BUSINESS ECONOMICS

I.
1. A Company produces commodity X. It collects Rs.1,75,000/- in revenue and
spends Rs.80,000/- on raw materials, labour expenses, utilities and rent The owners of
the company have provided Rs.5,00,000/- of their own money to the company instead
of investing the money and earning a 14% annual rate of return.

a. The explicit costs of the Company:. The implicit costs of the Company:. The total
economic cost:
b. The economic profit of the Company: _ The accounting profit of the Company:
c. If the owners could earn 20% annually on the money they have invested in the
Company, the economic profit of the Company would be:

2. Over the next 3 years, a firm is expected to economic profits of Rs.1,20,000/-in

the first year, Rs.1,40,000/- in the second year, and Rs.1,00,000/- in the third year.
After the end of third year, the firm will go out of business:

a. If the discount rate is 10% for each of the next 3 years, the value of the firm is Rs.
________ and the firm can be sold for a price of Rs. _________
b. If the discount rate is 8% for each of the next 3 years, the value of the firm is Rs.
________ and the firm can be sold for a price of Rs. _______._.

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II. Using the following data on Output (Q) and Price (P), calculate the related TR,
Note:TR = P.Q MR = d(TR) AR = TR
QQ
Q P TR MR AR

0 10

1 9

2 8

3 7

4 6

5 5 ' .

6 4

7 3

8 2

9 1

10 0

1. Graph the data with Price/Revenues on the Y - axis and Output (Q) on the X-axis.
2. At what output level, TR is maximized?
3. Why is MR less than AR at each price level?
• Consider the following information for commodity X produced by a business firm:
P = MR = 50
TC = 78,000 + 18 Q + 0.002 Q2
MC = 18 + 0.004 Q.

1. Calculate profit - maximizing output level.

2. Calculate the maximum profit.

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TTT. A Business Company operates a farm producing Potato. Potato and Wheat
are substitutes in production and consumption. Demand and supply functions for
Potato are estimated as follows:
D = -1,450 - 25 P + 12.5 Pw + 0.2Y S = -100 + 75 P- 25 Pco -12.5 PL + 10 R
Where: P = Average wholesale price of Potato per unit Pco = Average wholesale
price of Wheat per unit Y = Income in billions
PL = Average price of labour per unit of time R = Average annual rainfall in inches.
D,S = Millions of units of Potato demanded and supplied.
1. Using the following information, express D and S as a functions of price and
develop the Potato demand and supply functions/ curves: P = 2 Pco = 4Y = 7,500
billion PL = 8 R = 20.
2. Calculate the surplus or shortage of Potatoes when P = 1.50, 2, and 2,50.
3. Compute the market equilibrium price - output combination.

IV. A Soft Drink Company introduced a new product last year. Based on the
market survey data, the following equation expresses the revenue of the product
= 50Q-0.1Q2
1. Calculate revenue maximizing sales and price.
2. Compute the maximum revenue.
3. With more advertising and small increase in the average price by the company,
sales revenue would increase according to the following total revenue eauation.
= 70Q-0.1Q2
Before accepting this proposal, top management wants the following information:
(i) Revenue - maximizing sales volume.
(ii) Revenue - maximizing price.
(iii) Maximum revenue. i Compute all these values.

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V. Consider the following equation for the demand curve: Q = 120 - 2P
1. Find the corresponding TR function, MR function and AR function.
2. Determine the output level and price that will maximize TR.
3. Calculate the maximum TR.

VI. You are given the following market demand and supply functions for
commodity X:
Dx = 8000 - 1000 Px Sx = 3500 + 1250 Px
1. Derive the market demand and supply schedules.
2. Graph the market demand supply schedules. Find out equilibrium price and
quantity.
3. Using simultaneous equation method, compute equilibrium price and quantity.
Check these equilibrium quantities with those obtained in 2 above.

VII. There are 10,000 identical individual consumers in the market for Commodity
X, each with the following demand function.
dx = 10 - 5 Px and
100 identical producers of commodity X, each with a supply function given by:
Sx = 3 + 2 Px
1. Derive Market Demand function (Dx) and Market Supply function (Sx).
2. Obtain the equilibrium price and quantity, using simultaneous equation approach.

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3. With an increase in consumer's income (ORC), the individual demand function
(dx) changes to:
Dx = 15 - 5 Px,
While Market Supply function (Sx) remains unaltered. Derive the new Market
Demand function (Dx). Calculate new equilibrium price and quantity.

4. ORC, and improvement in the technology of producing commodity X results in a

new individual supply function.
Sx = 6 + 2 Px,
While the Market Demand function (Dx) remains the same. Derive the new Market
Supply function (Sx). Compute the new equilibrium P and Q.

5. Using Dx and Sx functions obtained before, computer new equilibrium P

andQ.

VIII. Complete the following Table which describes the demand for goods:
Price Units Total Utility Nj5J?!a ' 1 Price per
Utility Unit of M.U

11 0 0 .

10 1 25

9 2 45

8 3 60

7 4 70

6 5 75

(a) State the relationship between an increase in consumption and M.U and
Price/M.U ratio.
(b) What is the optimal level of consumption of goods if the M.U derived from the
consumption of .services costs 0.50 per Utile?

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IX. Consider the following data:
.. \
N
Goods (G) Services (S)

Units T.U Units T.U

0 0 ' 0 0

1 100 1 70

2 160 2 124

3 210 3 175

4 250 4 220

5 275 5 250
———————— *
———————

(a) Develop a table on M.U derived from consumption of goods and services. Also
show the trend in M.U per rupee spent (MU/P ratio) if PG = 20 and PS = 15.
(b) If consumption of two units of G is optimal, what level of consumption of S
could be justified?
(c) If consumption of 5 units of S is optimal, what level of consumption of G could
be justified?
(d) Determine the optimal allocation of Rs.100/ - budget between G and S.

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