Answer

Economics

5) Profit-maximizing price and quantity in each market

Profit is maximized when the marginal cost (MC) incurred for each market is equivalent to the marginal revenue (MR) earned from each market. This means therefore that and at price-maximizing quantity and price MR=MC

 Profit maximizing quantity for East=>

$50 for east=450-QEast

QEast+$50=450

QEast=450-50=400

Profit-maximizing quantity for East =400

Maximizing price for East => QEast = 900 – 2*PEast

Where Q=400 it follows that 400=900-2*PEast

2PEast+400=900

2PEast=900-400

2PEast=500

PEast=500/2=$250

 Profit-Maximizing price for East=$250

Profit maximizing quantity for West=>

$50 for West=700-2*QWest

2QWest+$50=700

2QWest=700-50=650

QWest=650/2=325

Profit-maximizing quantity for West =325

Maximizing price for West => QWest = 700 – PWest

Where Q=325 it follows that 325=700-PWest

PWest +325=700

PWest =700-325

PWest =375

Profit-Maximizing price for West=$375

6) The economic profit in each market

Economic profit is obtained by deducting explicit costs and opportunity costs from revenues. The economic profit for East market is given by revenues from East market less marginal cost and opportunity cost of selling in east market which is the profit from West market.

The Economic loss in East Market =>

(400*250)-50- ((375*325)-50)=

99,950-121825= ($21,875)

The economic profit for West market is given by revenues from West market less marginal cost and opportunity cost of selling in West market which is the profit from east market.

The Economic profit in West Market =>

 ((375*325)-50)- (400*250)-50=

121825-99,950 =$21,875

7) The  market in which demand is more elastic and the explanation

To determine which market is more elastic we have to vary price by a small margin say 10%

East Market=price will be 250*(1+10%)= $275

Demand in East Market at a price of $275 will be

QEast = 900 – 2*PEast => QEast = 900 – 2*275=350

West Market=price will be 375*(1+10%)= $ 412.5

Demand in East Market at a price of $412.5 will be

QWest = 700 – PWest=> QWest = 700 – 412.5=287.5

 East Market elasticity of demand=((Q1-Q2)/(Q1+Q2)) Dividend by ((P1-P2)/(P1+P2))

Q2=350, Q1=400, P1=250,P2=275

Hence elasticity of demand is ; (400-350)(400+350)/(250-275)/(250+275)=-1.4

West Market elasticity of demand=((Q1-Q2)/(Q1+Q2)) Dividend by ((P1-P2)/(P1+P2))

Q2=287.5, Q1=325, P1=375,P2=412.5

Hence elasticity of demand for West Market is ; (325-287.5)(325+287.5)/(375-412.5)/(375+412.5)=-1.3

Generally, demand is elastic if the elasticity of demand is more than 1 and inelastic if it is less than 1.  According to the calculations above, demand for both markets is inelastic since the elasticity of demand for each market is less than 1. However, demand for East market is more inelastic than for West market because its elasticity of demand is -1.4 while that of West market is -1.3. This implies that a change in price results in a lower change in quantity demanded in East market than in West market.

8) A Graph of the results by hand

9)  The answer is;

1. a) Only monopolies follow this rule of rational life of MR=MC. A monopoly produces unique products which cannot be produced by other firms or the industry it operates in has barriers to entry which prevents other firms from entering it. A monopoly does not face competition. To maximize profits the monopoly could simply increase prices to earn the targeted profits. Demand is elastic in a monopoly. To the monopoly this rule applies.