4. Here is a function that is either a demand function or a supply function (but

Question

4. Here is a function that is either a demand function or a supply function (but not both) 1 Q-2-5P A change occurs so that the following function now represents the situation: Q-6-5P We can conchude that (circle the appropriate conchusion on the answer sheet). a demand has increased b. demand has decreased c supply has increased d supply has decreased e. quantity supplied has decreased f quantity demanded has decreased g. quantity demanded has increased h. quantity supplied has increased 5. Here is a demand function: Q-6-6P Circle the correct formula for marginal revenue MR) a. MR 2-4Q e. MR 1-.167Q c. MR-1.5-.2Q d. MR-1-.3330 f. MR-1.5- .333Q 6. Circle your choice for the quantity that will maximize total revenue for the function in 5 (above 1 34.5 5 6 7.5 7. Suppose the price elasticity of demand for bread is 0.20. If the price of bread falls by 10%, the quantity demanded will increase by: a 2 percent and total expenditures on bread will rise. b.2 percent and total expenditures on bread will fall. s. 20 percent and total expenditures on bread will rise. d. 20 percent and total expenditures on bread will fall. e..20 percent and total expenditures on bread will be unchanged

Explanation / Answer

(4) (a)

Quantity is inversely related with price, therefore it is a demand function.

From original demand function,

When Q = 0, P = 2/5 = 0.4 (Vertical intercept) and when P = 0, Q = 2 (Horizontal intercept).

From new demand function,

When Q = 0, P = 6/5 = 1.2 (Vertical intercept) and when P = 0, Q = 6 (Horizontal intercept).

Since both vertical and horizontal intercepts are higher, it means the demand curve has shifted rightward as a result of an increase in demand.

(5) (d)

Q = 6 - 6P

6P = 6 - Q

P = (6 - Q) / 6

Total revenue (TR) = P x Q = (6Q - Q2) / 6

Marginal revenue (MR) = dTR/dQ = (6 - 2Q) / 6 = 1 - 0.333Q

(6) Q = 3

TR is maximized when dTR/dQ (= MR) = 0.

(6 - 2Q) / 6 = 0

6 - 2Q = 0

2Q = 6

Q = 3

(7) (b)

Price elasticity = % Increase in quantity demanded / % Decrease in price

0.2 = % Increase in quantity demanded / 10%

% Increase in quantity demanded = 10% x 0.2 = 2%

Since price elasticity is less than 1, demand is inelastic and a fall in price will lower total revenue.

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