Test Bank ECO 5020 01 Practice

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ECO502001PracticeQuestionsChapter2–AnswerGuide

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RevenueFunction:

(1) Thefirm’sinversedemandcurveisP(Q)=170–10Q.Whatisthefirm’srevenue

functionR(Q)?

Revenueispricemultipliedbyquantity.Therevenuefunctionisthusasfollows:

R(Q) = P(Q)*Q

=(170–10Q)*Q

=170Q–10Q2

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InverseDemandCurve:

(2) Afirm’sdemandcurveisdescribedbytheequation:Q=600–20P.Theinversedemand

curveis:

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a. P=30–20Q

b. P=300–20Q

c. P=300–0.05Q

d. P=30–0.05Q

e. Noneoftheaboveanswersiscorrect.

Theinversedemandcurve(priceasafunctionofquantity)isderivedasfollows:

Q =600–20P

Q+20P=600

20P=600–Q

P =(600–Q)/20

P=(600/20)–(Q/20)

P=30–0.05Q

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CostFunction:

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(3) ForacostfunctionofthegeneralformC(Q)=α+βQ,whatcomponentofcostisαand

whatisβ?Askedinanotherway:αiswhattypeofcost,andβiswhattypeofcost?

αis“fixedcost”,andβis“variablecost”.

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Forproblems(4)‐(6)findtheoptimallevelofoutput(Q*)thatmaximizesprofit.Dothisin

stepsandshowyourwork.

Forallproblems,theoptimallevelofoutput(Q*)mustsatisfythefirm’sconditionsforprofit

maximization,whichareasfollows:

Mπ(Q*)  =MR(Q*) –MC(Q*)=0

Marginal   Marginal Marginal

ProfitRevenue Cost

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(4) Thefirm’sprofitfunctionπ(Q)is:π(Q)=200+70Q–6Q2

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