Managerial Economics
Major Assignment
1) a) Demand Function: Quantity Demanded (Qd) = a + b* Price (P) Supply Function: Quantity Supplied (Qs) = a + b* Price (P)
Where: a = constant b = the change in quantity as a result to the change in price.
Demand Function: Quantity Demanded (Qd) = a + b* Price (P) b = (420 – 350) / (20 – 25) = 70 / -5 = -14
Using: P = 25, Qd = 350
350 = a – 14 * (25)
350 = a – 350
Therefore a = 700 and the demand function would be: Qd = 700 – 14 * P
Supply Function: Quantity Supplied (Qs) = a + b* Price (P) b = (350 – 420) / (20 – 25)
= -70 / -5 = 14
Using: P = 25, Qs = 420
420 = a + 14 * (25)
420 = a + 350
420 – 350 = a
Therefore a = 70 and the demand function would be: Qs = 70 + 14 * P
b) Graph Showing Equilibrium Price
Figure
Note: From the graph above the equilibrium price is approximately $22.50
c) Economically speaking, the goal of a company is to maximize profit, and maximizing profit is not usually the same thing as maximizing revenue. Therefore, while it may be appealing to think about the relationship between price and revenue, especially since the concept of elasticity makes it easy to do so, it's only a starting point for examining whether a price increase or decrease is a good idea. If a decrease in price is justified from a revenue perspective, one must think about the costs of producing the extra output in order to determine whether the price decrease is profit maximizing. On the other hand, if an increase in price is justified from a revenue perspective, it must be the case that it is also justified from a profit perspective simply because total cost decreases as less output is produced and sold.
Total revenue is maximized when selling an extra unit would cause your revenue to fall and selling a unit less would have also caused you to leave some revenue on the table rather than in your pocket. In other words, total revenue is maximized when marginal revenue is 0 and falling. Selling an extra
1) a) Demand Function: Quantity Demanded (Qd) = a + b* Price (P) Supply Function: Quantity Supplied (Qs) = a + b* Price (P)
Where: a = constant b = the change in quantity as a result to the change in price.
Demand Function: Quantity Demanded (Qd) = a + b* Price (P) b = (420 – 350) / (20 – 25) = 70 / -5 = -14
Using: P = 25, Qd = 350
350 = a – 14 * (25)
350 = a – 350
Therefore a = 700 and the demand function would be: Qd = 700 – 14 * P
Supply Function: Quantity Supplied (Qs) = a + b* Price (P) b = (350 – 420) / (20 – 25)
= -70 / -5 = 14
Using: P = 25, Qs = 420
420 = a + 14 * (25)
420 = a + 350
420 – 350 = a
Therefore a = 70 and the demand function would be: Qs = 70 + 14 * P
b) Graph Showing Equilibrium Price
Figure
Note: From the graph above the equilibrium price is approximately $22.50
c) Economically speaking, the goal of a company is to maximize profit, and maximizing profit is not usually the same thing as maximizing revenue. Therefore, while it may be appealing to think about the relationship between price and revenue, especially since the concept of elasticity makes it easy to do so, it's only a starting point for examining whether a price increase or decrease is a good idea. If a decrease in price is justified from a revenue perspective, one must think about the costs of producing the extra output in order to determine whether the price decrease is profit maximizing. On the other hand, if an increase in price is justified from a revenue perspective, it must be the case that it is also justified from a profit perspective simply because total cost decreases as less output is produced and sold.
Total revenue is maximized when selling an extra unit would cause your revenue to fall and selling a unit less would have also caused you to leave some revenue on the table rather than in your pocket. In other words, total revenue is maximized when marginal revenue is 0 and falling. Selling an extra