ECO402 Assignment No. 2 Solution

Semester spring 2011
Assignment no 02
ECO402
Total Marks: 15


Question no.1:
Suppose you are working in a mobile making firm operating in a perfectly
competitive market. Your cost of production is given by:
TC = 5000 + Q2

Where Q is the level of output and TC is total cost. The fixed cost of production is Rs.5000.

a. If the price of a mobile is Rs.7200, how many mobiles should you produce to
maximize profit?

b. What will your profit level be?
(Marks = 6 + 6)

Question no.02:
If a sales tax of Rs.50 per unit of output is placed on one firm whose product sells for Rs.500 in a competitive industry.

What will happen to price, output and profit? (Marks = 03)

Important Note:
�� Calculate to the point where calculation is being required. NO need to write irrelevant material or extra interpretation.

Important Tips
1. This Assignment can be best attempted from the knowledge acquired after
watching video lecture no. 16 to lecture no 29 and reading handouts as well as
recommended text book.
2. Video lectures can be downloaded for free from Online VU Lectures

Schedule
Opening Date and Time June, 09, 2011 At 12:01 A.M. (Mid-Night)
Due Date and Time June, 15, 2011 At 11:59 P.M. (Mid-Night)

Note: Only in the case of Assignment, 24 Hrs extra / grace period after the above mentioned due date is usually available to overcome uploading difficulties which may be faced by the students on last date. This extra time should only be used to meet the emergencies and above mentioned due dates should always be treated as final to avoid any inconvenience.
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Solution:
Take derivative of to find the value of marginal cost where Q is the level of output Tc is the total cost.

Now we find the marginal cost which is 2Q and the fixed price is 5000.
Where MC=MR………..(1)
MR= price
And price is7200

MC= 2Q put the value of MC an MR in equation one
MC=MR
2Q=7200
Q=3600


b) What will your profit level be?

(Marks = 6 + 6)
Question no.02:
If a sales tax of Rs.50 per unit of output is placed on one firm whose product sells for
Rs.500 in a competitive industry.
What will happen to price, output and profit?
(Marks = 03)

The level of profit will be lower because the level of price at very high point.


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