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HW4 Additional Problem Solution

HW4 Additional Problem Solution - Answer E P D = P P MAX-P...

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Homework 4 Additional Problem ECON 010, Fall 2011 Question 1 Consider a market for milk. The demand and supply for milk are as follows: Demand : P = 100 - 2 Q D Supply : P = 20 a) Find the equilibrium quantity, price and revenue generated in this market. Answer: We derive the equilibrium quantity by setting supply and demand equal to each other: 100 - 2 Q = 20 Q * = 40 P * = 20 Given the equilibrium price and quantity, we can derive the total revenue generated: TR = P × Q = 800 b) Calculate the price elasticity of demand at the equilibrium.
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Unformatted text preview: Answer: E P D = P P MAX-P = (20) / (100-20) =-1 / 4 c) Suppose that the farmers decide to withhold some of their produced milk in an effort to raise the price in the market. Find the amount of quantity they will need to withhold such that their total revenues are maximized. 1 Answer: Total revenue will be maximized at a point where ± ± E P D ± ± = 1 . This will occur at a point where P = 50 and Q = 25 . Therefore, the farmers will have to withhold 15 gallons of milk. 2...
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