EX1: The demand and supply functions of a good are given by

P = −5QD + 80

P = 2QS + 10

where P, QD and QS denote price, quantity demanded and quantity supplied respectively.

(1) Find the equilibrium price and quantity

(a) graphically

(b) algebraically ( P=10; Q=30)

(2) If the government deducts, as tax, 15% of the market price of each good, determine the new equilibrium
price and quantity.

EX2: The supply and demand functions of a good are given by

P = QS + 8

P = −3QD + 80

where P, QS and QD denote price, quantity supplied and quantity demanded respectively.

(a) Find the equilibrium price and quantity if the government imposes a fixed tax of $36 on each good.(P=53,
Q=9)

(b) Find the corresponding value of the government’s tax revenue.(324)

EX1: A firm’s monthly cost for paying cleaners’ wages is $47 250. Under a new pay deal each cleaner earns
$375 more each month. If the new pay deal goes through, the firm realises

that it will need to reduce the number of cleaners by 3 if it is to cover its costs within

the existing budget. What is the monthly salary of a cleaner before the pay rise?

EX2: Given the supply and demand functions

P = Qs2 + 2Qs +7

P = −Qd + 25

determine the equilibrium price and quantity. (P=22; Q=3)

EX1: (a) If the demand function of a good is given by

P = 80 − 3Q

(a) Find the price when Q = 10, and deduce the total revenue.(P=50; TR=500)

(b) If fixed costs are 100 and variable costs are 5 per unit. Find the total cost when Q = 10.(TC=150)

(c) Use your answers to parts (a) and (b) to work out the corresponding profit.(350)

EX2: If fixed costs are 30, variable costs per unit are Q + 3, and the demand function is

P + 2Q = 50

show that the associated profit function is

π = −3Q2 + 47Q − 30.

Find the break-even values of Q and deduce the maximum profit. (Q1=15 and Q2=2/3; Maximum

profit: 1849/12 at Q=47/6

Exercise:

1. A principal, $7000, is invested at 9% interest for 8 years. Determine its future value if the interest is

compounded:

(a) annually (b) semi-annually (c) monthly (d) continuously

(a) $13 947.94 (b) $14 156.59 (c) $14 342.45 (d) $14 381.03

2. Which of the following savings accounts offers the greater return?

Account A: an annual rate of 8.05% paid semi-annually

Account B: an annual rate of 7.95% paid monthly

3. Determine the APR if the nominal rate is 7% compounded continuously. (7.25%)

4. Find the value, in 2 years time, of $4000 invested at 5% compounded annually. In the following 2

years, the interest rate is expected to rise to 8%. Find the final value of the investment at the end of the

4-year period, and find the overall percentage increase. Give your answers correct to 2 decimal places.(

$4410; $5143.82; 28.60%)

5. Midwest Bank ofers a return of 5% compounded annually for each and every year. The rival BFB of ers

a return of 3% for the first year and 7% in the second and subsequent years (both compounded

annually). Which bank would you choose to invest in if you decided to invest a principal for (a) 2 years;

(b) 3 years?

6. World oil reserves are currently estimated to be 600 billion units. If this quantity is reduced by 8% a

year, after how many years will oil reserves drop below 100 billion units? (22years)

7. A prize fund is set up with a single investment of $5000 to provide an annual prize of $500. The fund is

invested to earn interest at a rate of 7% compounded annually. If the first prize is awarded 1 year after

the initial investment, find the number of years for which the prize can be awarded before the fund falls

below $500. (17years)

18. A project requires an initial investment of $7000, and is guaranteed to yield a return of $1500 at the

end of the first year, $2500 at the end of the second year and $ x at the end of the third year. Find the

value of x , correct to the nearest $, given that the net present value is $838.18 when the interest rate is

6% compounded annually. ($5000)

19. A proposed investment costs $130 000 today. The expected revenue fl ow is $40 000 at the end of

year 1, and $140 000 at the end of year 2. Find the internal rate of return, correct to 1 decimal place.

(20.3%)

20. During the next 3 years a business decides to invest $10 000 at the beginning of each year. The

corresponding revenue that it can expect to receive at the end of each year is given in Table 3.32 .

Calculate the net present value if the discount rate is 4% compounded annually. (38887.69)

8/ If the demand equation of a good is P = 40 − 2Q

Find the level of output that maximises total revenue.

9/ A fi rm’s short-run production function is given by Q = 30L2 − 0.5L3

Find the value of L which maximises APL and verify that MPL = APL at this point.

10/ The supply and demand equations of a good are given by 3P – QS = 3 and 2P + QD = 14 respectively.

The government decides to impose a tax, t , per unit. Find the value of t which maximises the

government’s total tax revenue on the assumption that equilibrium conditions prevail in the market.
11/ A manufacturer has fixed costs of $200 each week, and the variable costs per unit can be expressed

by the function, VC = 2Q − 36.

(a) Find an expression for the total cost function and deduce that the average cost function is given by

AC = 200

𝑄 + 2Q - 36

(b) Find the stationary point of this function and show that this is a minimum.

(c) Verify that, at this stationary point, average cost is the same as marginal cost.

12/ A firm’s demand function is

P = aQ + b ( a < 0, b > 0)

Fixed costs are c and variable costs per unit are d .

(a) Write down general expressions for TR and TC.

(b) By dif erentiating the expressions in part (a), deduce MR and MC.

(c) Use your answers to (b) to show that profi t, π, is maximised when Q= 𝑑−𝑏/ 2𝑎

13/ The demand functions for a firm’s domestic and foreign markets are

P1 = 50 − 5Q1

P2 = 30 − 4Q2

and the total cost function is TC = 10 + 10Q

where Q = Q1 + Q2 . Determine the prices needed to maximise profit

(a) with price discrimination (P1=$30, P2=$20)

(b) without price discrimination.(P=$24.44)

Compare the profits obtained in parts (a) and (b).( $95; $83.89)