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THE COPPERBELT UNIVERSITY
SCHOOL OF BUSINESS
BSP 110 PRINCIPLES OF ECONOMICS
2015 ASSIGNMENT
DUE DATE: 4th January 2016 at 10am
QUESTION
A manufacturing firm in Kitwe has a normal demand curve given by Q = 5,000 – 100P and its total cost curve in the relevant range is TC = 10,000 + 10Q (in K’000).
(i) Over this relevant range, plot the demand curve, marginal revenue curve, marginal cost curve, and average cost curve on one graph paper. Curves should be clearly labelled. (12 Marks)
(ii) Use the above curves to determine the firm’s normal profit-maximising price, quantity, and the amount of profits. (6 Marks)
(iii) Now suppose that there is a temporary shift in monthly demand to Q = 6,000 – 100P. Calculate the firm’s profit when it changes both price and quantity in response to the new demand. Assume the cost of changing prices is K3,000 (this includes the cost of re-adjusting price when ‘normal’ demand conditions return the following month).
(10 Marks)
(iv) Suppose that instead of changing price, the firm adopted a ‘sticky price’ policy and simply let quantity adjust to clear the market. Determine the firm’s profit under this strategy. (6 Marks)
(v) Now consider a short-run fall in monthly demand to Q = 4,000 – 100P. Calculate the firm’s profits when both price and quantity are adjusted in response to the new demand conditions. (Again the cost of changing prices is K3,000. (8 Marks)
(vi) Compare your answer in part (ii) to the level of profits the firm would obtain by adopting a sticky price strategy in the face of the fall in demand. Is the sticky price strategy worthwhile? (8 Marks)

Oh, my!

You expect someone here to do your entire assignment?? It won't happen here.

However, if you indicate what you have already done and what questions you have, someone here who's into economics might be able to help.

To answer this assignment question, we will need to go through each part step by step.

(i) To plot the demand curve, marginal revenue curve, marginal cost curve, and average cost curve on one graph paper, we need to calculate their respective values.

- The demand curve is given by Q = 5,000 - 100P.
- The marginal revenue curve is the derivative of the demand curve, which gives MR = 5,000 - 200P.
- The total cost curve is given by TC = 10,000 + 10Q. To find the marginal cost curve, we need to find the derivative of the total cost function with respect to Q, which gives MC = 10.
- The average cost curve is given by AC = TC/Q, where Q is the quantity.

Once we have these equations, we can plot them on a graph paper, labeling each curve clearly.

(ii) To determine the firm's normal profit-maximizing price, quantity, and the amount of profits, we need to find the equilibrium point where the marginal cost equals the marginal revenue.

Setting MC = MR, we get:
10 = 5,000 - 200P

Simplifying this equation, we find:
200P = 4,990
P = 24.95

Substituting this value of P back into the demand curve equation, we find:
Q = 5,000 - 100(24.95)
Q = 5000 - 2495
Q = 2505

The normal profit-maximizing price is 24.95, the quantity is 2505, and profits can be calculated by subtracting the total cost from the total revenue (Price * Quantity).

(iii) To calculate the firm's profit when it changes both price and quantity in response to the new demand, we need to consider the new demand equation: Q = 6000 - 100P.

We can follow the same steps as in part (ii) to find the new equilibrium price and quantity. Once we have the new price and quantity, we can calculate the profit by subtracting the total cost from the total revenue, taking into account the cost of changing prices.

(iv) To determine the profit under a sticky price strategy, we need to let the quantity adjust to clear the market. This means setting the new quantity equal to the demand equation: Q = 4000 - 100P.

We can follow the same steps as before to find the equilibrium price and quantity under this strategy. Then, calculate the profit by subtracting the total cost from the total revenue, considering the cost of changing prices.

(v) Similar to part (iii), we need to calculate the new equilibrium price and quantity using the updated demand equation: Q = 4000 - 100P.

Again, calculate the profit by subtracting the total cost from the total revenue, taking into account the cost of changing prices.

(vi) Compare the profit obtained from part (ii) (normal profit-maximizing price, quantity, and profits) to the profit obtained in part (iv) (sticky price strategy in the face of the fall in demand). Determine if the sticky price strategy is worthwhile by comparing the two levels of profit.