1
2
3
4
5
6
7
B.
P
$35
30
25
20
15
10
5
0
TR=PQ
$ 0
30
50
60
60
50
30
0
MR=TR/Q
-$30
20
10
0
-10
-20
-30
Revenue is maximized at an output level 4, where MR = 0.
AR=TR/Q=P
-$30
25
20
15
10
5
0
13.Profit Maximization. Fill in the missing data for price (P), total revenue (TR), marginal revenue (MR),
total cost (TC), marginal cost (MC), profit (), and marginal profit (M) in the following table.
Q
0
1
2
3
4
5
6
7
8
9
10
P
$200
180
120
100
80
60
20
10
TR=PQ
$ 0
180
320
420
500
480
320
180
MR=TR/Q
-$180
100
60
-20
-60
-100
-80
$
TC
0
100
175
240
MC=TC/Q
-$100
=TR-TC
65
55
55
180
185
150
50
55
65
180
-30
-185
350
400
450
570
750
$
0
80
-650
M=/Q
-$ 80
65
5
-35
-70
-110
-155
-205
-260
A. At what output (Q) level is profit maximized?
B.
At what output (Q) level is revenue maximized?
C.
Discuss any differences in your answers to parts A and B.
ANS:
A. Profit increases so long as MR > MC and M > 0. In this problem, profit is maximized at Q
= 4 where  = $185 (and TR = $480).
Q
0
1
2
3
4
5
6
7
8
9
10
P
$200
180
160
140
120
100
80
60
40
20
10
TR=PQ
$ 0
180
320
420
480
500
480
420
320
180
100
MR=TR/Q
-$180
140
100
60
20
-20
-60
-100
-140
-80
TC
$ 0
100
175
240
295
350
400
450
505
570
750
MC=TC/Q
-$100
75
65
55
55
50
50
55
65
180
=TR-TC
$
0
80
145
180
185
150
80
-30
-185
-390
-650
M=/Q
-$ 80
65
35
5
-35
-70
-110
-155
-205
-260
B.
Total Revenue increases so long as MR > 0. In this problem, revenue is maximized at Q = 5
where TR = $500 (and  = $150).
C.
Given a downward sloping demand curve and MC > 0, as is typically the case, profits will be
maximized at an output level that is less than the revenue maximizing level. Revenue
maximization requires lower prices and greater output than would be true with profit
maximization. The potential long-run advantage of a revenue maximizing strategy is that it
might generate rapid market expansion and long-run benefits in terms of customer loyalty
and future unit cost reductions. The cost is, of course, measured in terms of lost profits in the
short-run (here the loss is $35 in profits).
O
14. Optimization. Describe each of the following statements as true or false, and explain your answer.
A. To maximize the value of the firm, management should always produce the level of output
that maximizes short run profit.
B.
Average profit equals the slope of the line tangent to the total product function at each level
of output. OMIT
C.
Marginal profit equals zero at the profit maximizing level of output.
D. To maximize profit, total revenue must also be maximized.
E.
Marginal cost equals average cost at the average cost minimizing level of output.
ANS:
A. False. Value can be maximized by producing a level of output higher than that which
maximizes profits in the short run if the long run future profits derived from greater market
penetration and scale advantages are sufficient to overcome the disadvantage of lost short
run profits.
B.
False. Average profit is represented by the slope of the ray running from the origin to the
total product function at each level of output.
C.
True. Marginal profit equals the slope of the line tangent to the total profit function at each
level of output. The slope of the line tangent to the total profit function at its maximum point
equals zero. Thus, marginal profit equals zero at the profit maximizing level of output.
D. False. Total revenue is maximized at a level of output greater than the level of output that
maximizes profit because the level of output at which MR = 0 is greater than the level of
output at which MR = MC > 0 when MR is decreasing.
E.
True. Marginal cost equals average cost at the average cost minimizing level of output.
15. Profit Maximization: Equations. Woodland Instruments, Inc. operates in the highly competitive
electronics industry. Prices for its R2-D2 control switches are stable at $100 each. This means that P =
MR = $100 in this market. Engineering estimates indicate that relevant total and marginal cost
relations for the R2-D2 model are:
TC = $500,000 + $25Q + $0.0025Q2
A. Calculate the output level that will maximize R2-D2 profit.
B.
Calculate this maximum profit.
ANS:
A. To find the profit-maximizing level of output, set MR = MC and solve for Q:
MR = MC
$100 = $25 + $0.005Q
0.005Q = 75
Q = 15,000
(Note: Profits are decreasing for Q > 15,000.)
B.
The total revenue function for Woodland is:
TR = P  Q = $100Q
Then, total profit is:
 = TR - TC
= $100Q - $500,000 - $25Q - $0.0025Q2
= -$0.0025Q2 + $75Q - $500,000
= -$0.0025(15,0002) + $75(15,000) - $500,000
= $62,500
16. Average Cost Minimization. Commercial Recording, Inc., is a manufacturer and distributor of reelto-reel recording decks for commercial recording studios. Revenue and cost relations are:
TR = $3,000Q - $0.5Q2 AND TC = $100,000 + $1,500Q + $0.1Q2
A. Calculate output, marginal cost, average cost, price, and profit at the average costminimizing activity level.
B.
Calculate these values at the profit-maximizing activity level.
C.
Compare and discuss your answers to parts A and B.
ANS:
A. To find the average cost-minimizing level of output, set MC = AC and solve for Q:
$1,500 + $0.2Q =
1,500 + 0.2Q =
0.1Q =
Q2 =
Q=
+ 1,500 + 0.1Q
Q = 1,000
MC = $1,500 + $0.2(1,000)
= $1,700
AC =
+ $1,500 + $0.1(1,000)
= $1,700
P = TR/Q
= ($3,000Q - $0.5Q2)/Q
= $3,000 - $0.5Q
= $3,000 - $0.5(1,000)
= $2,500

=
= $800,000
(Note: Average cost is rising for Q > 1,000.)
B.
To find the profit-maximizing level of output, set MR = MC and solve for Q:
MR = MC
$3,000 - $1Q = $1,500 + $0.2Q
1.2Q = 1,500
Q = 1,250
MC = $1,500 + $0.2(1,250)
= $1,750
AC =
+ $1,500 + $0.1(1,250)
= $1,705
P = $3,000 - $0.5(1,250)
= $2,375
=
= $837,500
C.
Average cost is minimized when MC = AC = $1,700. Given P = $2,500, a $800 profit per
unit of output is earned when Q = 1,000. Total profit  = $800,000.
Profit is maximized when Q = 1,250 because MR = MC = $1,750 at that activity level.
Because MC = $1,750 > AC = $1,705, average cost is rising. Given P = $2,375 and AC =
$1,750, a $670 profit per unit of output is earned when Q = 1,250. Total profit  = $837,500.
Total profit is higher at the Q = 1,250 activity level because the modest $5(= $1,705 $1,700) increase in average cost is more than offset by the 250 unit expansion in sales from
Q = 1,000 to Q = 1,250 and the resulting increase in total revenues.
17. Revenue Maximization. Restaurant Marketing Services, Inc., offers affinity card marketing and
monitoring systems to fine dining establishments nationwide. Fixed costs are $600,000 per year.
Sponsoring restaurants are paid $60 for each card sold, and card printing and distribution costs are $3
per card. This means that RMS's marginal costs are $63 per card. Based on recent sales experience, the
estimated demand curve and marginal revenue relations for are:
P = $130 - $0.000125Q and TC=600,000 +63Q
A. Calculate output, price, total revenue, and total profit at the revenue-maximizing activity
level.
B.
Calculate output, price, total revenue, and total profit at the profit-maximizing activity level.
ANS:
A. To find the revenue-maximizing level of output, set MR = 0 and solve for Q:
MR = 0
$130 - $0.00025Q = 0
0.00025Q = 130
Q = 520,000
P = $130 - $0.000125Q
= $130 - $0.000125(520,000)
= $65
TR = PQ
= $65(520,000)
= $33,800,000
 = TR - TC
= $33,800,000 - $600,000 - $63(520,000)
= $440,000
(Note: Revenue is falling when Q > 520,000.)
B.
To find the profit-maximizing level of output, set MR = MC and solve for Q:
MR = MC
$130 - $0.00025Q = $63
0.00025Q = 67
Q = 268,000
P = $130 - $0.000125(268,000)
= $96.50
TR = $96.50(268,000)
= $25,862,000
 = $25,862,000 - $600,000 - $63(268,000)
= $8,378,000
CHAPTER 3—STATISTICAL ANALYSIS OF ECONOMIC RELATIONS
MULTIPLE CHOICE
18. Generally speaking, population parameters are not known and must be estimated by the sample:
a. mean.
b. mode.
c. median.
d. statistics.
ANS: D
19. Statistics are:
a. descriptive measures for a sample.
b. summary measures for the population.
c. predetermined variables.
d. endogenous variables.
ANS: A
20. The "middle" observation is the:
a. median.
b. average.
c. mean.
d. mode.
ANS: A
21. If the greater bulk of sample observations are found to the left of the sample mean, then the sample is
said to be:
a. skewed downward.
b. skewed upward.
c. skewed to the right.
d. symmetrical.
ANS: A
22. If a distribution is skewed downward, the median:
a. is greater than the mean.
b. is less than the mean.
c. is greater than the average.
d. equals the mean.
ANS: A
PROBLEMS
23. Sample Data Description. Express Mail Services, Inc., delivers small parcels to residential addresses
in the Long Beach, California area. To learn more about the efficiency of a new employee, EMS has
collected the following data on the number of deliveries per week for a recent six-week sample:
125
140
155
140
135
145
A. Calculate the mean, median and mode measures of central tendency for the number of
deliveries per week. Which measure does the best job of describing central tendency for this
variable?
B.
Calculate the range, variance and standard deviation for this data series.
ANS:
A. The mean, or sample average, is 140 deliveries per week. By inspection of a rank-order from
highest to lowest values, the "middle" or median value is 140 deliveries per week. The mode
is also 140 deliveries per week, and is the most commonly observed value among these six
customers. In this instance, the sample distribution is perfectly symmetric. As a result, either
the mean, mode or median can be used as a useful measure of central tendency and the size
of the typical observation.
B.
The range for these six weeks is from 125 to 155 deliveries per week. The sample variance is
100 (deliveries squared), and the sample standard deviation is 10 deliveries. Given the
symmetrical nature of the delivery distribution, perhaps the sample standard deviation offers
the most useful indicator of the magnitude of sample dispersion.
24. Simple Regression. May Brothers Department Store has conducted a survey to learn the buying
intentions of a sample of 62 department store customers. The survey asked each customer their
household gross income(in $ thousands), and their number of shopping trips per year.
B.
Interpret the following results for a simple regression over this sample where TRIPS is the
dependent Y variable and INCOME is the independent X-variable:
The regression equation is:
TRIPs = 0.5 + 0.1 INCOME
Predictor
Constant
INCOME
SEE = 0.3
ANS:
Coef
0.48
0.10
2
= 64% = 63.4%
Stdev
0.30
0.05
F statistic = 106.7
t ratio
1.6
2.0
B.
The constant in such a regression typically has no meaning. Clearly, the intercept should not
be used to suggest the number of planned trips for a department customer with zero income!.
The INCOME coefficient value of 0.1 implies that a one-unit (thousand dollar) increase in
INCOME results in an average increase of 0.1 units in the TRIPS variable.
CHAPTER 4—DEMAND AND SUPPLY
MULTIPLE CHOICE
25. If demand increases while supply decreases for a particular good:
a. its equilibrium price will increase while the quantity of the good produced and sold is
indeterminate.
b. the quantity of the good produced and sold will decrease while its equilibrium price is
indeterminate.
c. the quantity of the good produced and sold will increase while its equilibrium price is
indeterminate. .
d. its equilibrium price will decrease while the quantity of the good produced and sold is
indeterminate.
ANS: A
26. The supply of a product does not depend on:
a. raw material costs.
b. wage rates.
c. consumer incomes.
d. technology.
ANS: C
27. The equilibrium market price of a service is the:
a. price that buyers are willing and able to pay.
b. price where shortages exceed surpluses.
c. price that maximizes profit for sellers.
d. price where the quantity demanded equals the quantity supplied.
ANS: D
28. If the market price is higher than the equilibrium price a:
a. shortage exists and the equilibrium price will rise until it equals the market price and the
shortage is eliminated.
b. surplus exists and the market price will fall until it equals the equilibrium price and the
surplus is eliminated.
c. surplus exists and the equilibrium price will rise until it equals the market price and the
surplus is eliminated.
d. shortage exists and the market price will fall until it equals the equilibrium price and the
shortage is eliminated.
ANS: B
PROBLEM
29. Demand and Supply Curves. The following relations describe demand and supply conditions in the
oil industry:
QD = 525,000 - 7,500P
(Demand)
QS = -150,000 + 15,000P
(Supply)
where Q is quantity measured in millions of barrels and P is price in dollars.
A. Complete the following table:
Price
(1)
$35
30
25
20
15
Quantity
Supplied
(2)
Quantity
Demanded
(3)
Surplus (+) or
Shortage (-)
(4) = (2) - (3)
Quantity
Supplied
(2)
375,000
300,000
225,000
150,000
75,000
Quantity
Demanded
(3)
262,500
300,000
337,500
375,000
412,500
Surplus (+) or
Shortage (-)
(4) = (2) - (3)
+112,500
0
-112,500
-225,000
-337,500
ANS:
A.
Price
(1)
$35
30
25
20
15
30. Demand Analysis. The demand for automobiles is often described as highly cyclical, and very
sensitive to automobile prices and interest rates. Given these characteristics, describe the effect of each
of the following..
A. A decrease in auto prices
B.
A fall in interest rates
C.
A rise in interest rates
D. A severe economic recession
E.
A robust economic expansion
ANS:
A. A decrease in auto prices will increase the quantity demanded and involve a downward
movement along the auto demand curve.
B.
A fall in interest rates will increase the demand for autos and cause an outward shift of the
auto demand curve.
C.
A rise in interest rates will decrease the demand for autos and cause an inward shift of the
auto demand curve.
D. A severe economic recession (fall in income) will decrease the demand for autos and result
in an inward shift of the auto demand curve.
E.
A robust economic expansion (rise in income) will increase the demand for autos and result
in an outward shift of the auto demand curve.
31. Comparative Statics. Coupon Promotions, Inc., is a coupon book publisher with markets in several
southwestern states. CPI coupon books are either sold directly to the public, sold through religious and
other charitable organizations, or given away as promotional items. Operating experience during the
past year suggests the following demand function for its coupon books:
Q = 10,000 - 5,000P + 0.02Pop + 0.4I + 0.6A
where Q is quantity, P is price ($), Pop is population, I is disposable income per capita ($), and A is
advertising expenditures ($).
A. Determine the demand curve faced by CPI in a typical market where P = $5, Pop =
1,000,000 persons, I = $35,000 and A = $10,000. Show the demand curve with quantity
expressed as a function of price, and price expressed as a function of quantity.
B.
Calculate the quantity demanded at prices of $5, $2.50, and $0.
C.
Calculate the prices necessary to sell 10,000, 25,000, and 50,000 units.
ANS:
A. The value for each respective non-price variable must be substituted into the demand
function in order to derive the relevant demand curve:
Q = 10,000 - 5,000P + 0.02Pop + 0.4I + 0.6A
= 10,000 - 5,000P + 0.02(1,000,000) + 0.4(35,000) + 0.6(10,000)
Q = 50,000 - 5,000P
Then, price as a function of quantity is:
Q = 50,000 - 5,000P
5,000P = 50,000 - Q
P = $10 - $0.0002Q
B.
At,
P = $5:
P = $2.50:
P = $0:
Q = 50,000 - 5,000(5) = 25,000
Q = 50,000 - 5,000(2.5) = 37,500
Q = 50,000 - 5,000(0) = 50,000
C.
At,
Q = 10,000:
Q = 25,000:
Q = 50,000:
P = $10 - $0.0002(10,000) = $8
P = $10 - $0.0002(25,000) = $5
P = $10 - $0.0002(50,000) = $0
32. Quantity Demanded. Gurgling Springs, Inc. is a bottler of natural spring water distributed throughout
the New England states. Five-gallon containers of GSI spring water are regionally promoted and
distributed through grocery chains. Operating experience during the past year suggests the following
demand function for its spring water:
Q = 250 - 100P + 0.0001Pop + 0.003I + 0.003A
where Q is quantity in thousands of five-gallon containers, P is price ($), Pop is population, I is
disposable income per capita ($), and A is advertising expenditures ($).
A. Determine the demand curve faced by CPI in a typical market where P = $4, Pop =
4,000,000 persons, I = $50,000 and A = $400,000. Show the demand curve with quantity
expressed as a function of price, and price expressed as a function of quantity.
B.
Calculate the quantity demanded at prices of $5, $4, and $3.
C.
Calculate the prices necessary to sell 1,250, 1,500, and 1,750 thousands of five gallon
containers.
ANS:
A. The value for each respective non-price variable must be substituted into the demand
function in order to derive the relevant demand curve:
Q = 250 - 100P + 0.0001Pop + 0.005I + 0.003A
= 250 - 100P + 0.0001(4,000,000) + 0.003(50,000) + 0.003(400,000)
Q = 2,000 - 100P
Then, price as a function of quantity is:
Q = 2,000 - 100P
100P = 2,000 - Q
P = $20 - $0.01Q
B.
C.
At,
P = $5:
P = $4:
P = $3:
Q = 2,000 - 100(5) = 1,500
Q = 2,000 - 100(4) = 1,600
Q = 2,000 - 100(3) = 1,700
At,
Q = 1,250:
Q = 1,500:
Q = 1,750:
P = $20 - $0.01(1,250) = $7.50
P = $20 - $0.01(1,500) = $5
P = $20 - $0.01(1,750) = $2.50
33. Demand Curve Analysis. Air California, Inc. is a regional airline providing service between Los
Angeles, California and Las Vegas, Nevada. An analysis of the monthly demand for service has
revealed the following demand relation:
Q = 45,000 - 250P - 300PC + 250BAI + 10,000S
Where Q is quantity measured by the number of passengers per month, P is the price ($), PC is a price
index for connecting flights (1982 = 100.), BAI is a business activity index (1982 = 100) and S, a
binary or dummy variable, equals 1 in summer months, zero otherwise.
A. Determine the demand curve facing the airline during the winter month of January if
P = $100, PC = 150, BAI = 200, and S = 0.
B.
Calculate the quantity demanded and total revenues during the summer month of July if all
price-related variables are as specified above.
ANS:
A. The demand curve facing Air California during January can be calculated by substituting the
appropriate value for each respective variable into the firm's demand function:
Q = 45,000 - 250P - 300PC + 250BAI + 10,000S
= 45,000 - 250P - 300(150) + 250(200) + 10,000(0)
Q = 50,000 - 250P
With price expressed as a function of quantity, the firm demand curve can be written:
Q = 50,000 - 250P
250P = 50,000 - Q
P = $200 - $0.004Q
B.
During the summer month of July, the variable S = 1. Therefore, assuming that price-related
values remain as before, the quantity demanded during July is:
Q = 45,000 - 250(100) - 300(150) + 250(200) + 10,000(1)
= 35,000 passengers
Total July revenue for the company is:
TR = PQ
= $100(35,000)
= $3,500,000
34.Supply Curve Analysis. A review of industry-wide data for the domestic wine manufacturing industry
suggests the following industry supply function:
Q = -7,000,000 + 400,000P - 2,000,000PL - 1,500,000PK + 1,000,000W
where Q is cases supplied per year, P is the wholesale price per case ($), PL is the average price paid
for unskilled labor ($), PK is the average price of capital (in percent), and W is weather measured by
the average seasonal rainfall in growing areas (in inches).
A. Determine the industry supply curve for a recent year when P = $80, PL = $10, PK = 12%,
and W = 25 inches of rainfall. Show the industry supply curve with quantity expressed as a
function of price and price expressed as a function of quantity.
B.
Calculate the quantity supplied by the industry at prices of $50, $75 and $100 per case.
C.
Calculate the prices necessary to generate a supply of 10 million, 25 million, and 50 million
cases.
ANS:
A. With quantity expressed as a function of price, the industry supply curve can be written:
Q = -7,000,000 + 400,000P - 2,000,000PL - 1,500,000PK + 1,000,000W
= -7,000,000 + 400,000P - 2,000,000(10) - 1,500,000(12) + 1,000,000(25)
= -20,000,000 + 400,000P
With price expressed as a function of quantity, the industry supply curve can be written:
Q = -20,000,000 + 400,000P
400,000P = 20,000,000 + Q
P = $50 + $0.0000025Q
B.
Industry supply at each respective price is:
P = $50:
P = $75:
P = $100:
C.
Q = -20,000,000 + 400,000(50) = 0
Q = -20,000,000 + 400,000(75) = 10,000,000
Q = -20,000,000 + 400,000(100) = 20,000,000
The price necessary to generate each level of supply is:
Q = 10,000,000:
Q = 25,000,000:
Q = 50,000,000:
P = $50 + $0.0000025(10,000,000) = $75
P = $50 + $0.0000025(25,000,000) = $112.50
P = $50 + $0.0000025(50,000,000) = $175
35. Supply Curve Analysis. Computers.com is a leading Internet retailer of high-performance desktop
computers. Based on an analysis of monthly cost and output data, the company has estimated the
following relation between its marginal cost of production and monthly output:
MC = $100 + $0.005Q
Omit A
B.
Express output as a function of marginal cost. Calculate the level of output at which MC =
$1,000, $1,500 and $2,000.
C.
Calculate the profit-maximizing level of output if prices are stable in the industry at $1,500
per unit and, therefore, P = MR = $1,500.
D. Again assuming prices are stable in the industry, derive the firm's supply curve. Express
price as a function of quantity and quantity as a function of price.
ANS:
B.
When output is expressed as a function of marginal cost:
MC = $100 + $0.005Q
0.005Q = -100 + MC
Q = -20,000 + 200MC
The level of output at each respective level of marginal cost is:
MC = $1,000:
MC = $1,500:
MC = $2,000:
C.
Q = -20,000 + 200(1,000) = 180,000
Q = -20,000 + 200(1,500) = 280,000
Q = -20,000 + 200(2,000) = 380,000
Note from part B that MC = $1,500 when Q = 280,000. Therefore, when MR = $1,500, Q =
280,000 will be the profit-maximizing level of output. More formally:
MR = MC
$1,500 = $100 + $0.005Q
0.005Q = 1,400
Q = 280,000
D. Because prices are stable in the industry, P = MR. This means that the company will supply
output at the point where:
MR = MC
and, therefore, that:
P = $100 + $0.005Q
This is the company supply curve, where price is expressed as a function of quantity. When
quantity is expressed as a function of price:
P = $100 + $0.005Q
0.005Q = -100 + P
Q = -20,000 + 200P
36. Market Equilibrium. Florida Orange Juice is a product of Florida's Orange Growers' Association.
Demand and supply of the product are both highly sensitive to changes in the weather. During hot
summer months, demand for orange juice and other beverages grows rapidly. On the other hand, hot
dry weather has an adverse effect on supply by reducing the size of the orange crop.
Demand and supply functions for Florida orange juice are as follows:
QD = 4,500,000 - 1,200,000P + 2,000,000PS + 1,500Y + 100,000T
(Demand)
QS = 8,000,000 + 2,400,000P - 500,000PL - 80,000PK - 120,000T
(Supply)
where P is the average price of Florida ($ per case), PS is the average retail price of canned soda ($ per
case), Y is income (GNP in $billions), T is the average daily high temperature (degrees), PL is the
average price of unskilled labor ($ per hour), and PK is the average cost of capital (in percent).
A. When quantity is expressed as a function of price, what are the Florida demand and supply
curves if P = $11, PS = $5, Y = $12,000 billion, T = 75 degrees, PL = $6, and PK = 12.5%.
B.
Calculate the surplus or shortage of Florida orange juice when P = $5, $10, and $15.
C.
Calculate the market equilibrium price-output combination.
ANS:
A. When quantity is expressed as a function of price, the demand curve for Florida Orange
Juice is:
QD = 4,500,000 - 1,200,000P + 2,000,000PS + 1,500Y + 100,000T
= 4,500,000 - 1,200,000P + 2,000,000(5) + 1,500(12,000) + 100,000(75)
QD = 40,000,000 - 1,200,000P
When quantity is expressed as a function of price, the supply curve for Florida Orange Juice
is:
QS = 8,000,000 + 2,400,000P - 500,000PL - 80,000PK - 120,000T
= 8,000,000 + 2,400,000P - 500,000(6) - 80,000(12.5) - 120,000(75)
QS = -5,000,000 + 2,400,000P
B.
The surplus or shortage can be calculated at each price level:
Price
(1)
$5:
Quantity
Supplied
(2)
QS = -5,000,000+2,400,000(5)
Quantity
Demanded
(3)
QD = 40,000,000-1,200,000(5)
Surplus (+) or
Shortage (-)
(4) = (2) - (3)
-27,000,000
$10:
$15:
C.
= 7,000,000
QS = -5,000,000+2,400,000(10)
= 19,000,000
QS = -5,000,000+2,400,000(15)
= 31,000,000
= 34,000,000
QD = 40,000,000-1,200,000(10)
= 28,000,000
QD = 40,000,000-1,200,000(15)
= 22,000,000
9,000,000
+9,000,000
The equilibrium price is found by setting the quantity demanded equal to the quantity
supplied and solving for P:
QD = QS
40,000,000 - 1,200,000P = -5,000,000 + 2,400,000P
3,600,000P = 45,000,000
P = $12.50
To solve for Q, set:
Demand:
QD = 40,000,000 - 1,200,000(12.50) = 25,000,000
Supply:
QS = -5,000,000 + 2,400,000(12.50) = 25,000,000
In equilibrium, QD = QS = 25,000,000.