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## Calculating the Price Elasticity of Demand

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Instructions:Calculating the Price Elasticity of Demand

- (20 points) Suppose honey is produced in a beehive using bees and sugar. Each honey producer uses one beehive which she rents for $40/month. Producing q gallons of honey in one month requires spending 4q dollars bees, and 2q2 dollars on sugar.
- a) (4 points) What is the total cost of producing q units of honey for an individual honey producer in a given month?
- b) (4 points) In general, if the total cost of producing honey is a + bq + cq2, then the marginal cost of producing honey is b + 2cq. Assuming each honey producer operates as a price-taker, what is the monthly supply curve for an individual producer?
- c) (4 points) Let Q be the total market supply, and q is the supply of an individual firm. Therefore, q = Q/n where n is the total number of firms in the market. Suppose the demand for honey is given by Q = 548-4P. Also, suppose there are 60 honey producers in the market. What is the equilibrium price of honey?
- d) (4 points) How much profit does an individual producer make in a month?
- e) How many firms will there be in long run equilibrium? (Remember, a firm will enter the market as long as it can make a positive profit, otherwise a firm will not enter the market.)
- (12 points) Suppose the demand for a product is given by Q = 200 – 5P.
- a) Calculate the Price Elasticity of Demand when the price of the good is P = 8?
- b) What is the Marginal Revenue of the firm when P = $8?
- c) If the firm wants to increase their total revenue, should they increase or decrease the Price?
- d) What price should the firm charge if it wants to maximize Total Revenue?
- (18 points) A monopolist faces a demand curve given by:
P = 200 – 10Q, where P is the price of the good and Q is the quantity demanded. The marginal cost of production is constant and is equal to $60. There are no fixed costs of production.

- A) (4 points) What quantity should the monopolist produce in order to maximize profit?
- B) (2 points) What price should the monopolist charge in order to maximize profit?
- C) (4 points) How much profit will the monopolist make?
- D) (4 points) What is the deadweight loss created by this monopoly (hint: compare the monopoly outcome with the perfectly competitive outcome).
- E) (4 points) If the market were perfectly competitive, what would the price of the product be?

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Introduction45-41 points

The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.

Literature Support91-84 points

The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.

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Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met.

Average Score50-85%

40-38 points

More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided.

83-76 points

Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration.

52-49 points

Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met.

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37-1 points

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75-1 points

Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration.

48-1 points

There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met

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