HARAMAYA UNIVERSITY

COLLEGE OF COMPUTING AND INFORMATICS

DEPARTMENT OF SOFTWARE ENGINEERING
INTRODUCTION TO ICONOMICS
GROUP ASSINGNMENT
PREPARED BY: ID.NO
1. Yasin Husen ………………………………….…………….1826/14
2. Mihrat Wubshet…………………………………………. 3444/14
3. Hamdi Abdulfetah……………………………………..….3107/14
4. Firafis Berhanu………………………………………………2937/14
5. Muaz Shewabu……………………………………………..3543/14
6. Oriemi Obang……………………………………………….1385/14
7. Latera Dereje……………..…………………………………3273/14

Submitted to: Mr.Urgessa F2

Submission date: june,5 ,2023

HARAMAYA UNIVERSITY, ETHIOPIA

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9. Let C(y) be the total cost function of a firm. If C(y) = 144 + 16y 2, determine the minimum
average
cost.
Given
TCF = C(y) = 144 + 16y2
Solution
 First we need to find the derivative of the average cost function and set it equal to zero.
 The average cost function is
AC ( y )=C ( y )/ y=( 144/ y )+16 y .

 The derivative of this function is

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AC ’( y)=− 144 / y +16.

 Setting this equal to zero, we get

2
−144 / y +16=0.
y=3 .

 Substituting this value of y into the average cost function, we find that the minimum
average cost is
AC(3)=(144 /3)+16 (3)=48+ 48=96.
10). Gada has a workshop where he repairs cars (a). For all a >= 0 his total costs are: C(a)= 144
+5a2 + 120a + 80. If he repairs 20 cars, what will be his average variable costs, average fixed
cost and marginal cost.
 Given, the total cost function of Gada's workshop is:
• C(a) = 144 + 5a2 + 120a + 80.
First we have to find total fixed cost (TFC) and total variable cost (TVC)
• TFC = 144 + 80 = 224
• TVC = 5a2 + 120a
To find the average variable cost (AVC), we need to divide the total variable cost (TVC) by the
number of cars repaired.
• AVC = TVC/a
• AVC = (5a2 + 120a) / a
• AVC = 5a + 120
 When a = 20, the average variable cost is:
• AVC = 5(20) + 120
• AVC = 220

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To find the average fixed cost (AFC), we need to divide the total fixed cost (TFC) by the number
of cars repaired.
• AFC = TFC/a
• AFC = 224/ a
 When a = 20, the average fixed cost is:
• AFC = 224/ 20
• AFC = 11.2
To find the marginal cost (MC), we need to take the derivative of the total cost function with
respect to the number of cars repaired.
In this case, the total cost function is: C(a) = 144 + 5a2 + 120a + 80
Taking the derivative with respect to a,
• MC = 10a + 120
 When a = 20, the marginal cost is:
• MC = 10(20) + 120
• MC = 320
Therefore,
 The average variable cost when 20 cars are repaired is 220.
 The average fixed cost when 20 cars are repaired is 11.2.
 The marginal cost when 20 cars are repaired is 320.

11),
i. What is output maximizing total revenue (TR) ii. Calculate market price
and total revenue iii. If MC=2Q, Calculate maximum profit/ minimum loss
solution
to find the out put maximum total revenue we differentiate the total revenue with respect Q
and equal to zero .
Q=√(750-10p)
Both side square the equation and solve p
Qˆ 2=750-10p
10p= 750-Qˆ 2
P=(750-Qˆ 2)/10
i.Total revenue is equal to
TR=P*Q
TR=(750-Qˆ 2)/10 * Q = (750Q- Qˆ 3)/10
Derivate TR with respect to Q

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 dTR/dQ=d/dQ((750Q- Qˆ 3)/10)
TR= (750-3 Qˆ 2)/10
(750-3 Qˆ 2)/10=0
75=(3 Qˆ 2)/10
750/3= Qˆ 2
250= Qˆ 2
Q=√250 =>Q=5√10………………the out put of total revenue
ii. P=(750-Qˆ 2)/10………….substitute the value of Q in the equation and get the value of P
P=(750-Qˆ 2)/10
= (750- (5√10ˆ 2))/10
= (750-250)/10 = 500/10
P=50
TR= P*Q
TR=50*5√10=250√10
TR = 790.564
iii. if mc =2Q , calculate maximum profit/ minimum loss
MR=MC
MR= dTR/dQ
(750-3 Qˆ 2)/10=2Q
3Qˆ 2+20Q-750=0………………………………………….solve Q by
quadratic equationWe can solve this quadratic equation using the quadratic formula:
Q = (-b ± sqrt(b^2 - 4ac)) / 2a
where a = 3, b = 20, and c = -750.
Substituting these values, we get:
Q = (-20 ± sqrt(20^2 - 4(3)(-750))) / 2(3)
Simplifying the expression under the square root, we get:
Q = (-20 ± sqrt(1000)) / 6

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 Q = (-20 ± 10sqrt(10)) / 6
Simplifying further, we get:
Q ≈ -5.58 or Q ≈ 8.92
Therefore, the solutions to the quadratic equation are approximately Q=-5.58 and Q=8.92.
However, since Q represents a quantity, we can only consider the positive solution, which is Q ≈
8.92.
Therefore: P=(750-Qˆ 2)/10
Substitute the value of Q
P=(750-(8.92)ˆ 2)/10
P=67.0434
TR=Q*P
TR=8.92*67.0434
TR=598.0271
TC is the result of integrated MC which was 2Q. So:
TC = Q^2
= (8.92)^2
= 79.5664
Maximum profit = TR – TC
∏ = TR – TC
=598.0271–79.5664
= 518.4606.......This is the maximum profit.

12. Consider in perfect competitive market, and then Show that: -

a. MR = P(1-1/(ed))

In a perfect competitive market, firms are price takers, meaning that they cannot influence the
market price. As a result, the marginal revenue (MR) of a firm is equal to the price (P) of the
good.

To show this, we can use the following equation:

MR = dTR/dQ

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where MR is marginal revenue, TR is total revenue, and Q is quantity.

In a perfect competitive market, total revenue is equal to price multiplied by quantity, or:

TR = P*Q

Differentiating both sides of this equation with respect to Q, we get:

dTR/dQ = P*dQ/dQ + Q*dP/dQ

The first term on the right-hand side is zero, because quantity is being held constant. The
second term is equal to MR, so we can write:

MR = P*dP/dQ

The elasticity of demand (e) is defined as the percentage change in quantity demanded divided
by the percentage change in price. We can write this as:

e = (dQ/Q)/(dP/P)

Substituting this into the equation for MR, we get:

MR = P*(dP/P)/(dQ/Q)

This simplifies to:

MR = P(1-1/e)

This equation shows that the marginal revenue of a firm in a perfect competitive market is
equal to the price of the good minus the inverse of the elasticity of demand.

In other words, the more elastic the demand for a good, the lower the marginal revenue of a
firm selling that good. This is because a small increase in price will lead to a large decrease in
quantity demanded, which will reduce the total revenue generated by the firm.

b. MR = AR(1-1/(ed)) or AR=MR(ed/(ed-1)

The relationship between marginal revenue (MR) and average revenue (AR) can be expressed
as:

MR = AR(1-1/(ed))

where ed is the elasticity of demand.

This equation can be derived by using the following steps:

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1. Total revenue (TR) is equal to price (P) multiplied by quantity (Q):

TR = P*Q

2. Marginal revenue (MR) is equal to the change in total revenue divided by the change in
quantity:

MR = dTR/dQ

3. The elasticity of demand (ed) is defined as the percentage change in quantity demanded
divided by the percentage change in price:

ed = (dQ/Q)/(dP/P)

4. Substituting equations 2 and 3 into equation 1, we get:

MR = d(P*Q)/dQ

= P*dQ/dQ + Q*dP/dQ

= P*dP/dQ

= P*(dP/P)/(dQ/Q)

= P(1-1/(ed))

This equation shows that the marginal revenue of a firm is equal to the average revenue minus
the inverse of the elasticity of demand.

In other words, the more elastic the demand for a good, the lower the marginal revenue of a
firm selling that good. This is because a small increase in price will lead to a large decrease in
quantity demanded, which will reduce the total revenue generated by the firm.

The relationship between MR and AR can also be expressed as:

AR = MR(ed/(ed-1))

This equation can be derived by rearranging the previous equation.

The relationship between MR and AR is important for firms to understand because it can help
them to make decisions about pricing and output. For example, if a firm knows that the
demand for its product is elastic, it will want to lower its price in order to increase its output
and total revenue.

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13) Assume that the function U (x, y) = X0.3Y0.5 is the utility function of a person who consumes
two goods in quantities Qx and Qy, respectively. The price of x is Px= 5 and the price of y is Py
=8. This person´s income is M = 160.based on this given:
Given
Px= 5 ; Py =8 ; M = 160 ; (x, y) = X0.3Y0.5
Solution:
A. Find the optimal consumption choice of this person
The consumer's utility function is given by:
U(x, y) = x^0.3y^0.5
The consumer's budget constraint is given by:
5x + 8y = 160
Rearranging consumer's budget to solve for Y in terms of X.
Y=(160 -5x)/8 ………………………………………………………………….(i)
We can maximize the consumer's utility by equating the marginal rate of substitution (MRS) to
the ratio of the prices. The MRS is the rate at which the consumer is willing to trade one good
for another while maintaining the same level of utility. The ratio of the prices is the price of one
good divided by the price of another good
MUx/MUy =Px/Py => MUx = dUx/dx MUy = dUx/dx
=0.3x-0.7y0.5 = 0.5x0.3y-0.5
MUx/MUy = (0.3x-0.7y0.5 )/ (0.5x0.3y-0.5) = 5/8
= 3Y/5X = 5/8
= 24y = 25x
X = 24Y/25 ………………………………………………….(ii)
Now let us substitute equation (ii) in to equation (i) to solve for Y.
Y = (160 -5x)/8
Y = (160-5(24Y/25))/8
Y = (4000-120Y) /200
200Y = 4000-120Y
320Y = 4000
Y = 12.5
To solve for X we can substitute y in equation (ii)
X = 24Y/25
X = (24(12.5))/25 => X = 12
Therefore optimum combination levels of x and y which maximize the total utility subject to the
given income constraint are 12 units of x and 12.5 units of y.

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B. Verify that at the optimum that you found the MRS x y equals the price ratio.
The MRS is given by:
MRS = MUx/MUy = 3Y/5X
The price ratio is given by:
Price Ratio = Px/Py = 5/8
3Y/5X = 5/8
By substituting x and y values in MUx/MUy we can get:
3Y/5X = 5/8
3(12.5)/5(12)= 5/8
37.5/60 = 5/8
0.625 = 0.625
As you can see, the MRS is equal to the price ratio. This confirms that the consumer is
maximizing their utility at the optimum.
C. Explain your result in terms of economic theory
The consumer maximizes their utility by consuming the quantities of x and y that give them the
highest possible utility given their income and the prices of x and y. The consumer does this by
equating the MRS to the price ratio. The MRS is the rate at which the consumer is willing to
trade one good for another while maintaining the same level of utility. The price ratio is the
price of one good divided by the price of another good. In this case, the consumer is maximizing
their utility by consuming 12 units of x and 12.5 units of y. This is because the MRS at this point
is equal to the price ratio. If the consumer consumed more or less of either good, their utility
would be lower.
D. Assume that the price of Qx falls to Px= 4. Draw the old and the new budget constraints in
a diagram. (Indicate at what values they intersect the axes)
The old budget constraint is given by:
5x + 8y = 160
The new budget constraint is given by:
4x + 8y = 160
The old budget constraint is a straight line with a slope of -5/8 and
x-axis at y = 0 y-intercept at x = 0
5x + 8(0)=160 5(0)+8y = 160
5x = 160 8y = 160
X = 32 y = 20

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The new budget constraint is a straight line with a slope of -4/8 and
x-axis at y = 0 y-intercept at x = 0
4x + 8(0)=160 4(0)+8y = 160
4x = 160 8y = 160
X = 40 y = 20
The old budget constraint intersects the x-axis at 32 and the y-axis at 20. The new budget
constraint intersects the x-axis at 40 and the y-axis at 20.
The diagram below shows the old and new budget constraints.

Y
20
Old budget line

New budget line

32 40 X

diagram showing the old and new budget constraints

As we can see, the new budget constraint is flatter than the old budget constraint. This means
that the consumer can now buy more x and y with their income. The consumer will therefore
consume more x and y.
The consumer will consume more x because the price of x has fallen. The consumer will also
consume more y because the consumer can now afford to buy more y with their increased
income.

14) Consider a perfectly competitive market in the short run. Assume that market demand
is P=100 − 4 Qd and market supply is P=Qs . And TFC =50 MC =8 q+12 q 2
A. What is the market equilibrium price and quantity?

B. Do firms make a profit or loss in the short run, and how much are these profits/
losses?
C. What is the minimum value of MC and AVC?
D. How much should be the minimum price of product firm needed to stay in market?

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 Given:
TFC = 50 MC=8 q+12 q2

Market demand function:

P=100 − 4 Qd
P+ 4 Qd=100
(100 − P)
Qd=
4
Market supply function is given as:
Qs=P

Solution:
A) To find Market equilibrium price and quantity we equate the demand function and supply
function
(100 − P)
Qd= =Qs=P
4
(100 − P)
=P
4
P=20 (equilibrium price)

To find equilibrium quantity we substitute equilibrium price into demand and supply
function
(100 − P)
Qd=
4
(100 −20)
Qd= =20
4
Qs=P=20
So equilibrium quantity is 20
B).To know if firms make a profit or loss in the short run we have to get
Total revenue and total cost
First we find profit maximizing output, to do this we equate marginal revenue and marginal cost

TR
MR=
q
Total revenue(TR) is the product of price and output

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 TR=P × q=20 q
Then marginal revenue become MR=20
MC=MR
2
8 q +12 q =20
Solving this equation, we find:

−5
q= , q=1
3
The slope of marginal cost has to be positive
Because of this q=1 is the correct profit maximizing output
Now we can get total revenue:
TR=Pq=20 ×1=20

To find total cost we integrate marginal cost and add TFC

2 3 2 3
TC=4 q + 4 q +50=4 (1) + 4 (1) +50=58

By subtracting total cost from total revenue we get:

TR −TC=20 −58=−38

Therefore, the firm is making a loss of 38

C) The minimum value of MC and AVC:
d (MC )
The minimum value of MC can be found by substituting the value of output at =0 into
d(q)
the marginal cost function
d (MC )
=0
d(q)

d (8 q+ 12q 2)
=0
d (q)

8+24 q=0

−1
q=
3

Substituting this into marginal cost function we the get the minimum value

2
8 q +12 q

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 ( ) ( )
2
−1 −1
8 +12 =− 1.33
3 3

This shows that for each additional output produced, the total cost decrease by 1.33(This
does not appear in real world)
The minimum value of AVC can found at
2 3
TC=4 q + 4 q +50
2 3
TVC =4 q +4 q
TVC
AVC=
q
2 3
4 q +4q 2
AVC= =4 q +4 q
q
d ( AVC )
The minimum value of AVC can be found by substituting the value of output at = 0 into
d (q )
AVC function
2
d (4 q+ 4 q )
=0
d (q)

4 +8 q=0

q=− 2

Substituting this into average variable cost function we the get the minimum value

2
4 q+ 4 q

2
4 (− 2)+ 4 ( −2 ) =8

This show each output has a contribution of 8$ for total variable cost
D) To stay in operation, the firm needs the price which equals at least the minimum AVC.
Thus, to determine the minimum price required to stay in business, we have to determine
the minimum AVC.
We get the minimum value of AVC, which is 8
Therefore, Thus, to stay in the market the firm should get a minimum price of $ 8.
15) Suppose in Haramaya University a certain contractor wants to maximize profit (∏) from
building one bridge. The contractor uses both labor and capital, and efficient combinations of

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Labor and capital that are sufficient to make a bridge is by the function 0.25 L 0.5 K 0.5, if the prices
of labor (w) and capital (r) are $ 5 and $ 10 respectively.
A).Find the cost-minimizing levels of labor and capital:
Start with the production function: Q =0.25 L0.5 K0.5
Set up the equation for the marginal rate of technical substitution (MRTS):

w MP L
MRTS = =
r MP K

where w is the wage rate, r is the rental rate of capital, MPL is the marginal product of labor,
and MP K is the marginal product of capital.

Compute the marginal products of labor and capital:

dQ dQ
MP L = =¿0.125 L−0.5 K 0.5 and MP k ¿= =¿0.125 L0.5 K −0.5
dL ¿ dK
Substitute the marginal products into the MRTS equation and simplify:
−0.5 0.5
0.125 L K w
0.5 − 0.5 = =
0.125 L K r

K K 1
Solve for =: = , L = 2K
L L 2
Substitute L = 2K and Quantity = 1 into the production function: 1 = 0.25 (2K)0.5 K0.5
Solve for K:
1 = 0.5K, K = 2
K 1
Substitute K = 2 into = : L=4
L 2
B).Compute the minimum cost of production:
Use the cost function: C = wL + rK
Substitute the values of w, r, L, and K: C = 5(4) + 10(2)
Simplify: C = 40birr
A) Compute the marginal product of labor and capital at their cost-minimizing levels:
Substitute L = 4 and K = 2 into the marginal product equations:
dQ MP k ¿= dQ =¿0.125 L0.5 K −0.5
MP L = =¿0.125 L−0.5 K 0.5 and
dL ¿ dK

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Simplify: => MP L=
√2 and MP = √2
K
10 8

References:
-Introduction to economics (Econ 1011) module
- Varian, H. R. (2014). Intermediate microeconomics: A modern approach (9th ed.). W. W.
Norton & Company.
- Mankiw, N. G. (2014). Principles of Microeconomics (7th ed.). Cengage Learning.
- Parkin, M., Powell, M., & Matthews, K. (2014). Economics. Pearson Higher Education AU.

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