2007 Pearson Education Asia

Applications and Linear Functions

Example 1 Production Levels
Suppose that a manufacturer uses 100 lb of material
to produce products A and B, which require 4 lb and
2 lb of material per unit, respectively.

Solution:
If x and y denote the number of units produced of A
and B, respectively,


Solving for y gives
0 , where 100 2 4 > = + y x y x
50 2 + = x y
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Demand and Supply Curves
Demand and supply curves have the following
trends:
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3
Demand Function
Relationship between demand amount of
product and other influenced variables as
product price, promotion, appetite/taste, quality
and other variable.
Q = f(x1,x2,x3,xn)

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Demand Function
D : Q = a b P



Q P
20 100
18 200
16 300
14 400
12 500
10 600
100 200 300 400 500 600
1
0
12
14
16
18
20
22
Q
P
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Linear Demand function
Q = a - b P
Q : amount of product
P : product price
b : slope ( - )
a : value of Q if P = 0

P
Q
0
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Property of Demand function
1. Value of q and p always positif or >= 0
2. Function is twosome/two together, each value
of Q have one the value of P, and each value
of P have one the value of Q.
3. Function moving down from left to the right
side monotonously
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Supply function
Relationship between Supply amount of product
and other influenced variables as product price,
technology,promotion, quality and other variable.
Q = f(x1,x2,x3,xn)

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Supply Function
S : Q = a +b P



Q P
10 100
12 200
14 300
16 400
18 500
20 600
100 200 300 400 500 600
1
0
12
14
16
18
20
22
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Linear Function Supply
Q = a + b P
Q : Amount of product
P : product orice
b : slope ( + )
a : value of Q if P = 0

P
Q
0
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Property of Supply Function
1. Value of q and p always positif or >= 0
2. Function is twosome/two together, each value
of Q have one the value of P, and each value
of P have one the value of Q.
3. Function moving up from the left to the right
side monotonously
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The point of market equilibrium
Agreement between buyer and seller
directly or indrectly to make the
transaction of product with certain price
and amount of quantity.
In mathematics the same like crossing
between demand and supply function
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Equilibrium
The point of equilibrium is where demand and
supply curves intersect.
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D: P = 15 - Q
S :P = 3 + 0.5Q

A. Determine equilibrium point
B. Graph D, S function
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Exercise : Price - Demand
At the beginning of the twenty-first century, the world
demand for crude oil was about 75 million barrels per day
and the price of a barrel fluctuated between $20 and $40.
Suppose that the daily demand for crude oil is 76.1
million barrels when the price is $25.52 per barrel and
this demand drops to 74.9 million barrels when the price
rises to $33.68. Assuming a linear relationship between
the demand x and the price p, find a linear function in the
form p = ax + b that models the price demand
relationship for crude oil. Use this model to predict the
demand if the price rises to $39.12 per barrel.
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Exercise : Price - Demand
Suppose that the daily supply for crude oil is 73.4 million
barrels when the price is $23.84 per barrel and this
supply rises to 77.4 million barrels when the price rises to
$34.2. Assuming a linear relationship between the
demand x and the price p, find a linear function in the
form p = ax + b that models the price demand
relationship for crude oil. Use this model to predict the
supply if the price drops to $20.98 per barrel.
Whats equilibrium point and make a graph in the same
coordinate axes
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Example 1 Tax Effect on Equilibrium
Let be the supply equation for a
manufacturers product, and suppose the demand
equation is .

a. If a tax of $1.50 per unit is to be imposed on the
manufacturer, how will the original equilibrium price
be affected if the demand remains the same?

b. Determine the total revenue obtained by the
manufacturer at the equilibrium point both before and
after the tax.
50
100
8
+ = q p
65
100
7
+ = q p
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Solution:
a. By substitution,
Before tax,
and


After new tax,
and
100
50
100
8
65
100
7
=
+ = +
q
q q
( ) 58 50 100
100
8
= + = p
70 . 58 50 . 51 ) 90 (
100
8
= + = p
90
65
100
7
50 . 51
100
8
=
+ = +
q
q q
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Solution:
b. Total revenue given by
Before tax


After tax,
( )( ) 5800 100 58 = = = pq y
TR
( )( ) 5283 90 70 . 58 = = = pq y
TR
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BREAK EVENT POINT
BEP is identifying the level of operation
or level output that would result in a
zero profit. The other way thatr the firm
cant get profit or dont have loss
TC= FC + VC
TC : Total Cost
FC : Fixed Cost
VC : Variabel Cost
VC = Pp x Q = cost production per unit x
amount of product
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TR = Pj x Q
Tr : Total Revenue
Pj : Selling Price
Q : Amount of product

Profit = TR TC
BEP TR=TC
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BE
P
T
R
T
C
F
C
Q
$
0
Q
bep
C
bep
loss
profit
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Example 2 Break-Even Point, Profit, and Loss
A manufacturer sells a product at $8 per unit, selling
all that is produced. Fixed cost is $5000 and variable
cost per unit is 22/9 (dollars).
a. Find the total output and revenue at the break-even
point.
b. Find the profit when 1800 units are produced.
c. Find the loss when 450 units are produced.
d. Find the output required to obtain a profit of
$10,000.

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Break-Even Points
Profit (or loss) = total revenue(TR) total cost(TC)
Total cost = variable cost + fixed cost

The break-even point is where TR = TC.
FC VC TC
y y y + =
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Solution:
a. We have

At break-even point,



and

b.
The profit is $5000.
5000
9
22
8
+ = + =
=
q y y y
q y
FC VC TC
TR
900
5000
9
22
8
=
+ =
=
q
q q
y y
TC TR
( ) 7200 900 8 = =
TR
y
( ) ( ) 5000 5000 1800
9
22
1800 8 =
(

+ =
TC TR
y y
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BEP Exercise
A firm produce some products where the cost per unit is
Rp 4.000,- and selling price per unit is Rp12.000,-
.Management developed that fixed cost is Rp 2.000.000,-
Determine the amount of product where the firm should
sell amount of product so that the break event point
achieved.
a. Find the total output and revenue at the break-even
point.
b. Find the profit when 1600 units are produced.
c. Find the loss when 350 units are produced.
d. Find the output required to obtain a profit of
Rp 7,000.