MGEC Group assignment 1.docx - Homework 1 submission Group...

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Homework 1 submissionGroup details:Section: BStudygroup: 6Members:Problem 1:A.Economic cost = Rs.25,000oEconomic cost = Explicit cost + Implicit costoExplicit cost = Rs.25,000, which is the total cash outlay to purchase 1 laser printer from thedistributor.oImplicit cost is 0, because there is no mention of any alternative use of Rs.25,000 by theretailer.B.Economic cost = Rs.10,000oExplicit cost = 0, because the total cash outlay to purchase 1 laser printer from the distributoris now a sunk cost.oImplicit cost = Rs.10,000, which is the alternative use of the printer by selling the printer backto the distributor. (0.4*25,000 = 10,000)C.No, the owner’s argument is not correct in the economic sense because the cost price (25,000)of the printer is sunk cost and shouldn’t impact any future decisions. However, the owner’sargument is correct only in accounting sense (Loss = Retail price – cost price).Problem2:A.0500010000150002000025000300003500040000450000200040006000800010000120001000005000Demand curveQuantityPriceB.Ans: Q = 20,000P = 5,000Solution:Elasticity = (dQ/dP)*(P/Q)
For unit elasticity, (dQ/dP)*(P/Q) = -1 (Equation 1)We know that, QD = 40,000 - 4P (Equation 2)Differentiating w.r.t. P we get,dQ/dP = -4 (Equation 3)Combining Equation 1 & 3, we get:-4*(P/Q) = -14P = Q (Equation 4)Substituting Equation 4 in Equation 2 we get;QD = 40,000 – QDQD = 20,000 (Equation 5)

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Term
Fall
Professor
Pankaj Tandon

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