214ECN Managerial Economics

Seminar 1

Questions

1. If the total revenue and total cost functions are

TR=50Q-5Q2
TC=10+5Q-0.5Q2
a). what is the marginal revenue function?
b). what is the marginal cost function?
c). what level of output equates marginal revenue to marginal cost?
d). what level of output maximizes profit?

2. At a small food company, the relationship between profit (Π) and output (Q) is
as:
 =-40+20Q-2Q 2
d
a). at what value of Q does 0 ?
dQ
b). is  minimized or maximized at this value of Q?
c). what is the second derivative of  with respect to Q at the value of Q?

3. The Cornell Company makes two products: chairs and tables. The relationship
between  the firm’s annual profit, and its output of each good is,
  80  30Q1  25Q2  4Q12  3Q22  2Q1Q2

Where Q1 is the firm’s hourly output of chairs, and Q2 is the firm’s hourly
output of tables. (Neither Q1 and Q2 needs to be an integer)
a). find the output of chairs and the output of tables that will maximize the firm’s
profit.
b). what is the maximum profit that the firm can earn per year?

4. Avis Car Rental offers two schemes for rental of a compact car. It charges £60
per day for an unlimited mileage plan, and £40 per day for a time-and-mileage
plan with 100 free miles plus 20 pence a mile for mileage in excess of the free
allowance.
a). For a customer who plans to drive 50 miles, which is the cheaper plan. What
are the average and marginal costs per mile of rental? (The marginal cost is the
cost of an additional mile of usage.)

b). For a customer who plans to drive 150 miles, which is the cheaper plan. What
are the average and marginal costs per mile of rental?

c). If Avis raises the basic charge for the time-and-mileage plan to £44 per day,
how would that affect the average and marginal costs for a customer who drives
150 miles?