Question

1. Suppose there is a perfectly competitive industry in Dubai, where all the firms are identical. All the firms in the industry sell their products at 20 AED. The market demand for this product is given by the equation: (Total marks = 5)

Q = 25 – 0.25P

Furthermore, suppose that a representative firm’s total cost is given by the equation:

TC = 50 +4Q + 2Q²

1. What is the inverse demand function for this market?

2. Calculate the MC function?

3. Calculate the MR function?

4. Calculate the profit maximizing level of output for the firm?

5. Calculate the size of the profit? Show it graphically

6. Is this industry SR or LR?

2. Suppose the demand function for a monopolist’s product is given by:

Q = 80 – 5P                                       (Total marks = 5)

and the cost function is given by

C = 30 + 2Q + 0.5Q²

1. What is the inverse demand function for this monopoly?

2. Calculate the MC.

3. Calculate the MR.

4. Determine the profit-maximizing price.

5. Determine the profit-maximizing quantity.

6. How much profit will the monopolist make?

7. What is the value of the consumer surplus under monopoly?

8. What is the value of the deadweight loss?

3. Suppose the inverse demand for a monopolist’s product is given by

P (Q) = 20 – 3Q                                              (Total marks = 5)

The monopolist can produce output in two plants. The marginal cost of producing in plant 1 is

MC₁ = 20 + 2Q₁

While the marginal cost of producing in plant 2 is

MC₂ = 10 + 5Q₂

1. How much output should be produced in each plant?

2. What price should be charged?

Answer 1