Elasticity, Production and Cost Issues - Case Study Example

The demand will also decrease because low supply will result in to increase in price.

1. a). The market quantity equilibrium will shift to the right. The quantity supplied will increase and the market price will decrease but in the short run.  In the long run, the demand will increase due to a decrease in price. However, suppliers may hoard the goods to wait for the prices to increase hence low supply.

b).  The equilibrium price will decrease since low demand will cause a greater decrease in price to attract more customers.

1. An increase in demand will result in higher supply. This will make the suppliers hoard the goods in anticipation of higher prices hence decreasing supply. Consequently, customers will demand more and eventually leading to further increase in prices.

5 a)         (X1+x2/2, y1+y2/2)

           = (35+50/2, 180+100/2)

           = (85/2, 280/2)

           = (42.5, 140)

 When the price of a commodity is $42.5, the quantity demanded is 140 units. The price is elastic since the increase in price results in a decrease in quantity demanded and vice versa is true.

b).        Qd=a-bp where Qd=quantity demanded, a= factor of price change, and p is the price.

At equilibrium price, (X1+x2/2, y1+y2/2), elasticity = 1.0

        20+35/2, 300+180/2

       = 27.5, 240

         Qd=240, p=$27.5

A decrease in price decrease is 95% of $27.5= 240 of x%, where x is the % change in quantity demanded. Therefore, 95% of 27.5= 26.125, this is equivalent to 240 of x%

26.125=240x/100.  x=26.125 /2.40

X=10.88%

The percentage change in quantity demanded is 0.52. This is a percentage increase in quantity demanded.

c). total revenue = price *quantity. When P=$10, the total revenue is 10*500=$5000. When the price increases to $20, the total revenue is P*Q= 20*300=$6000. This shows that the increase in price by $10 increase total revenue by ($6000-$5000). This is an increase of $1000 revenue.

6.0 When the demand for labor is inelastic, the rate of unemployment increases. For example, if labor demanded is 300 and skilled workers are 600, 300 people will remain unemployed.  As more people gain skills, demand does not change hence more people remain jobless.

7. Average physical product (APP) = Total physical products (TPP)/ Number of workers
8. a) Marginal product of 4th worker 120-111= 9 units.
9. b) Marginal revenue of 5th worker, 1650-1320= $330
10. c) Marginal cost of 2nd worker, $290-$145=$145
11. d) The optimal number of workers to be hired is five. The marginal cost of any additional work should not exceed his/her marginal revenue. Hiring a sixth person will cost more than the revenue he or she can generate.
12. Since fixed cost does not change, at optimal output, price should be greater or equal to total variable cost. The average Variable cost should be at the minimal point.

Total product

TFC

TVC

ATVC

0

200

0

0

1

200

70

70

2

200

120

60

3

200

150

50

4

200

220

55

5

200

300

60

6

200

390

65

To obtain Average Total Variable Cost (ATVC), =TVC/Total Product (TP)

Therefore, they should three units because the fourth unit will result in an increase in total variable cost.

10. For the business to continue its operation, it should be able to break even. At this point, total revenue (TR) = total cost (TC). However, at break-even, the business should be able to cover all its variable costs from the revenue. For 3 months, revenue is $4000, while variable cost is ($12000-$6000) = $6000. Therefore, it should close down since it is not able to generate enough revenue to cover fixed costs.