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1. The document contains multiple choice questions and word problems about profit maximization for a firm. 2. One question involves determining the profit-maximizing output and price for a textbook publisher given costs and demand functions. The optimal output is 50,000 books and price is $100 per book, yielding $2 million in profits. 3. A second question asks about raising price in response to a competitor increasing their price by $15. Matching the full $15 increase would not be optimal, as the publisher could increase price by less and sell more books, capturing more total profits.

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Will Kane
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322 views3 pages

Answer Mid

1. The document contains multiple choice questions and word problems about profit maximization for a firm. 2. One question involves determining the profit-maximizing output and price for a textbook publisher given costs and demand functions. The optimal output is 50,000 books and price is $100 per book, yielding $2 million in profits. 3. A second question asks about raising price in response to a competitor increasing their price by $15. Matching the full $15 increase would not be optimal, as the publisher could increase price by less and sell more books, capturing more total profits.

Uploaded by

Will Kane
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Multiple-choice

1. A 2. C 3. D 4. D 5. D 6. E 7. C 8. B 9. A 10. D 11. C 12. C 13. B 14. C 15. B

Part 2
Suppose that a firm sells in a highly competitive market, in which the going price is $15 per unit. The firms cost equation is C = $25 + .25Q2. b) Suppose that fixed costs increase to $75. Find the profit-maximizing level of output for the firm. Determine its level of profit. a. Profit maximizing level of output at which MR= MC 1. Revenue R= P*Q R= 15Q Marginal revenue = dR/dQ = 15 2. Total cost Marginal cost MC= dC/dQ= 0.5Q 3. MR=MC 15= 0.5Q

Q = 30 (unit) 4. at the profit maximizing level of output Q= 30, the level of output = Revenue- Cost = 15*30- (25 + 0.25*900) = $200 b. fixed cost increases to $75, Cost function becomes: C= 75+ 0.25Q^2 Everything else remain the same, thus MR= MC Q=30 = Revenue Cost = 15*30 (75 + 0.25*900) = $150 2. (15 points) the college and graduate-school textbook market is one of the most profitable segments for book publishers. A best-selling accounting text published by Old School Inc (OS) has a demand curve: P = 150 - Q, where Q denotes yearly sales (in thousands) of books. (In other words, Q = 20 means 20 thousand books.) The cost of producing, handling, and shipping each additional book is about $40, and the publisher pays a $10 per book royalty to the author. Finally, the publishers overall marketing and promotion spending (set annually) accounts for an average cost of about $10 per book. a) Determine OSs profit-maximizing output and price for the accounting text. b) A rival publisher has raised the price of its best-selling accounting text by $15. One option is to exactly match this price hike and so exactly preserve your level of sales. Do you endorse this price increase? (Explain briefly why or why not.) a. profit maximizing level of output and price 1. Demand for OS Q= 150-P Revenue R =P*Q (in thousand) = 1000(150-Q)*Q Marginal revenue MR = 1000(150-2Q) 2. Cost of OS C = (40+10)*Q*1000 Marginal cost = 50*Q 3. MR= MC 150-2Q= 50 Q= 50 (thousand book) P= 150-50 = $100 Profit = 1000(100*50-60*50) = $2mil (Fixed cost for marketing F = 1000(10*50) = 500000 b. if the rival publisher raises its price dramatically, the firms demand curve shifts upward and to the right. The new intersection of MR and MC now occurs at a greater output.

MR = 165- 2Q MC= 50 maximize output Q = 57.5, Price = 107.5 Thus, it is incorrect to try to maintain sales via a full $15 price hike. For instance, in the case of a parallel upward shift, P = 165 Q. Setting MR = MC, we find: MR = 165 2Q = 50, implying Q* = 57.5 thousand books, and in turn, P* = 165 57.5 = $107.50 per book. Here, OS should increase its price by only $7.50 (not $15).

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