Homework Assignment: Toot Boot's Cost, Demand, and Pricing

This economics homework assignment analyzes the cost structure, demand, and pricing strategies of a fictional company, Toot Boot. The assignment begins by calculating fixed and marginal costs based on a given cost function. It then explores profit-maximizing price and quantity, profit, average cost, and consumer surplus in a London market scenario. Further, the assignment examines the impact of changing cost functions, delivery services to Edinburgh, and the opening of a branch in Manchester, including price discrimination strategies and the effects of managerial decisions. The homework also tests understanding of basic economic concepts such as shifts in supply and demand, substitutes and complements, and the law of downward sloping demand. Solutions are provided for each question, demonstrating economic principles and calculations.

Homework 2
1. What is Toot Boot.s .xed cost? What is its marginal cost?
c (Q) = 8000+100Q.
Fixed cost is 8000
Marginal cost is = TC = 8000Q+ 100Q^2
MC = 8000 – 200Q
2. Toot Boot sells its boots in London, where the yearly demand for the
boots is described by the straight line equation P = 1100 - 4Q.
(a) What are the pro.t-maximizing price and quantity?
TR = 1100Q – 4Q2
MR = 1100 – 8Q
MC = MR
8000 – 200Q = 1100 – 8Q
= 8000 – 1100 =- 8Q + 200Q
= 7900 = 192Q
Q = 41.14
P = 1100 – 4(41.14)
= 935.44
(b)What are Toot Boot.s (yearly) pro.t and average cost?
Profits = TR – TC
=TC = 8000 + 100 (35.63)
= 11563
TR = 35.63* 935.44
= 33329.73

Profit = 33329.7272 – 11563
= 21766.73
Average cost = TC/Q
= 8000Q – 200Q^2
= 8000 – 200Q
= 8000 – 200(35.63)
= 874
(c) What is the consumer surplus?
Consumer surplus
1100 – 4(35.63)
= 957.48 - 935.44
= 22.04
(d) A year has gone by and Toot Boot.s costs function is now c (Q) =
9500 + 100Q: What price should Toot Boot charge now? What
are its pro.ts?
TC = 9500Q – 100q^2
9500 – 200Q = 1100 – 8Q
=8400 = 192Q
Q = 43.75
P = 1100 – 4(43.75)
= 925

=TC = 8000 + 100 (35.63)
= 11563
TR = 35.63* 925
= 32957.75
Profit = 32957.75 – 11563
= 21394.75
3. As an experiment, Toot Boot had decided to o¤er delivery service to
customers in Edinburgh. It costs Toot Boot £ 10 to ship a pair of boots
there. The demand curve in Edinburgh is the same as in London.
(a) What price should Toot Boot charge for the boots it ships to
Edinburgh?
TC = 9510Q – 100q^2
9510 – 200Q = 1100 – 8Q
=8410 = 192Q
Q = 43.8020833
P = 1100 – 4(43.8020833)
= 924.7917
(b) What fraction of the shipping cost does Toot Boot pass on to the
Edinburgh customers?
1%
4. Toot Boot has found that shipping boots poses unexpected quality
control issues and has decided to stop its delivery service. Instead, it
has opened a branch in Manchester, where the demand curve is given

by P = 700 - 2Q. It has also opened a factory in Manchester, with
the same cost function as the London factory. That is, its two cost
functions are cM (Q) = 9500 + 100QM and cL (Q) = 9500 + 100QL.
(a) Toot Boot knows about price discrimination and will charge dif-
ferent prices in London and Manchester. How should Toot Boot
price the boots it sells in London and its boots in Manchester?
MC =MR
MR = 700 – 4Q
MC = 9500 + 200Q
MR = MC= 700 – 4Q = 9500 - 200Q
= 8800 = 196Q
Q= 44.89
P = 700 – 2(44.89)
= 610.22 in Manchester
(b) What are Toot Boot.s total profits?
=TC = 9500 + 100 (35.63)
= 13063
TR = 35.63* 610
= 21734.3
Profit = 21734.3– 13063
= 10171.3

(c) Toot Boot has hired a new manager, who has not taken an eco-
nomics class. He argues that it does not make sense for Toot
Boot to sell a pair of boots in Manchester for less money than it
could get for the same boots in London. Accordingly, he raises
the Manchester price to be the same as the London price. What
are Toot Boot.s (yearly) pro.ts now?
TC = 9500 + 100 (35.63)
= 13063
TR = 35.63* 925
= 21734.3
Profits = 21734.3 – 13063
= 8671.3
(d) The new manager has been .red and Toot Boot has gone back
to price discrimination. Word has gotten around about the price
di¤erence between the London and Manchester stores. What dif-
ference, if any, does this make?
More people would be inclined to purchase the boots at the Manchester
location
5. Recent research has cast doubts on the health benefts of vitamin E.
As a result, less vitamin E is being consumed. This quotation describes
(a) A shift in the supply curve of Vitamin E and a shift in the demand
curve of Vitamin E.
(b) A shift in the supply curve of Vitamin E leading to a movement
along the demand curve of Vitamin E.
(c) A shift in the demand curve of Vitamin E leading to a movement
along the supply curve of Vitamin E.
(d) A movement along the supply curve of Vitamin E and a movement
along the demand curve of Vitamin E.

6. Suppose that an increase in the price of coffee leads consumers to buy
less sugar. This is best described as
(a) A movement along the demand curve for sugar in a downward
direction.
(b) A movement along the demand for sugar in an upward direction.
(c) A shift in (or leftwards) of the demand curve for sugar.
(d) A shift out (or rightwards) of the demand curve for sugar.
7. Suppose that an increase in the price of X leads consumers to buy more
Y. This tells us that
(a) X and Y are substitutes.
(b) X and Y are complements.
(c) Y is a normal good.
(d) Y is an inferior good.
8. The law of downward sloping demand indicates that
i) As the price of a good falls, more of it is demanded.
ii) As consumers.incomes rise, more of a good is demanded.
(a) Only i
(b) Only ii.
(c) Both i and ii.
(d) Neither i nor ii.
9. The market demand curve indicates
(a) The quantity that consumers will buy at any given price.
(b) The quantity that consumers would like to buy at any given price.
(c) The price that consumers would like to pay at any given price.
(d) None of the above.
10. For many industrial uses, palladium and platinum are substitutes, but
only platinum can be used in jewellery. Suppose platinum becomes
more popular in jewellery. At the same time, wages for palladium
workers fall. What is the e¤ect on the market for palladium?
(a) The price and quantity both increase.
(b) The price and quantity both decrease.
(c) The price of palladium increases, the e¤ect on quantity is ambigu-
ous.
(d) The quantity of palladium increases, the e¤ect on price is ambigu-
ous.
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