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Equilibrium Price and Quantity, and Elasticity of Demand

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1. Use the cost table below to answer the following questions. (Note: You cannot match up price exactly with the appropriate item. Choose the one that comes most nearly.)

Total Total Average

Fixed Variable Total Total Marginal
Quantity Cost Cost Cost Cost Cost
0 $40 0 40 X X
1 40 55 95 95 55
2 40 75 115 57.50 20
3 40 90 130 43.33 15
4 40 110 150 37.50 20
5 40 135 175 35 25
6 40 170 210 35 35
7 40 220 260 37.14 50
8 40 290 330 41.25 70

a) At a product price of $72, how many units will this firm produce in the short-run?
b) At a product price of $52, how many units will this firm produce in the short-run?
c) At a product price of $28, how many units will this firm produce in the short-run?

2. If demand and supply are given by the following:

DEMAND FOR WHEAT

PRICE OF WHEAT QUANTITY DEMANDED (BUSHELS)
$ 5 18
4 20
3 24
2 30
1 40

SUPPLY OF WHEAT

PRICE OF WHEAT QUANTITY SUPPLIED (BUSHELS)
$ 5 36
4 32
3 24
2 14
1 0

a) What will be the equilibrium price?
b) What will be the equilibrium quantity?

3. The following is a straight-line demand curve:

Price Quantity Demanded
$12 1
10 2
8 3
6 4
4 5

a) Calculate the elasticity of demand in going from 2 unit to 3 units.
b) Is the demand elastic or inelastic in this range?

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Solution Summary

The solution to the first problem describes the methodology to find out the output quantities at different market prices. The solution to the second problem calculates equilibrium price and quantity from the given demand and supply schedules. The solution to the third problem depicts the steps to calculate price elasticity of demand in the given price range.

Solution Preview

Please refer to the attached file for complete solutions. Expressions typed with the help of equation writer may not print here.

1. a) At a product price of $72, how many units will this firm produce in the short-run?

Let us assume perfectly competitive environment,

A perfectly competitive firm will increase its output till marginal revenue (price) is more than marginal cost or is just equal to marginal cost (price) at that level of output for optimal production.

We can see that Marginal cost for producing 8th ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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