Q. 4 (a) Discuss why the price elasticity of demand is greater for goods and services that have better close substitute.
Ans. Price Elasticity of demand is greater than on for commodities which have better close substitutes. The reason is very simple, as the price of a commodity say X increases and prices of its substitutes remain constant then the commodity X becomes relatively expensive and therefore buyers shit their demand towards cheaper close substitutes. This causes sharp decrease in the demand of X commodity.
(b) You have been hired as an economic consultant by OPEC and given the following statistics showing the world demand for oil:
Price ($ per barrel) Quantity Demanded
(millions of barrels per day)
10 60,000
20 50,000
30 40,000
40 30,000
50 20,000
A. What is the total revenue maximizing profit?
B. Clearly state all assumptions and qualifications that underline your answer.
| P | Q | Revenue |
| 10 | 60000 | 600000 |
| 20 | 50000 | 1000000 |
| 30 | 40000 | 1200000 |
| 40 | 30000 | 1200000 |
| 50 | 20000 | 1000000 |
The profit maximizing revenue for the OPEC is 1200000 at price 40 because at this price Marginal revenue is zero (Total Revenue is maximum hen marginal revenue is zero)
Q. 5 (a) What is the relationship among a firms total revenue, profit and total cost? How
Are they related?
Ans. Total profit is the difference between total Revenue and Total Cost.
Profit =TR-TC
In terms of total revenue and total cost curves , Total profit of the firms is maximum at an output level where positive difference between total Revenue and total cost is maximum. This difference can found by drawing tangent on the two curves. The point where these tangents are parallel shows the maximum profit for the firm. So in terms of marginal revenue and marginal cost, a firm earns maximum profit where MR=MC
(b) How do economists measure profitability? Explain in detail.
Ans: Economist measures total profit as given in the following equation
Total Profit = Total Revenue-Total Explicit Cost-Total Implicit Cost