Answer to Question #63257 in Microeconomics for Ahmed
i. Total change in demand for X
ii. Substitution effect
iii. Income effect
Q4Under a perfect competition the price as sh. 6 per unit has been determined. An individual firm has a total cost function given by C=10+15Q - 5 + . Find:
i. Revenue function (2 marks)
ii. The quantity produced at which profit will be maximum profit (6 marks)
iii. Maximum profit (2 marks)
∆ xm = x1(p',m) − x1(p'm')
Q4. P = 6 per unit, C = 10 + 15Q - 5Q^2 + Q^3/3.
i. Revenue function TR = P*Q.
In equilibrium P = MR = MC = C' = 15 - 10Q + Q^2,
TR = P*Q = (15 - 10Q + Q^2)*Q = 15Q - 10Q^2 + Q^3
ii. The quantity produced at which profit will be maximum profit is when MR = MC = P = 6, so:
15 - 10Q + Q^2 = 6,
Q^2 - 10Q + 9 = 0,
Q1 = 9, Q2 = 1 - is not optimal.
iii. Maximum profit is:
TP(max) = TR - TC = 6*9 - (10 + 15*9 - 5*9^2 + 9^3/3) = 71.
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Q2. A policy analyst has shown that the price elasticity of demand for salt is 0.85 while that of visitation to the national parks is 2.1.
i) Argue whether this scenario is feasible
ii) By what percentage the demand for these two commodities change, if as a result of a tax policy the prices are increased by 8 percent? (3mks)