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eco204_summer_2009_practice_problem_18

# eco204_summer_2009_practice_problem_18 - University of...

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University of Toronto, Department of Economics, ECO 204. Summer 2009. S. Ajaz Hussain ECO 204 Summer 2009 S. Ajaz Hussain Practice Problems 18 Please help improve the course by sending me an e mail 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 (2008 2009 Test Question) Spurred by the success of major sports leagues ‐‐ such as the NBA, NHL, NFL and UFC ‐‐ you start a new sports league BED: “ B attle of E conomists unto D eath”. This profit maximizing league organizes gladiator style fights between prominent economists. BED’s costs stem from printing tickets only. Suppose Q is measured in thousands. A typical match hall has a capacity of 2,000 or Q = 2. (a) In March 2009, Professor Pea sando will battle Lord Maynard Keynes. Suppose demand for March 2009 is estimated to be P = 25 5Q and MC is estimated to be MC = 5. How many tickets will you print and sell? At what price? (b) In April 2009, Professor Hussain will battle Eco man . Suppose demand for April 2009 is estimated to be P = 25 5Q and MC is estimated to be MC = 5. However, before any tickets are printed, the MC estimate changes to MC = 10. How many tickets should you print and sell? At what price? (c) In May 2009, Professor G Indart will battle Milton Friedman. Suppose demand for May 2009 is estimated to be P = 25 5Q and MC is estimated to be MC = 5. However, after all tickets are printed, the demand forecast is revised to P = 10 Q. How many tickets should you sell? What is the price of the tickets? 1

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University of Toronto, Department of Economics, ECO 204. Summer 2009. S. Ajaz Hussain Question 2 Ajax computers manufactures, distributes and retails computers for microeconomic computing. It estimates demand to be P = 100 25Q, where P is in \$ and Q is in ‘000s. The MC of manufacturing, distributing and retailing 1,000 machines is given by: MC = MC manufacture + MC distribution + MC retail = 25 + 5 + 20 (a) Calculate the revenue maximizing output and price. (b) Calculate the profit maximizing output and price. (c) Suppose after the machines have been produced, the MC of distribution increases from \$5 to \$10. How will this impact Ajax computers? Question 3 "Hee Haw" sells farm equipment and faces demand given by P = 3,000 Q, where P is the price in dollars and Q is output sold per month. In its East Coast factory, the firm's fixed costs are \$250,000 per month, and its marginal cost of manufacturing the equipment is \$1,000 per unit.
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eco204_summer_2009_practice_problem_18 - University of...

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