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A1. The demand and supply functions in the market of a certain good are given by:
QD = 29 – P – PB QS = -4 + 4P
Where PB is the price of a related good B. Assume for now that PB = 8.
a) Find the inverse demand and inverse supply functions. Interpret the
information given by these functions. Represent this market graphically in
the (Q,P) plane.
b) Find the equilibrium price and quantity for this market.
c) Suppose that a tax of t = 2 is imposed on each unit of product sold. Find the
new equilibrium price and quantity. What is the percentage of tax burden that
is passed on to the consumers?
d) In general, how does the equilibrium quantity of the good depend on the
price of good B? Are the two goods substitutes or complements? Justify your
A2. A firm has fixed costs of 300 and variable costs of (0.75Q + 8)
per unit produced.
a) Define and find an expression for the firm’s total costs in terms of Q.
Let the inverse demand function faced by the same firm be:
P = 201- 2Q
Where Q ≥ 0
b) Define and find the firm’s total revenue function.
c) Find the firm’s profit function and draw the respective graph.
d) For which production levels does the firm have no negative profits? Find the
firm’s optimal production level.
Business & Finance homework help