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Unformatted text preview: University of Toronto, Department of Economics, ECO 204. Summer 2009. S. Ajaz Hussain ECO 204 Summer 2009 S. Ajaz Hussain Practice Problems 16 Please help improve the course by sending me an email about typos or suggestions for improvements Note: Please don't memorize these solutions in the expectation that similar questions will appear on tests and exams. Instead, try to understand how to derive the answer as you'll be tested on techniques and applications, not on memorization. Moreover, tests and exams will cover topics and techniques that may not be in these practice problems. You are urged to go over all lectures, class notes and HWs thoroughly. Question 1 Ajax Microchip Corporation (AMC) manufactures and sells microchips. In July 2009, it produced and sold 1,000 microchips at a price of $150/microchip. AMC's cost function is estimated to be: C = 100 + 38Q Where Q is in `000s of units (i.e. 1,000 units would be Q = 1). Assume AMC has the capacity to produce 10,000 microchips a month. (a) For July 2009, management estimates that if price per microchip was dropped from $150 to $140, sales would increase by 50% while if price per microchip was raised from $150 to $160, sales would decrease by 50%. Based on this information, can you "estimate" AMC's demand curve? Express the demand curve with Q in `000s of units. (b) If AMC wanted to maximize revenues, calculate the optimal price and quantity. (c) Calculate the price elasticity for your answer in part (b). Obviously you should get E = 1. (d) Calculate the average variable cost and interpret it. (d) Calculate the marginal cost and interpret it. 1 University of Toronto, Department of Economics, ECO 204. Summer 2009. S. Ajaz Hussain (e) If AMC wanted to maximize profits, calculate the optimal price and quantity. (f) Calculate the price elasticity for your answer in part (e). Obviously you should get E > 1. (g) Suppose AMC's CEO Ajax uses company funds to buy himself a nice hair piece. This hair piece, while very nice, raises AMC's TFC to $1,000,000,000. Should AMC raise prices to "cover" the higher fixed cost? (h) Now suppose AMC's capacity is 3,000 units (i.e. Q = 3). Solve for the profit maximizing price and output. (i) Given your answer in part (h) what is the value (before cost of capacity) of adding another unit (microchips, not Q = 1 which is 1,000 units) of additional capacity? (j) What is the optimal capacity of AMC? 2 ...
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This note was uploaded on 05/02/2011 for the course ECO 204 taught by Professor Hussein during the Fall '08 term at University of Toronto.
 Fall '08
 HUSSEIN
 Economics, Microeconomics

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