ECON 102 Tutorial: Week 6
Shane Murphy
www.lancaster.ac.uk/postgrad/murphys4
Cost and Production Questions
Key Concepts needed for these questions:
 Perfectly competitive firms are price takers, so for them MR = P.
 For all firms, profit is maximized at the quantity where MR = MC.
 When we want to understand how a firm makes entry/exit
decisions, we use the shutdown conditions – these are different
for the short run and the long-run:
 Short-run shutdown condition:
A firm should shut down when MR < AVC.
If the firm is perfectly competitive, this is when P < AVC.
This can also be written as when TR < VC.
 Long-run shutdown condition:
A firm should shut down when MR < ATC.
If the firm is perfectly competitive, this is when P < ATC.
This can also be written as when TR < TC or when profit < 0.
Question 1: Ch. 5 Problem 2
A price-taking firm makes air conditioners. The market price of one of
their new air conditioners is €120. Its total cost information is given in
the table below.
How many air conditioners should the firm
Air conditioners Total cost
per day
(€ per day)
1
100
2
150
3
220
4
310
5
405
6
510
7
650
8
800
produce per day if its goal is to maximise its
profit?
Question 1: Ch. 5 Problem 2
A price-taking firm makes air conditioners. The market price of one of
their new air conditioners is €120. Its total cost information is given in
the table below.
How many air conditioners should the firm produce per
day if its goal is to maximise its profit?
Air conditioners Total cost
per day
(€ per day)
1
100
2
150
3
220
4
310
5
405
6
7
8
510
650
800
Marginal Cost
(€ per day)
50
70
90
95
Profit is maximized where MR = MC.
Because this firm is a price taker, we know
that MR = P. So what we want to find is at
what quantity is MC = P?
The MC for each of the first 6 air
conditioners produced each day is less than
€120 (MC<P), but the marginal cost of the
7th air conditioner is €140, (MC>P).
105
140
150
So the company should produce 6 air
conditioners per day.
Question 2: Ch. 5 Problem 3(a)
The Paducah Slugger Company makes baseball bats out of lumber supplied
to it by Acme Sporting Goods, which pays Paducah €10 for each finished bat.
Paducah’s only factors of production are lathe operators and a small building
with a lathe. The number of bats per day it produces depends on the
number of employee-hours per day, as shown in the table below.
If the wage is €15 per hour and Paducah’s daily fixed cost for the lathe and
building is €60, what is the profit-maximising quantity of bats?
Number of Number of
Number of Number of
bats per day employeebats per day employeehours per day
hours per day
0
0
5
5
10
15
20
25
30
30
35
35
0
0
1
1
2
4
7
11
16
16
22
22
Total
Revenue
(€/day)
TR = P*Q
Total cost
Profit
Total labor
(€/day)
(€/day)
cost
(€/day)
VC = wage* TC = FC + VC π=TR – TC
# of employee hrs.
Question 2: Ch. 5 Problem 3(a)
The Paducah Slugger Company makes baseball bats out of lumber supplied
to it by Acme Sporting Goods, which pays Paducah €10 for each finished bat.
Paducah’s only factors of production are lathe operators and a small building
with a lathe. The number of bats per day it produces depends on the
number of employee-hours per day, as shown in the table below.
If the wage is €15 per hour and Paducah’s daily fixed cost for the lathe and
building is €60, what is the profit-maximising quantity of bats?
As indicated by the
entries in the last
column of the table
to the right, the
profit-maximizing
quantity of bats for
Paducah is 20/day,
which yields daily
profit of €35.
Number of Number of
Total
bats per day employee- Revenue
hours per day (€/day)
0
5
10
15
20
25
30
35
0
1
2
4
7
11
16
22
0
50
100
150
200
250
300
350
Total labor
cost
(€/day)
Total
cost
(€/day)
Profit
(€/day
)
0
15
30
60
105
165
240
330
60
75
90
120
165
225
300
390
-60
-25
10
30
35
25
0
-40
Question 2: Ch. 5 Problem 3(b)
What would be the profit-maximising number of bats if the firm’s
fixed cost were not €60 per day but only €30?
Same quantity as in part a, but now profit is €65, or €30 more
than before.
Q
Number of
Total
(bats/day) employee- Revenue
hours per (€/day)
day
0
0
0
1
5
50
2
10
100
4
15
150
7
20
200
11
25
250
16
30
300
22
35
350
Total labor Total
cost
cost
(€/day) (€/day)
0
15
30
60
105
165
240
330
30
45
60
90
135
195
270
360
Profit
(€/day)
-30
5
40
60
65
55
30
-10
Question 3: Ch. 5 Problem 7
For the pizza seller whose marginal, average variable and average
total cost curves are shown in the diagram below, what is the profitmaximising level of output and how much profit will this producer
earn if the price of pizza is €2.50 per slice?
Question 3: Ch. 5 Problem 7
For the pizza seller whose marginal, average variable and average
total cost curves are shown in the diagram below, what is the profitmaximising level of output and how much profit will this producer
earn if the price of pizza is €2.50 per slice?
To answer this question, we use the same rule as we
did in Ch. 5 Problem 2: For a perfectly competitive
firm, profit is maximized where MC = P.
This firm will sell 570 slices per day, the quantity for
which P = MC.
Its profit will be:
π = (P-ATC)*Q
π = (€2.50/slice - €1.40/slice)*(570 slices/day)
π = €627/day.
Question 4: Ch. 5 Problem 8
For the pizza seller whose marginal, average variable and average total cost
curves are shown in the diagram below, what is the profit-maximising level
of output and how much profit will this producer earn if the price of pizza is
€0.80 per slice?
Question 4: Ch. 5 Problem 8
For the pizza seller whose marginal, average variable and average total cost
curves are shown in the diagram below, what is the profit-maximising level
of output and how much profit will this producer earn if the price of pizza is
€0.80 per slice?
This firm will sell 360 slices per day, the quantity
for which P = MC.
Its profit will be:
π = (P-ATC)*Q
π = (€0.80/slice - €1.03/slice)*(360 slices/day)
π = -€82.80/day.
Question 5: Ch. 5 Problem 9
For the pizza seller whose marginal, average variable and average total cost
curves are shown in the diagram below, what is the profit-maximising level
of output and how much profit will this producer earn if the price of pizza is
€0.50 per slice?
Question 5: Ch. 5 Problem 9
For the pizza seller whose marginal, average variable and average total cost
curves are shown in the diagram below, what is the profit-maximising level
of output and how much profit will this producer earn if the price of pizza is
€0.50 per slice?
Because price is less than the minimum value of
AVC, this producer will shut down in the short run.
He will experience a loss equal to his fixed cost.
Fixed cost is the difference between total cost and
total variable cost.
For Q = 260 slices/day, we know both ATC and AVC, so for that output level
we can calculate:
TC = ATC*Q = (260 slices/day)*(€1.18/slice) = €306.80/day
VC = AVC*Q = (260 slices/day)*(€0.68/slice) = €176.80/day.
So fixed cost, FC = TC - VC = €306.80/day - €176.80/day = €130/day.
This producer’s profit is thus - €130/day.
Question 6
The table below gives the relationship between the number of workers in a firm,
and the total output that can be produced per day. Workers are paid $20 per day.
a) Fill in the rest of the table, expressing each of the costs in the cost per day for the
firm. (Note: AFC is average fixed cost, AVC is average variable cost, ATC is average
total cost, and MC is marginal cost)
Workers
Q
0
0
1
25
2
63
3
94
4
119
5
140
6
158
Fixed Variable Total
AFC
Costs Costs
Cost
10
-
AVC
ATC
MC
-
-
-
Does this production technology exhibit diminishing marginal products? Explain.
Question 6
The table below gives the relationship between the number of workers in a firm,
and the total output that can be produced per day. Workers are paid $20 per day.
a) Fill in the rest of the table, expressing each of the costs in the cost per day for the
firm. (Note: AFC is average fixed cost, AVC is average variable cost, ATC is average
total cost, and MC is marginal cost)
Workers
Q
Fixed Variable Total
AFC
Costs Costs
Cost
0
0
10
0
10
1
25
10
20
30
2
63
10
40
50
3
94
10
60
70
4
119
10
80
90
5
140
10
100
110
6
158
10
120
130
-
AVC
ATC
MC
-
-
-
Does this production technology exhibit diminishing marginal products? Explain.
Question 6
The table below gives the relationship between the number of workers in a firm,
and the total output that can be produced per day. Workers are paid $20 per day.
a) Fill in the rest of the table, expressing each of the costs in the cost per day for the
firm. (Note: AFC is average fixed cost, AVC is average variable cost, ATC is average
total cost, and MC is marginal cost)
Workers
Q
Fixed Variable Total
AFC
Costs Costs
Cost
0
0
10
0
10
1
25
10
20
2
63
10
3
94
4
AVC
ATC
MC
-
-
-
-
30
10
20
30
20
40
50
5
20
25
20
10
60
70
3.33
20
23.33
20
119
10
80
90
2.25
20
22.5
20
5
140
10
100
110
2
20
22
20
6
158
10
120
130
1.66
20
21.66
20
Does this production technology exhibit diminishing marginal products? Explain.
Perfect Competition Questions
Question 1: Ch. 7 Problem 3(a)
John Jones owns and manages a café whose annual revenue is
€5,000. The annual expenses are as in the table below.
Expense
Labour
Food and drink
Electricity
Vehicle lease
Rent
Interest on loan for equipment
Calculate John’s annual accounting profit.
€
2,000
500
100
150
500
1,000
John's accounting profit is his
revenue minus his explicit costs, or
€750 per year.
Question 1: Ch. 7 Problem 3(b)
John Jones owns and manages a café whose annual revenue is
€5,000. The annual expenses are as in the table below.
Expense
Labour
Food and drink
Electricity
Vehicle lease
Rent
Interest on loan for equipment
€
2,000
500
100
150
500
1,000
John could earn €1,000 per year as a
recycler of aluminium cans. However,
he prefers to run the café. In fact, he
would be willing to pay up to €275 per
year to run the café rather than to
recycle cans. Is the café making an
economic profit? Should John stay in
the business? Explain.
Yes: his opportunity cost of his labour to run the café is €1,000 €275, or €725 per year. Adding this implicit cost to the explicit costs
implies that the café is making an economic profit of €25 per year.
And since €25>0, John should stay in business.
Question 1: Ch. 7 Problem 3(c)
John Jones owns and manages a café whose annual revenue is
€5,000. The annual expenses are as in the table below.
Expense
Labour
Food and drink
Electricity
Vehicle lease
Rent
Interest on loan for equipment
€
2,000
500
100
150
500
1,000
Suppose the café’s revenues and expenses
remain the same, but recyclers’ earnings
rise to €1,100 per year. Is the café still
making an economic profit? Explain.
John's opportunity cost rises by €100, to €825 per year. The café is
thus now making an economic loss of €75 per year.
Question 1: Ch. 7 Problem 3(d)
John Jones owns and manages a café whose annual revenue is
€5,000. The annual expenses are as in the table below.
Expense
Labour
Food and drink
Electricity
Vehicle lease
Rent
Interest on loan for equipment
€
2,000
500
100
150
500
1,000
Suppose John had not had to get a
€10,000 loan at an annual interest rate of
10 per cent to buy equipment, but instead
had invested €10,000 of his own money in
equipment. How would your answers to
parts (a) and (b) change?
The accounting profit would now be €1,750/yr. The answer to part b. would
not change. If John had €10,000 of his own to invest in the café, he would
forgo €1,000/yr in interest by not putting the money in a savings account.
That amount is an opportunity cost that must be included when calculating
economic profit.
Question 1: Ch. 7 Problem 3(e)
John Jones owns and manages a café whose annual revenue is
€5,000. The annual expenses are as in the table below.
Expense
Labour
Food and drink
Electricity
Vehicle lease
Rent
Interest on loan for equipment
€
2,000
500
100
150
500
1,000
If John can earn €1,000 a year as a recycler,
and he likes recycling just as well as running
the café, how much additional revenue
would the café have to collect each year to
earn a normal profit?
To earn a normal profit, the café would have to cover all its implicit and
explicit costs. The opportunity cost of John's time is €1,000/yr, whereas the
café's accounting profit is only €750/yr. Thus, the café would have to earn
additional revenues of €250/yr to make a normal profit.
Perfect Competition Q2(a)
Dave owns a firm that produces and sells gizmos in a perfectly competitive
market.
His fixed costs are $200 per day, and his variable costs are VC(Q) = 2Q2.
(given this variable cost curve, Dave’s marginal cost curve is: MC(Q) = 4Q.).
Assume that each firm in this market has the same costs as Dave, and the
costs I’ve described include both implicit and explicit costs.
If the current market price of gizmos is $60, how many gizmos does Dave
produce to maximize his profit? How much economic profit does Dave earn?
Perfect Competition Q2(a)
Dave owns a firm that produces and sells gizmos in a perfectly competitive market.
His fixed costs are $200 per day, and his variable costs are VC(Q) = 2Q2. (given this
variable cost curve, Dave’s marginal cost curve is: MC(Q) = 4Q.). Assume that each
firm in this market has the same costs as Dave, and the costs I’ve described include
both implicit and explicit costs.
If the current market price of gizmos is $60, how many gizmos does Dave produce
to maximize his profit? How much economic profit does Dave earn?
We know that Dave’s marginal cost curve is MC(Q) = 4Q.
Because Dave’s firm is in a perfectly competitive market, we know that it
maximizes profit when MC(Q) = P.
We can re-write this as:
4Q = 60
And solve for Q:
Q = 15
To find Dave’s economic profit, we use the equation: π = TR – TC, where TR = P*Q
and TC = FC + VC. When Dave produces Q = 15 units, his total variable costs are:
VC(Q) = 2Q2 = 2(15)2 = 450 and his fixed costs are FC = 200. We can plug these in
to the equation for economic profit: π = TR – TC
π = P*Q – FC - VC
π = 15*60 – 200 - 450
π = 900 – 650
π = 250
Perfect Competition Q2(b)
Is the market price of $60 sustainable in the long run?
Explain why or why not.
No, this market price is not sustainable in the long run.
Since firms in the industry are earning positive economic
profit, new entrants will enter the industry; this will shift
the supply curve to the right and drive the price down.
Perfect Competition Q2(c)
Dave owns a firm that produces and sells gizmos in a
perfectly competitive market. His fixed costs are $200 per
day, and his variable costs are VC(Q) = 2Q2. (given this
variable cost curve, Dave’s marginal cost curve is: MC(Q) =
4Q.). Assume that each firm in this market has the same
costs as Dave, and the costs I’ve described include both
implicit and explicit costs.
Write down the expression for Dave’s total costs
The equation for Total Cost is: TC(Q) = FC + VC(Q)
So Dave’s Total Cost is:
TC(Q) = 200 + 2Q2
Perfect Competition Q2(d)
Dave owns a firm that produces and sells gizmos in a perfectly
competitive market. His fixed costs are $200 per day, and his variable
costs are VC(Q) = 2Q2. (given this variable cost curve, Dave’s marginal
cost curve is: MC(Q) = 4Q.). Assume that each firm in this market has
the same costs as Dave, and the costs I’ve described include both
implicit and explicit costs.
In part (c), we found TC(Q) = 200 + 2Q2
Write down the expression for Dave’s average total cost
Perfect Competition Q2(d)
Dave owns a firm that produces and sells gizmos in a
perfectly competitive market. His fixed costs are $200 per
day, and his variable costs are VC(Q) = 2Q2. (given this
variable cost curve, Dave’s marginal cost curve is: MC(Q) =
4Q.). Assume that each firm in this market has the same
costs as Dave, and the costs I’ve described include both
implicit and explicit costs.
Write down the expression for Dave’s average total cost
The equation for Average Total Cost is:
ATC(Q) = TC(Q)/Q
Plug in Dave’s total cost from part (c): ATC(Q) = (200 + 2Q2)/Q
So Dave’s Average Total Cost is:
ATC(Q) = 200/Q + 2Q
Perfect Competition Q2(e)
Solve for the long-run equilibrium price.
We know that we have a perfectly competitive market. FC = $200/day, variable
costs are VC(Q) = 2Q2 and Dave’s marginal cost curve is: MC(Q) = 4Q.
In parts (c) and (d), we found TC = 200 + 2Q2 and ATC = 200/Q + 2Q.
Perfect Competition Q2(e)
Solve for the long-run equilibrium price.
The long-run equilibrium price is the price where firms earn zero economic
profit. This happens at the minimum of the ATC cost curve. To find the
minimum of the ATC curve, recall that when MC = ATC, ATC is at its minimum.
So, we can set MC(Q) = ATC(Q).
We know that MC(Q) = 4Q, that was given in the problem.
In part (d) we found ATC(Q) = 200/Q + 2Q.
So let’s set
MC(Q) = ATC(Q)
Plugging in, we get:
4Q = 200/Q + 2Q
2Q = 200/Q
2Q2 = 200
Q2 = 100
Q = 10
So, ATC(Q) reaches its minimum when Q = 10. To find the value of ATC, we
can plug in Q = 10 into ATC(Q) = 200/Q + 2Q.
ATC(Q) = 200/10 + 2(10) = 40
Thus, the long-run equilibrium price is 40.
Exam on Friday
 50 minutes; 24 Questions: 16 from Rietzke, 8 from Peel.
 What to Revise: Practice MC Questions, Tutorial worksheets,
Peel’s Maths Questions, Lecture Notes, and textbook
chapters.
 Check your timetable for Exam time and location.
 Bring a pencil and eraser.

No calculators, cell phones, or electronic translators will be allowed.
(Paper versions of English-to-Other Language dictionaries will be
allowed and checked by invigilators).
 Also, for next week, there will be a tutorial worksheet on
Moodle.
 Good luck and see you next week!
If an indifference curve is smooth
and convex to the origin, then:
a) The two goods are said to be convex
combinations of each other
b) There is a diminishing marginal rate of
substitution
c) The indifference curve is said to be normal
d) None of the above
Q5
From Tutorial 4 worksheet: Question 1
Assuming an indifference curve which is convex to the
origin, what can this tell us about a consumer’s marginal
rate of substitution between coffee and muffins?
A profit maximizing firm would like
to produce at least the number of
units which minimises short run:
a)
b)
c)
d)
Average total cost
Average fixed cost
Average variable cost
Marginal cost
Note: A profit-maximizing firm produces at the efficient
scale: the quantity of output that minimizes ATC. We
can find this quantity where MC = ATC.
Q18
Long Run Exit Condition
• In the long run, firms will continue if there is a
profit, so the exit condition is:
Profit < 0
TR – TC < 0
TR < TC
AR < ATC
P < ATC
Short Run Exit Condition
• In the short run, fixed costs are sunk costs and firms
will run if there is greater profit from continuing than
from exiting. The firm pays the fixed cost whether it
continues or exits the market, so the exit condition is:
TR – (VC+FC) < -FC
TR-VC-FC < -FC
TR – VC < 0
TR < VC
AR < AVC
P < AVC
• So a firm’s short run exit
condition is P < AVC
P, C
• Since a firms supply
curve is equal to its
Marginal Cost Curve,
and since MC = AVC at
the minimum of AVC, if
0
Q is less than the
quantity that minimizes
AVC, P will be less than
AVC for that Q.
MC=S
AVC
q
Suppose demand curve written
D=120-2P, and the supply curve is
S=20+2P. What is the equilibrium
price and quantity?
a)
b)
c)
d)
P*=70 and Q*=25
P*=25 and Q*=70
P*=50 and Q*=35
P*=35 and Q*=50
Note: Set the two equations equal to each other and
solve for P. Plug that value back in to either equation to
solve for Q.
Q22
Suppose a product has a demand curve written D = 120 – 2P, and
the supply curve is S = 20 + 2P. What is the equilibrium price and
quantity.
Equilibrium occurs where D = S, i.e.
120 – 2P = 20 + 2P
100 = 4P
P = 25
Then, substitute P = 25 into either the D or S equation:
D = 120 – 2 * 25 = 70
or
S = 20 + 2*25 = 70
a.
b.
c.
d.
P* = 70 and Q* = 25
P* = 25 and Q* = 70
P* = 50 and Q* = 35
Q* = 35 and P* = 50
Suppose demand is given by D=120-2P
and supply is originally S=20+2P but
the government imposes a tax of 10
on this good. What happens to the
equilibrium price?
a)
b)
c)
d)
Rises by 10
Rises by 8
Rises by 5
Rises, but it’s not possible to say by how much
Q23
We have D=120-2P and S=20+2P
Then a tax of 10 is imposed on this good.
What happens to the equilibrium price?
There are two ways we can solve this.
1. By assuming that the tax is placed on
consumers, thus affecting the Demand curve
(shifting it to the left)
2. By assuming that the tax is placed on
suppliers/sellers, thus affecting the Supply curve
(shifting it to the left).
I’ll work through both methods in the following
slides.
We have D=120-2P and S=20+2P
Then a tax of 10 is imposed on this good.
By assuming that the tax is placed on consumers, thus affecting the Demand
curve (shifting it to the left)
The new demand curve can be written as:
D = 120 – 2(P+T), where T = 10.
D = 120 – 2P -20
D = 100 – 2P
We then need to find where this new
demand curve crosses the supply curve.
D=S
100 – 2P = 20 + 2P
80 = 4P
P = 20
This gives us the new market equilibrium price. It is the price that the
consumers will give to the suppliers for each good purchased.
On top of this, the consumers must pay the tax of 10, so the total cost to the
consumers will be: P + T = 30.
So the actual price consumers pay will rise by $5 because of this tax.
We have D=120-2P and S=20+2P
Then a tax of 10 is imposed on this good.
By assuming that the tax is placed on suppliers, thus affecting the Supply curve
(shifting it to the left)
The new Supply curve can be written as:
S = 20 + 2(P-T), where T = 10.
S = 200 + 2P -20
S = 2P
We then need to find where this new supply
curve intersects with our original demand curve.
D=S
120 – 2P = 2P
120 = 4P
P = 30
This gives us the new market equilibrium price. It is the price that the
consumers will give to the suppliers for each good purchased. From this, the
sellers have to pay the government a tax of 10, so the total cost to the
consumers will be: P = 30 and the total amount that sellers receive will be 20.
So the actual price consumers pay will rise by $5 because of this tax.
Suppose D=10/P, work out the
price elasticity at P=10 and P = 20
and P=30.
a) Not possible to say without knowing what the
corresponding level of demand is.
b) -1, -2, -3
c) -3, -2, -1
d) -1, -1, -1
Q25
Suppose D=10/P, work out the price elasticity at P=10
and P = 20 and P=30.
Because we are asked to find the price elasticity at a specific
point, we will use the point elasticity method. The equation for
𝑑𝐷
𝑃
𝐷
point elasticity is: 𝜀 =
∗
Step 1: we can solve
𝑑𝑝
𝑄
𝑑𝐷
for :
𝑑𝑝
D = 10/P = 10𝑃−1
𝑑𝐷
= −1 10 𝑃 −1−1
𝑑𝑝
𝑑𝐷
= − 10 𝑃 −2
𝑑𝑝
𝑑𝐷
10
=− 2
𝑑𝑝
𝑃
Now that we have dD/dp, we can plug it into our point
elasticity equation for any value of P and the corresponding Q.
Q25
We have solved for
𝑑𝐷
𝑑𝑝
=
10
− 2.
𝑃
Step 2: we need to solve for Q when P = 10 by plugging into
the demand equation that was given.
D = 10/P
D = 10/10
(remember, in equilibrium D = S= Q, so when P = 10, Q = 1))
D=1
Step 3: we can plug all of these parts into the elasticity
𝑑𝐷
𝑃
𝐷
equation : 𝜀 =
∗
𝑑𝑝
𝑄
10 10
𝜀 𝐷 =− 2 ∗
𝑃
1
10
10
𝐷
𝜀 =−
∗
2
(10)
1
10
10
𝐷
𝜀 =−
∗ =
100
1
100
−
100
= -1
To find elasticity when P = 20 and P = 30, repeat steps 2&3.
Q25
Suppose supply is perfectly elastic at a
price of £10 and the government imposes
a tax of £2 on a good whose demand curve
is given by D=100-5P. Compute the
amount of tax revenue raised, the
deadweight loss of the tax, and the change
in consumer surplus.
a)
b)
c)
d)
10, 80, 90
80, 10, 90
10, 90, 100
10, 75, 85
Q26
Suppose supply is perfectly elastic at a price of £10 (i.e. the S
curve is horizontal) and the government imposes a tax of £2 (so
the S curve shifts upward by 5) on a good whose demand curve is
given by D = 100 – 5P. Compute the amount of tax revenue raised,
the deadweight loss of the tax, and the change in consumer
surplus.
P = 20 – 1/5 D
20
P
To find horizontal intercept:
0 = 20 – 1/5 D
1/5 D = 20
D = 100
D
12
10
S’
S
0
D
40 50
100
If P = 10,
10 = 20 – 1/5 D
D = 50
If P = 12,
12 = 60 – ½ D
D = 40
Continued:
Compute the amount of tax revenue raised, the deadweight loss
of the tax, and the change in consumer surplus.
Tax Revenue:
£2 * 40 = 80
20
DWL:
½ * 10 * 2 = 10
P
D
12
10
S’
S
Tax
0
40 50
D
100
CS = ½ * 50 * 10 = 250
CS’ = ½ * 40 * 8 = 160
CS – CS’ = 90
a)
b)
c)
d)
10, 80, 90
80, 10, 90
10, 90, 100
10, 75, 85
Suppose the TC curve for a firm where
TC=12+4Q+Q2 and MR=8. What level of
output will the firm produce in order to
maximise profit (ie where MC=MR)?
a)
b)
c)
d)
0
2
4
8
Q30
Suppose the TC curve for a firm where TC = 12 + 4Q + Q^2 and
MR = 8. What level of output will the firm produce in order to
maximise profit (i.e. where MC = MR)?
Remember the rule
slope of Y = b.Xc is c.b.Xc-1
a.
b.
c.
d.
0
2
4
8
TC  12  4Q  2Q 2
MC  4  2Q
MR  8
MC  MR :
2Q  4  8
2Q  4
Q2