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THE COPPERBELT UNIVERSITY
SCHOOL OF BUSINESS
BSP 110 PRINCIPLES OF ECONOMICS
2015 ASSIGNMENT
DUE DATE: 4th January 2016 at 10am
QUESTION
A manufacturing firm in Kitwe has a normal demand curve given by Q = 5,000 – 100P and its total cost curve in the relevant range is TC = 10,000 + 10Q (in K’000).
(i) Over this relevant range, plot the demand curve, marginal revenue curve, marginal cost curve, and average cost curve on one graph paper. Curves should be clearly labelled. (12 Marks)
(ii) Use the above curves to determine the firm’s normal profit-maximising price, quantity, and the amount of profits. (6 Marks)
(iii) Now suppose that there is a temporary shift in monthly demand to Q = 6,000 – 100P. Calculate the firm’s profit when it changes both price and quantity in response to the new demand. Assume the cost of changing prices is K3,000 (this includes the cost of re-adjusting price when ‘normal’ demand conditions return the following month).
(10 Marks)
(iv) Suppose that instead of changing price, the firm adopted a ‘sticky price’ policy and simply let quantity adjust to clear the market. Determine the firm’s profit under this strategy. (6 Marks)
(v) Now consider a short-run fall in monthly demand to Q = 4,000 – 100P. Calculate the firm’s profits when both price and quantity are adjusted in response to the new demand conditions. (Again the cost of changing prices is K3,000. (8 Marks)
(vi) Compare your answer in part (ii) to the level of profits the firm would obtain by adopting a sticky price strategy in the face of the fall in demand. Is the sticky price strategy worthwhile? (8 Marks)