CHAPTER 4 - Market

1. Given the total cost function TC = 1500+ 15Q- 6Q2+Q3 Where TC is total cost and Q is level
of output. (i) Determine: (a) Total variable cost function, (b) marginal cost function and (c)
Average variable cost function. (ii) Calculate total cost, ATC, AVC and MC when the firm
produces 50 units of output.
Answer: ia) Total variable cost function: 𝑇𝑉𝐶 = 15𝑄 − 6𝑄 2 + 𝑄 3
𝜕𝑇𝐶 𝜕
ib) Marginal cost function: 𝑀𝐶 = = (1500 + 15𝑄 − 6𝑄 2 + 𝑄 3 ) =
𝜕𝑄 𝜕𝑄
𝜕 𝜕 𝜕 𝜕
(1500) + (15𝑄) − (6𝑄 2 ) + (𝑄 3 ) = 0 + 15 − 12𝑄 + 3𝑄 2 = 15 − 12𝑄 + 3𝑄 2
𝜕𝑄 𝜕𝑄 𝜕𝑄 𝜕𝑄

𝑇𝑉𝐶 15𝑄−6𝑄 2 +𝑄 3
ic) Average variable cost function: 𝐴𝑉𝐶 = 𝑄
= 𝑄
= 15 − 6𝑄 + 𝑄 2

ii) Total cost when 𝑄 = 50: 𝑇𝐶 = 1500 + 15𝑄 − 6𝑄 2 + 𝑄 3 = 1500 + 15 × 50 − 6 ×

50 + 503 = 1500 + 750 − 15000 + 125000 = 1,12,250
2

𝑇𝐶 112250
ATC when 𝑄 = 50: 𝐴𝑇𝐶 = 𝑄
= 50
= 2,245

MC when 𝑄 = 50: 𝑀𝐶 = 15 − 12𝑄 + 3𝑄 2 = 15 − 12 × 50 + 3 × 502 = 15 − 600 +

7500 = 6,915

2. Consider the long run cost function C(Q) = Q3-50Q2+1000Q. Show that MC and AC are equal
at minimum AC.
Answer: Given the longrun cost function 𝐶(𝑄) = 𝑄 3 − 50𝑄 2 + 1000𝑄, average cost function is
𝑄 3 −50𝑄2 +1000𝑄
𝐴𝐶 = 𝑄
= 𝑄 2 − 50𝑄 + 1000
𝜕𝑇𝐶 𝜕 𝜕 𝜕
and marginal cost function is 𝑀𝐶 = = (𝑄 3 − 50𝑄 2 + 1000𝑄) = 𝑄3 − 50𝑄 2 +
𝜕𝑄 𝜕𝑄 𝜕𝑄 𝜕𝑄
𝜕
1000𝑄 = 3𝑄 2 − 100𝑄 + 1000
𝜕𝑄

𝜕𝐴𝐶 𝜕 𝜕 𝜕
AC is minimum when 𝜕𝑄
= 0 ⇒ 𝜕𝑄 (𝑄 2 − 50𝑄 + 1000) = 0 ⇒ 𝜕𝑄 (𝑄 2 ) − 𝜕𝑄 (50𝑄) +
𝜕
(1000) = 0 ⇒ 2𝑄 − 50 + 0 = 0 ⇒ 2𝑄 − 50 = 0 ⇒ 2𝑄 = 50 ⇒ 𝑄 = 25
𝜕𝑄

Now, MC when 𝑄 = 25: 𝑀𝐶 = 3𝑄 2 − 100𝑄 + 1000 = 3 × 253 − 100 × 25 + 1000 =

46,875 − 2500 + 1000 = 45,375
AC when 𝑄 = 25: 𝐴𝐶 = 𝑄 2 − 50𝑄 + 1000 = 252 − 50 × 25 + 1000 = 625 − 1250 +
1000 = 375

3. Given the total cost function TC = 1500+ 15Q- 6Q2+Q3

Determine:
a. Total variable cost function,
b. marginal cost function and
c. Average variable cost function
 d. Calculate total cost ATC, AVC and MC when the firm produces 50 units of
output.
Answer: Same as (1)

4. Given the following total cost function TC = 700 + 37Q – 2Q2 + 5Q3
(i) Determine the total fixed cost for producing 250 units of output and 1500 units of
output.
(ii) What will be marginal cost at (a) 100 units of output and (b) 1500 units of output?

Answer: i) In this case, fixed cost is 700 regardless of the quantity of output.
𝜕𝑇𝐶 𝜕 𝜕
iia) Marginal cost function: 𝑀𝐶 = = (700 + 37𝑄 − 2𝑄 2 + 5𝑄 3 ) = 700 +
𝜕𝑄 𝜕𝑄 𝜕𝑄
𝜕 𝜕 𝜕
𝜕𝑄
37𝑄 − 𝜕𝑄 2𝑄 2 + 𝜕𝑄 5𝑄 3 = 0 + 37 − 4𝑄 + 15𝑄 2 = 37 − 4𝑄 + 15𝑄 2

Now, marginal cost at the output level of 100 units: 𝑀𝐶 = 37 − 4𝑄 + 15𝑄 2 = 37 − 4 × 100 + 15 ×
1002 = 37 − 400 + 150000 = 1,49,637
iib) Marginal cost at the output level of 1,500 units: 𝑀𝐶 = 37 − 4𝑄 + 15𝑄 2 = 37 − 4 ×
1500 + 15 × 15002 = 37 − 6000 + 33750000 = 3,37,44,037

CHAPTER 5 - NATIONAL INCOME

5. How can we calculate GNP, NNP, National Income, Personal Income and Personal
Disposable income with following data?
GDP = $5677.5
Net Factor payment from abroad = $17.5
Capital consumption allowance = $626.1
Indirect taxes = $475.2
Social security contribution = $528.8
Govt. and business transfers to person = $771.1
Dividends = $137
Personal Tax & Non-Tax payment = $618.7

Solution:
GNP = $5677.5 + $17.5= $5695

NNP = GNP – Depreciation

NNP = $5695 – 626.1= $5068.9

National Income = NNP – Indirect Taxes + Subsidies

National Income = $5068.9 – 475.2= 4593.7

PI = NI + Transfer Payments – Profit Taxes – Undistributed profit

PI = 4593.7 + 528.8 + 771.1 + 137= 6030.6

DPI = PI – Personal Taxes

DPI = 6030.6 – 618.7

6. The following information from the national income accounts for a hypothetical country Title
Amount ($) GDP $6000 Gross Investment $800 Net Investment $200 Consumption $4000
Govt. Purchases of Goods & Services $1100 Govt. Budget Deficit $30.
a) NDP =?
b) Net Exports (Nx) =?
c) Govt. Taxes minus Transfer (TA – TR) =?
d) Disposable Personal Income (DPI) =?

Solution:
a) NDP = GDP – Depreciation
= GDP – (Gross Investment – Net Investment)
= $6000 – ($800 - $200)
= $5400
b) GDP = C + I + G + NX
$6000 = 4000 + 800 + 1100 + NX
NX= $100

c) Budget Deficit = G + TR – TA
-30 = 1100 + TR – TA
-1130 = TA – TR
TA – TR = $1130

d) DPI = Personal Income - Tax

= GDP + TR – TA
= 6000 – 1130 [We have got TA – TR = $1130]
= $4870
7. Assume that GDP is $6000, Personal Disposable Income is $5100 and the Govt. Budget Deficit
is $200, Consumption is $3800 and the Trade Deficit is $100
a) How large is saving?
b) What is the size of Investment?
c) How large is Govt. Spending?

Solution:
a) We know,
Disposable Personal Income = Consumption + Saving
$5100 = 3800 + S
S= $1300

b) We know, S – I = (G + TR - TA) - NX
1300 – I = 200 – 100
→ I = $1200

c) We know, GDP = C + I + G + NX
→ 6000 = 3800 + 1200 + G – 100
→ G = $1100

8. The following is information from the national income accounts for a hypothetical country:
GDP=$ 6000, Gross investment= $800, net investment=$200, consumption=$4000,
government purchases of goods and services=$1100 and government budget surplus=$30.
What is (i) NDP? (ii) Nx? (iii) DPI?

9. Assume that GDP is $ 5000, personal disposable income is $ 4100 and the government budget
deficit is $100, consumption is $2800 and the trade deficit is $ 50.
(i) How large is saving?
(ii) What is the size of investment?
(iii) How large is government spending?