Q-1 MCQ

1. Ans C
2. Ans A
3. Ans C
4. Ans C
5. Ans B
6. Ans A
Q-2 (b)
a. With a price elasticity of demand of 0.4, reducing the quantity demanded of cigarettes by 20% requires a
50% increase in price, because 20/50 = 0.4. With the price of cigarettes currently $2, this would require
an increase in the price to $3.33 a pack using the midpoint method (note that ($3.33 $2)/$2.67 = .50).
b. The policy will have a larger effect five years from now than it does one year from now. The elasticity is
larger in the long run, because it may take some time for people to reduce their cigarette usage. The
habit of smoking is hard to break in the short run.
c.
Q-2(b)

Because teenagers do not have as much income as adults, they are likely to have a higher price elasticity
of demand. Also, adults are more likely to be addicted to cigarettes, making it more difficult to reduce
their quantity demanded in response to a higher price.

a. The fixed cost is $300, because fixed cost equals total cost minus variable cost. At an output of zero, the
only costs are fixed cost.
b.
Quantity
0
1
2
3
4
5
6

Total
Cost
$300
350
390
420
450
490
540

Variable
Cost
$0
50
90
120
150
190
240

Marginal Cost
(using total cost)
--$50
40
30
30
40
50

Marginal Cost
(using variable cost)
--$50
40
30
30
40
50

Marginal cost equals the change in total cost for each additional unit of output. It is also equal to the change in variable
cost for each additional unit of output. This occurs because total cost equals the sum of variable cost and fixed cost and
fixed cost does not change as the quantity changes. Thus, as quantity increases, the increase in total cost equals the
increase in variable cost.
Q-5 (a)
10. a. The marginal revenue from selling to each type of consumer is shown in the following tables:
Price
10
9
8
7
6
5
4
3
2
1
0

Quantity of Adult
Tickets
0
100
200
300
300
300
300
300
300
300
300

Total Revenue from Sale

of Adult Tickets
0
900
1,600
2,100
1,800
1,500
1,200
900
600
300
0

Marginal Revenue from

Sale of Adult Tickets
---9
7
5
-3
-3
-3
-3
-3
-3
-3

Price
10
9
8
7
6
5
4
3
2
1
0

Quantity of Child
Tickets
0
0
0
0
0
100
200
200
200
200
200

Total Revenue from Sale

of Child Tickets
0
0
0
0
0
500
800
600
400
200
0

Marginal Revenue from

Sale of Child Tickets
---0
0
0
0
5
3
-2
-2
-2
-2

To maximize profit, you should charge adults $7 and sell 300 tickets. You should charge children $4 and
sell 200 tickets. Total revenue will be $2,100 + $800 = $2,900. Because total cost is $2,000, profit will be
$900.
b. If price discrimination were not allowed, you would want to set a price of $7 for the tickets. You would
sell 300 tickets and profit would be $100.
c.

The children who were willing to pay $4 but will not see the show now that the price is $7 will be worse
off. The producer is worse off because profit is lower. Total surplus is lower. There is no one that is
better off.

d. In (a) total profit would be $400. In (b), there would be a $400 loss. There would be no change in (c).