Question

Joe owns a restaurant. Many of the restaurants that he competes with recently closed, shifting his perceived demand curve. The following 2 tables show his old and new perceived demand curves.

Original Demand Curve

Price Quantity TC

$20 0 $1,000

$18 100 $1,100

$16 200 $2,000

$14 300 $4,000

$12 400 $7,000

New Demand Curve

Price Quantity TC

$25 0 $1,000

$23 100 $1,100

$21 200 $2,000

$19 300 $4,000

$17 400 $7,000

Assume that Joe can only choose from the quantities of output given in the table.

By how much does the price that he charges change after the restaurants leave the market?

a) increase by 3

b) increase by 4

c) decrease by 4

d) decrease by 3

If you can please show me how to get the right answer, please. I keep getting the answer 5 which is not an option.

Answer 1

Ans. Increase by $5

I think the options you have should have increase by $5 as an option as the method used below is correct and I’m also getting the same answer.

Old demand curve,

Quantity(Q) Price(P) TC TR (P*Q) Profit(TR-TC)

0 20 1000 0 -1000

100 18 1100 1800 700

200 16 2000 3200 1200

300 14 4000 4200 200

400 12 7000 4800 -2200

Thus, profit is maximised at quantity 200 units and peice $16 and the profit is $1200.

New Demand curve

Quantity(Q) Price(P) TC TR (P*Q) Profit(TR-TC)

0 25 1000 0 -1000

100 23 1100 2300 1200

200 21 2000 4200 2200

300 19 4000 5700 1700

400 17 7000 6800 -2200

Thus, the new price is $21 where profit is $2200.

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