Microeconomics Assignment: Demand, Revenue, and Cost Analysis Solution

This microeconomics assignment analyzes the Dolan Corporation's engine sales, demand, revenue, and cost structures within a monopolistically competitive market. It calculates optimal prices and quantities for revenue and profit maximization, considering fixed and marginal costs. The a...Read More

Running head: MICROECONOMICS
Microeconomics
Name of the Student
Name of the University
Student ID

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................6
Answer 3..........................................................................................................................................7
Answer 4..........................................................................................................................................8
Answer 5..........................................................................................................................................9
Answer 6........................................................................................................................................10
Answer 7........................................................................................................................................12
Reference.......................................................................................................................................13

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Answer 1
(a)
To sell 20 engines per month, Dolan Corporation needs to charge the price shown below
P=2000−50 Q
¿ , P=2000−(50 × 20)
¿ , P=2000−1000
¿ , P=$ 1000
(b)
After the setting price of $500, the number of engines Dolan could sell per month is
P=2000−50 Q
¿ , 500=2000−50 Q
¿ , 50 Q=1500
¿ , Q=30
(c)
Own price elasticity of demand for engines sold by Dolan is given by
Own price elastcicty of demand=
∆ Q
Q
∆ P
P

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¿ , Own price elastcicty of demand=
30−20
20
500−1000
1000
¿ , Own price elastcicty of demand=
10
20
−500
1000
¿ , Own price elastcicty of demand=
1
2
−1
2
¿ , Own price elastcicty of demand=−1
(d)
Dolan maximize their monthly revenue at the price where marginal revenue (MR) equals
zero. Now, total revenue (PQ) is
Total Revenue (TR)=2000 Q−50 Q2
¿ , dTR
dQ = d (2000Q−50 Q2)
dQ
¿ , MR= d (2000Q−50 Q2)
dQ
¿ , MR=2000−100 Q
Now, putting the value of MR=0 since the revenue maximization occurs where MR equals zero
¿ , 0=2000−100 Q
¿ , 100 Q=2000

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¿ , Q=20
At quantity 20, the price of engines is $1000 and thus at this price Dolan maximizes revenue.
(e)
Dolan maximizes revenue at quantity 20. Fixed cost of Dolan is $12000 per month
marginal cost is $300. Therefore, the average unit cost is
Average unit cost= Total cost
Quantity
¿ , Average unit cost=12000+(20 ×300)
20
¿ , Average unit cost=18000
20
¿ , Average unit cost=$ 900
(f)
Dolan maximize their monthly profit at the price where marginal revenue (MR) equals marginal
cost (MC). Now, total revenue (PQ) is
Total Revenue (TR)=2000 Q−50 Q2
¿ , dTR
dQ = d (2000Q−50 Q2)
dQ
¿ , MR= d (2000Q−50 Q2)
dQ
¿ , MR=2000−100 Q

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Now, putting the value of MR=300 since the revenue maximization occurs where MR equals
MC.
¿ , 300=2000−100 Q
¿ , 100 Q=1700
¿ , Q=17
At quantity 17, the profit is maximized. Therefore, monthly profit maximizing price is
P=2000−50 Q
¿ , P=2000−(50 ×17)
¿ , P=2000−850
¿ , P=$ 1150
(g)
Figure 1: Dolans demand, marginal cost and average cost curves
Source: (Created by the Author)

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Answer 2
(a)
Rival
Strategies Advertise Do not Advertise
You Advertise (5,5) (10,3)
Do not Advertise (1,3) (2,4)
(b) From the matrix, it is evident that you have a dominant strategy because whatever be the
rival’s strategy you is better off by choosing advertise1. However, it is evident that rival has no
dominant strategy as with change of strategy of you, rival needs to changes its strategy.
(c) The Nash equilibrium for this game is to Advertise2.
(d) There will be no negotiation since you have dominant strategy.
1 Li, Shengwu. "Obviously strategy-proof mechanisms." American Economic Review 107.11
(2017): 3257-87.
2 Reny, Philip J. "Nash equilibrium in discontinuous games." Economic Theory 61.3 (2016):
553-569.

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Answer 3
(a)
Expected value of Project 1 is
Expected value 1= [ ( 0.5× 100000 ) + ( 0.5 ×50000 ) ]
¿ , Expected value 1=$ 7 5000
Expected value of Project 2 is
Expected value 2= [ ( 0.75× 100000 ) + ( 0.25 ×0 ) ]
¿ , Expected value 2=$ 7 5000
(b)
Variance of Project 1 is
Variance 1=Expected value of Revenue Square−Expectd value1
Variance 1=[ ( 0.5× 1000002 ) + ( 0.5 ×500002 ) −75000]
Variance 1=4999925000
Variance of Project 2 is
Variance 1=Expected value of Revenue Square−Expectd value2

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Variance 1=[ ( 0.7 5 ×750002 ) + ( 0.25 × 02 ) −75000]
Variance 2=4218675000
(c) A risk averse consumer will prefer Project 2 since the variance of project 2 is lower than
project 1.
Answer 4
(a)
Figure 2: Supply curve shifted
rightward
Source: (Created by the Author)
(b)
(i) D1 depicts the initial demand for the aluminum and D2 depicts the reduced demand for
aluminum.
(ii) Q1 represent the initial demand and supply equilibrium quantity of aluminum.
(iii) P2 is the price at which demand exceeds supply.

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(iv) When demand is D2 and the price is P2, then there exist over supply since at P1 quantity
demanded is Q3 and quantity supplied is Q1 where Q1 is greater than Q3.
(c)
Figure 3: Smelters supply
position
Source: (Created by the Author)
Answer 5
(a) The advantage of hiring a real estate agent that charges 6% commission over hiring an agent
that charges fixed fee is completely depends on the worth of eh house that I am selling. Suppose
that I am selling a house of worth $100000 then I have to pay the agent with percentage based
commission model $6000 whereas for the same house fixed commission is $75000. Therefore,
for percentage based commission the amount of commission is lower when the value of house is
lower3. However, in the case of high value house over $125000 it is better to go by fixed fee
3 Korver-Glenn, Elizabeth. "Brokering Ties and Inequality: How White Real Estate Agents Recreate Advantage and
Exclusion in Urban Housing Markets." Social Currents 5.4 (2018): 350-368

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commission agent. Thus, it can be said that when you are selling low value house then
percentage based i.e. 6% commission real agent is advantageous for hiring.
(b) The seller would choose the fixed fee agent over the commission agent when the value of
commission under commission goes above the fixed fee. For example if the value of the house
that I am selling is $200000 and for that the fixed fee charged by agent is $10000. In the case of
commissioned agent, the charge would be $12000 as per the 6% rate amount. Therefore, in this
case hiring fixed fee agent is beneficial. Hence, when the price of house is so high that the
amount of commission goes above the fixed fee then choosing fixed fee agent is more profitable.
Answer 6
(a) The AirBNB has become one of the leading online platform for renting houses. It has made
easy for people to rent their extra rooms or house to put on rent and earn some extra money.
Through AirBNB people can rent a house for less than 30 days which in general case does not
happen if anyone goes directly to the landlord. The rent charged is also lower in case of renting
housing through AirBNB or similar websites. Therefore, due to this the business of hotels are
getting affected as the people are renting house for less than 30 days and in that way the cost is
getting lower for them4. However, hotels are paying the indirect toll for this as their business are
being affected by this. This is nothing but a negative externality caused by AirBNB.
(b) Person renting houses from AirBNB by looking at the pictures given in the website. The
images are actually posted by the person who is actually letting his or her house for rent5. There
4 Shusong, Ba, et al. "Heterogeneity risks and negative externality." Economic Modelling (2019).
5 Yuxin, Huang, Chen Yuanyuan, and Tan Chuan Ho. "Short-Term Rental Regulation and House
Sharing Behavior: Evidence From Airbnb. com." International Conference on Information

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are many cases where tenant after renting the house found that the water supplies, electricity
supplies and even the condition of the house not up to the mark and not worth the rent he or she
is paying. Thus, this happens because of information asymmetry. In this case, the landlord is
informed and the tenant is uninformed. Additionally, the tenant is renting the house over online
website AirBNB and thus not checking the house physically or not even directly contacting the
landlord and thus it is not possible to get informed prior to renting the property.
(c) The market failure of information asymmetry mainly occurs in the case of rentals of house
less than 30 days6. Therefore, in order to regulate the market and mitigate the problem of market
failure the government has made registration mandatory for every host and in addition to that, a
person who is living in the city for more than a certain period is allowed to rent houses otherwise
not7. Thus, these regulations assure that the quality of houses that are on rent improves and no
tenants get exploited.
(d) There are no reasons to exempt the people listing their room for rent in AirBNB from
licensing and inspection because it will create market failure like negative externality and
asymmetric information.
Resources Management (CONF-IRM). Association For Information Systems, 2018.
6 Lev Aretz, Yafit, and Katherine J. Strandburg. "Regulation and Innovation: Approaching
Market Failure from Both Sides." Available at SSRN 3462522 (2019).
7 Nieuwland, Shirley, and Rianne van Melik. "Regulating Airbnb: how cities deal with perceived
negative externalities of short-term rentals." Current Issues in Tourism (2018): 1-15.

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Answer 7
The economist are skeptical that Alcan’s internal generation of electricity given them low
costs because if it had lowered its cost then it is obvious that the company had been producing
the product of the company at lower cost than its competitors and thus it must cushion to allow
some cost increase but it did not occur8. Purchasing electricity from the Hydro Quebec pushes
the production cost so high that Alcan could not even make the break even and decided to shut
down. Thus, this nude economist to think in the way as mentioned.
8 Batkovskiy, Aleksandr Mikhaylovich, et al. "Statistical simulation of the break-even point in
the margin analysis of the company." Journal of Applied Economic Sciences, Romania:
European Research Centre of Managerial Studies in Business Administration 12.2 (2017): 558.

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Reference
Batkovskiy, Aleksandr Mikhaylovich, et al. "Statistical simulation of the break-even point in the
margin analysis of the company." Journal of Applied Economic Sciences, Romania: European
Research Centre of Managerial Studies in Business Administration 12.2 (2017): 558.
Korver-Glenn, Elizabeth. "Brokering Ties and Inequality: How White Real Estate Agents
Recreate Advantage and Exclusion in Urban Housing Markets." Social Currents 5.4 (2018): 350-
368.
Lev Aretz, Yafit, and Katherine J. Strandburg. "Regulation and Innovation: Approaching Market
Failure from Both Sides." Available at SSRN 3462522 (2019).
Li, Shengwu. "Obviously strategy-proof mechanisms." American Economic Review 107.11
(2017): 3257-87.
Nieuwland, Shirley, and Rianne van Melik. "Regulating Airbnb: how cities deal with perceived
negative externalities of short-term rentals." Current Issues in Tourism (2018): 1-15.
Reny, Philip J. "Nash equilibrium in discontinuous games." Economic Theory 61.3 (2016): 553-
569.
Shusong, Ba, et al. "Heterogeneity risks and negative externality." Economic Modelling (2019).
Yuxin, Huang, Chen Yuanyuan, and Tan Chuan Ho. "Short-Term Rental Regulation and House
Sharing Behavior: Evidence From Airbnb. com." International Conference on Information
Resources Management (CONF-IRM). Association For Information Systems, 2018.

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