ANSWERS TO QUESTIONS
Compute Total Revenue and Coefficient of Price Elasticity
To compute for the total revenue, we use the formula
For price 6, Quantity 1 TR 6 x 1 6
For price 5, Quantity 2 TR 5 x 2 10
For price 4, Quantity 3 TR 4 x 3 12
For price 3, Quantity 4 TR 3 x 4 12
For price 2, Quantity 5 TR 2 x 5 10
For price 1, Quantity 6 TR 1 x 6 6
To compute for the coefficient of Price Elasticity, we use the formula
That is
For New P 5, Old P 6 New Q 2, old Q 1 E QUOTE -3.667
For New P 4, Old P 5 New Q 3, old Q 2 E QUOTE -1.80
For New P 3, Old P 4 New Q 4, old Q 3 E QUOTE -1
For New P 2, Old P 3 New Q 5, old Q 4 E QUOTE -0.556
For New P 1, Old P 2 New Q 6, old Q 5 E QUOTE -0.273
For convenience, we will only use the absolute values of the computed E. The table below summarizes the results
PriceQuantity DemandedTotal RevenueCoefficient of Price Elasticity 61652103.66743121.803412125100.5561660.273
Describe the character of elasticity across the prices based on the total revenue test and the elasticity coefficient.
Based on the table shown above, elasticity changes with respect to the change of total revenue per level of price and demand. In the table both parameters (price and demand) change inversely, meaning as price decreases, the demand increases. This behavior led to increasing total revenue for the first three levels and a decreasing behavior on the latter three stages. It can also be noticed that greater than 1 values of elasticity were achieved in 2nd and 3rd stages (prices are 5 and 4). This value of elasticity means that at an elastic demand, as price decreases, total revenue increases as reflected on the table.
The table also portrays that revenue cannot continue to rise as price falls and this is shown in the latter stages where the values of elasticity are less than 1 (prices are 2 and 1) which indicates that the demand is inelastic. This continuous reduction in prices led to a reduction in total revenue as well.
Lastly, a unitary elastic demand (E1) was achieved at a 3 price where the total revenue remain at a stable level of 12.00.
Does a straight line demand curve have constant elasticity
No. This is because a straight demand curve consists of constant intervals that make it straight. However, it does not lead to a conclusion that elasticity is constant. As observed from the table, the demand line is straight because it has constant intervals but the values of elasticity computed for each level differ that when it is graphed, a curve line will actually be created rather than a straight (constant) line.
Explain the determinant factors of price elasticity of demand
Determinant factors of price elasticity of demand
Necessities versus Luxuries the demand for necessities are usually inelastic as opposed to luxuries which are elastic. This is because necessities are the things that are most important to us and that we cannot live without like water, food, etc. Thus, even if the price increases, our level of consumption will still remain. This is different from luxuries because luxuries are things that we want but are not really important, thus, when the price increases, we may choose the option of not buying it which leads to a reduced level of consumption.
Availability of substitutes during situations in which prices on certain items increases, when there are available substitutes in the market that have lower prices, people tend to buy these substitutes rather than buying the expensive ones. For example, if the price of fish increases, consumers may choose to buy chicken or other meat to avoid high fish prices.
Price relative to income consumption of goods or services is affected by the change in price especially if the price of a certain commodity or service is quite expensive relative to the consumers income. For example, if the price for plane tickets changes, this will result to an abrupt change in the number of traveling passengers. However, for certain commodities like rice, since the price is lower relative to the consumers income, any change in it price will not lead to an immediate change in consumption level.
Duration for most goods, the longer a price change holds, the higher the elasticity becomes because more and more people will stop consuming the goods. Substitution may also happen in the long run as people will continue to look for alternative goods that they can consume. A good example is gasoline. Nowadays, as the price of gasoline increases, more and more people choose other types of gasoline like biodiesel that are cheaper than the gasoline that they are purchasing.
Brand Some consumers value brand highly that even if price increases, they will still choose to buy that commodity, thus, making the demand more inelastic. An example of this would be Macintosh products that even if their products are more expensive than other existing products, many people still buy because of brand loyalty.
4. Assume a single firm in a purely competitive industry has variable costs as indicated in the following table in column 2. Complete the table and answer the questions
To compute for Total Cost, the formula used is
In the problem, TFC 40
For TP 0 TC 40 0 40 For TP 1 TC 40 55 95
For TP 2 TC 40 75 115 For TP 3 TC 40 90 130
For TP 4 TC 40 110 150 For TP 5 TC 40 135 175
For TP 6 TC 40 170 210 For TP 7 TC 40 220 260
For TP 8 TC 40 290 330
To compute for Average Fixed Cost (AFC), the formula used is
For TP 1 AFC 401 40.00 For TP 2 AFC 402 20.00 For TP 3 AFC 403 13.33 For TP 4 AFC 404 10.00
For TP 5 AFC 405 8.00 For TP 6 AFC 406 6.67
For TP 7 AFC 407 5.71 For TP 8 AFC 408 5.00
To compute for Average Variable Cost (AVC), the formula used is
For TP 1 AVC 551 40.00 For TP 2 AFC 752 37.50
For TP 3 AVC 903 30.00 For TP 4 AFC 1104 27.50
For TP 5 AVC 1355 27.00 For TP 6 AFC 1706 28.33
For TP 7 AVC 2207 31.43 For TP 8 AFC 2908 36.35
To compute for Average Total Cost (ATC), the formula used is
For TP 1 AVC 951 95.00 For TP 2 AFC 1152 57.50
For TP 3 AVC 1303 43.33 For TP 4 AFC 1504 37.50
For TP 5 AVC 1755 35.00 For TP 6 AFC 2106 35.00
For TP 7 AVC 2607 37.14 For TP 8 AFC 3308 41.25
To compute for Marginal Cost (MC), the formula used is
For TP 1 MC (95-40)(1-0) 55.00 For TP 2 MC (115-95)(2-1) 20.00
For TP 3 MC (130-115)(3-2) 15.00 For TP 4 MC (150-130)(4-3) 20.00
For TP 5 MC (175-150)(5-4) 25.00 For TP 6 MC (210-175)(6-5) 35.00
For TP 7 MC (260-210)(7-6) 50.00 For TP 8 MC (330-260)(8-7) 70.00
The table below summarizes the results obtained from the above calculations
(1)(2)(3)(4)(5)(6)(7)Total ProductTotal Var. CostTotal CostAFCAVCATCMC00 40 0.0 0.0 0.0 --1559540.0055.0095.05527511520.0037.5057.502039013013.3330.0043.3315411015010.0027.5037.502051351758.0027.0035.002561702106.6728.3335.003572202605.7131.4337.145082903305.0036.3541.2570
At a product price of 52, will this firm produce in the short run Explain. What will its profitloss be
At a product price of 52, the firm can produce units in the short run because the price exceeds the marginal cost. The table below shows the profits that can be generated when production is pursued.
(1)(2)(3)(4)(5)Total ProductTotal Var. CostTotal CostRevenue
P 52.00Profit (loss)00 40 0.0 0 40 (-40.00) 155951 x 52 52.0052- 95 (-43.00)2751152 x 52 104.00104 115 (-11.00)3901303 x 52 156.00156 - 130 26.0041101504 x 52 208.00208 150 58.0051351755 x 52 260.00260 175 85.0061702106 x 52 312.00312 210 102.0072202607 x 52 364.00364 260 104.0082903308 x 52 416.00416 330 86.00
Based on the table, negative profits (loss) can be achieved if production of 0-2 units is pursued. This is explainable due to the fixed cost that has been applied. A clear magnification of profit reduction can be seen on the production of 8 units which reduced the company profits from 104 (producing 7 units) to 86. Thus, it is clear that 7-unit production is the most profitable at the price level given with a profit of 104.
At a product price of 28, will this firm produce in the short run Explain. What will its profitloss be
The table below summarizes the profits or loss per production level given the price of 28. Since the price given is greater than the marginal cost computed for some levels, it is recommended for the company to pursue production at those levels. Even if loss will be achieved in the production of units, production should still continue to stay competitive rather than obtaining more loss for not producing at all. The optimal level for this production is 5 units that will lead to a 35 loss.
(1)(2)(3)(4)(5)Total ProductTotal Var. CostTotal CostRevenueProfit (loss)00 40 0.0 0 40 (-40.00) 155951 x 28 28.0028 95 (-67.00)2751152 x 28 56.0056- 115 (-59.00)3901303 x 26 84.0084 130 (-46.00)41101504 x 28 112.00112 150 (-38.00)51351755 x 28 140.00140 - 175 (-35.00)61702106 x 28 168.00168 210 (-42.00)72202607 x 28 196.00196 260 (-64.00)82903308 x 28 224.00224 330 (-106.00)
At a product price of 22, will this firm produce in the short run Explain. What will its profitloss be
At a price of 22 dollars, production is feasible for 2, 3 and 4 units since the price given exceeds the marginal cost for these levels. Thus, it is still good for the company to pursue production to remain competitive even if losses can occur. Based on the table generated, the optimal level at a price of 22 is 4 units with a loss of 62.00.
(1)(2)(3)(4)(5)Total ProductTotal Var. CostTotal CostRevenueProfit (loss)00 40 0.0 0 40 (-40.00) 155951 x 22 22.0022 95 (-73.00)2751152 x 22 44.0044 115 (-71.00)3901303 x 22 66.0066 130 (-64.00)41101504 x 22 88.0088 150 (-62.00)51351755 x 22 110.00110 175 (-65.00)61702106 x 22 132.00132 210 (-78.00)72202607 x 22 154.00154 260 (-106.00)82903308 x 22 176.00176 330 (-154.00)
Complete the following short-run supply schedule for this firm.
The data for the 52, 28 and 22 prices came from the previous computations. For 72, 45 and 15, the computations are shown below
At price 72, optimal units 8 units (marginal cost is nearest the price)
Profit (72 x 8) 330 246.00
At price 45, optimal units 6 units (marginal cost is nearest the price)
Profit (45 x 6) 210 60.00
At price 15, optimal units 3 units (marginal cost equals price)
Profit (15 x 3) 130 (88.00)
Product PriceQuantity SuppliedProfit () or Loss (-)728246.00527104.0045660.00285(35.00)224(62.00)153(88.00)
Assume there are 500 identical firms in this industry, that they have identical cost data as the firm above, and that the industry demand schedule is as follows
Product PriceQuantity Supplied
(per firm)Quantity Demanded728250052735004564000285520022459001536700
What will the equilibrium price be
Equilibrium price will be at the point where quantity supplied quantity demanded
At price 72.00 Demand 2500 500 5 per firm ( not equilibrium
At price 52.00 Demand 3500 500 7 per firm( equilibrium
At price 45.00 Demand 4000 500 8 per firm ( not equilibrium
At price 28.00 Demand 5200 500 10.4 per firm ( not equilibrium
At price 22.00 Demand 5900 500 11.8 per firm ( not equilibrium
At price 15.00 Demand 6700 500 13.4 per firm ( not equilibrium
Thus equilibrium price is 52.00 where Demand 7 units equals Supply 7 units
What will the equilibrium output for each firm be
Equilibrium output will be the supply at the equilibrium price (52.00), that is
Equilibrium output 7 units
What will profitloss be per unit
The profit per unit will be
For Q 7 units Total Revenue (TR) 7 x 52 364.00 Total Cost (TC) 260.00
Profit TR TC 364 260 104.00
Profit per unit 104 7 14.85 unit
What will profitloss be per firm
The profit per firm will be
For Q 7 units Total Revenue (TR) 7 x 52 364.00 Total Cost (TC) 260.00
Profit TR TC 364 260 104.00firm