1) Assume the total cost function of your business is given by C(q) = 100+5q+q 2
ID: 1189615 • Letter: 1
Question
1) Assume the total cost function of your business is given by C(q) = 100+5q+q2. Then, if the output is q = 10, the average total cost is
15 dollars
20 dollars
25 dollars
30 dollars
2)
Assume the cross price elasticity of demand of products A and B is EAB = 2/3. Then, a 30% increase in the price of product B will
Decrease the sales of product A by 20%
Increase the sales of product A by 20%
Decrease the sales of product A by 45%
Increase the sales of product A by 45%
3)
If the own price elasticity of demand for computers is E = -3/2, a 10% decrease in the price of computers will
Decrease the quantity demanded by 10%
Decrease the quantity demanded by 15%
Increase the quantity demanded by 10%
Increase the quantity demanded by 15%
4)
Assume you have an asset which will pay 5,000 dollars at the end of each year forever. Then, if the interest rate is 5% per year, the value of the asset is
25,000 dollars
50,000 dollars
100,000 dollars
500,000 dollars
5)
Assume you expect a future payment of 1100 dollars one year from now. If the interest rate is 10% per year, what is the present value?
1100 dollars
1210 dollars
1000 dollars
1010 dollars
6)
Assume you are the manager of a business with the total cost function C(q)=50+5q2 and you sell your output in a competitive market at a price of p=250 dollars per unit. Then, to maximize your profit you should produce
15 units
20 units
25 units
30 units
A.15 dollars
B.20 dollars
C.25 dollars
D.30 dollars
Explanation / Answer
(1) Option (C)
C(q) = 100 + 5q + q2
ATC = C(q) / q = (100 / q) + 5 + q
When q = 10, ATC = 10 + 5 + 10 = 25
(2) Option (B)
Cross price elasticity = 2/3 signifies that if price of B increases by 1%, quantity demanded of A increases by (2/3)%.
So, when price of B increases by 30%, quantity demanded of A increases by (30 x 2/3)% = 20%
(3) Option (D)
E = -3/2 indicates that if price decreases by 1%, quantity demanded will increase by (3/2)% = 1.5%
So, if price decreases by 10%, quantity demanded will increase by (1.5 x 10%) = 15%
(4) Option (C)
Value of a perpetuity = Annual cash flow / interest rate
= $5,000 / 0.05 = $100,000
(5) Option (C)
FV = PV x (1 + interest rate)Number of years
$1100 = PV x (1.10)
PV = $1100 / 1.1 = $1000
(6) Option (C)
In a competitive market, P = Marginal cost (MC)
C(q)=50+5q2
MC = dC(q) / dq = 10q
10q = 250
q = 25
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