Problem sets for Microeconomics II [110051-0471]

1 Optimal decisions using marginal analysis
Exercise 1.1. A television station is considering the sale of promotional videos. It
can have the videos produced by one of two suppliers. Supplier A will charge the
station a setup fee of $1,200 plus $2 for each cassette; supplier B has no setup fee
and will charge $4 per cassette. The station estimates its demand for the cassettes
to be given by Q = 1, 600 − 200P, where P is the price in dollars and Q is the
number of cassettes.
a. Suppose the station plans to give away the videos. How many cassettes should
it order From which supplier
b. Suppose instead that the station seeks to maximize its profit from sales of the
cassettes. What price should it charge How many cassettes should it order
from which supplier
Exercise 1.2. As the exclusive carrier on a local air route, a regional airline must
determine the number of flights it will provide per week and the fare it will
charge. Taking into account operating and fuel costs, airport charges, and so
on, the estimated cost per flight is $2,000. It expects to fly full flights (100 passengers),
so its marginal cost on a per passenger basis is $20. Finally, the airline’s
estimated demand curve is P = 120 − .1Q, where P is the fare in dollars and Q is
the number of passengers per week.
a. What is the airline’s profit-maximizing fare How many passengers does it
carry per week, using how many flights What is weekly profit
b. Suppose the airline is offered $4,000 per week to haul freight along the route
for a local firm. This will mean replacing on of the weekly passenger flights
with a freight flight (at same operating cost). Should the airline carry freight
for the local firm Explain.
Exercise 1.3. Under the terms of the current contractual agreement, Burger Queen
(BQ) is entitled to 20 percent of the revenue earned by each of its franchises. BQ’s
best-selling is the Slopper (it slops out of the bun). BQ supplies the ingredients
for the Slopper (bun, mystery meat, etc.) at cost to the franchise. The franchisee’s
average cost per Slopper (including ingredients, labor cost, and so on) is $.80. At
a particular franchise restaurant, weekly demand for Sloppers is given by P =
3.00 − Q/800.
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