Homework Problem Set 4
1. Because Q=12-2P
inverse demand P = -0.5
For “half price” case, P = 2.5, Q=7
consumer surplus = 7*(6-2.5)/2 = 12.25
For “buy one, get one free” case, when original P = 5, Q = 4 instead of 2, total benefit TB = (4+6)*4/2 = 20
On the other hand, payment is 2*5=10 dollars, so consumer surplus will be = 10 Thus “half price” gives more surplus.
2. cost minimizing manner, marginal product of typewriter/marginal product of word processor=rent of typewriter/rent of word processor
(marginal product of typewriter/marginal product of word processor) does not equal to (rent of typewriter/rent of word processor). Hence Temporary Services is not utilizing the typewriters and word processors in a cost minimizing manner.
3. when in the long run cost minimizing level, MPL / w = MPK / r = MPM / m, KM/2= LM=KL/4, K=4M=2L,
Then Q =KLM= K3/8 = 1000, so K=20, M=5, L=10
Total cost = Lw+Kr+Mm=60
4. C(Q) = 50 + 25Q + 30Q2 + 5Q3
when producing 10 units of output
fixed cost = 50
variable cost= 25Q + 30Q2 + 5Q3= 8250
total cost = 50 + 25Q + 30Q2 + 5Q3= 8300
average fixed cost= FC/Q= 5
average variable cost = VC(Q)/Q = 825
average total cost = C(Q)/Q = 830
marginal cost = ΔC/ΔQ = 2125
5. a) fixed cost=5000
b) Yes. If firm A was to refund the equipment, it will only be able to regain $1000 as opposed to the $4500 it will stand to gain if it was to sublease the equipment.
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