Maryland International College

School of Graduate Studies

Managerial Economics Assignment

Name: BIRUK TESFA

ID NO.: 022/20

Addis Abeba, Ethiopia

25-05-2021
1. Assess the existing state of the competition for one of certain
market in Ethiopia such as the market for coffee, cement, sugar,
beverage, shoes and leather products, etc and based on the
information collected answer the following questions (5 marks)

a) Characterize the structure of the market in terms of number of

sellers, type of the product, information, barriers to entry, power
to affect price, profit potential and non-price competition.

b) To which market structure does the given market

fits/resembles? Why?

c) How does the government policy on the sector affected

competition? Is there price fixing and quota system? Describe.

d) What anti-competitive practice has been observed in the

sector?

e) Assuming you are managing one of the firm in the market,

how do you maximize profit given the nature of the market?

A) Ethiopian coffee has an oligopolistic business system. It possesses the

following characteristics:

 A small number of large firms dominate the market structure.

 Companies market goods that are either similar or exclusive.

 In the industry, there is the possibility of incomplete information.

 Since companies obtain and maintain market dominance through proprietary

resource ownership, government controls, high start-up costs, and copyrights,

there are barriers to entry in the market.

 Firms provide some pricing regulation, and a single trader can control costs.

 Since no one company has a huge share of the market, both firms will need to

work together to lift rates and increase economic benefit.

 Advertisement, promotional campaigns, sales staff, market analysis, and

innovative product creation are also examples of non-price rivalry that

dominate the market.

B) The coffee industry is similar to an oligopoly. This is due to the industry's

multiple traits, such as a limited number of big companies dominating the

market, the selling of similar or distinct goods, entry barriers,

interdependence, lack of perfect competitiveness, and non-price competition

prevalence advertising.

C) Because of the limitations imposed, many regulatory controls in the industry

deter new entrants. Yes, the coffee industry has a price-fixing and quota

scheme. Firms conspire to fix premiums and production ratios in order to

boost and optimize profit margins. One company will serve as the price

leader and set the product's price, while others can enter into a quota-based

market share arrangement.

D) Price fixing and sexism, production coercion, and exclusive dealing deals are

also examples of anti-competitive activities in the coffee industry.

 E) Due to the oligopolistic nature of the coffee industry, you can increase income

by equating marginal sales and marginal cost, resulting in an equilibrium

production (Q) and an equilibrium price (P). Firms in the coffee industry

would be able to increase their earnings at that time.

2. A firm’s demand curve in period 1 is Q=25 - P. Fixed costs are 20

and marginal costs per unit are 5. (5 marks)

a. Derive equations for total revenue and marginal revenue.

b. At what output will marginal revenue be zero?

c. At what price will total revenue be maximized?

d. At what price and output will profit be maximized?

e. Calculate the maximum profits the firm makes.

A) Equations for total revenue and marginal revenue:

Total Revenue (TR) = P x Q
First, derive the inverse function of the demand function
Q = 25 – P

P = 25 – Q

TR = (25 – Q) Q = 25Q – Q2

TR = 25Q – Q2

Marginal revenue = change in TR divided by change in Q

MR = ∂TR/∂Q = 25 - 2Q

MR = 25 – 2Q

B) MR is equal to zero when Total Revenue (TR) is maximized

Set MR = 0 to determine the level of output
MR = 25 – 2Q
25 – 2Q = 0
 25 = 2Q
Q = 25/2 = 12.5
Q = 12.5
Marginal revenue will be zero when output is 12.5 units
C) Total revenue will be maximized at the quantity at which marginal revenue is
equal to zero.
When MR = 0, quantity is equal to 12.5 units
Substitute for price in the inverse demand function:
P = 25 – Q
P = 25 – 12.5
P = 12.5
Total revenue will be maximized when the price is 12.5.
D) Profit will be maximized when MR = MC
MC = 5
MR = 25 – 2Q
25 – 2Q = 5
25 – 5 = 2Q
20 = 2Q
Q = 20/2 = 10
Substitute in the inverse demand function to derive P:
P = 25 – Q
P = 25 – 10
P = 15
Profit maximizing price = 15
Profit maximizing quantity = 10
E) Maximum profits = TR – TC
TR = P x Q = 15 x 10 = 150
TC = VC + FC
FC = 20
VC = MC per unit x Number of units = 5 x 10 = 50
TC = 50 + 20 = 70
 Maximum profits = 150 – 70 = 80
Maximum profits = 70

3. The market demand for wheat is Q = 100 - 2p + 1pb + 2Y. If the

price of wheat, p, is $2, and the price of barley, pb, is $3, and
income, Y, is $1000, what is the income elasticity of wheat?

Market demand for wheat: Q = 100 − 2p + 1pb + 2Y

price of wheat, p = $2

price of barley, pb = $3

Income, Y = $1000

Q = 100 − 2p + 1pb + 2Y

= 100 - (2 × 2) + (1 × 3) + (2 × 1,000)

= 100 - 4 + 3 + 2,000

= 2,099

Differentiating Q with respect to Y,

dQ/dY = 2

Income elasticity of wheat:

= (dQ/dY) × (Y ÷ Q)

= 2 × (1,000 ÷ 2,099)

= 0.95
4. Given the Production Function Q = 72X + 15X2 - X3, where Q
=Output and X=Input (5 marks)

a) What is the Marginal Product (MP) when X = 8?

b) What is the Average Product (AP) when X = 6?

c) At what value of X will Q be at its maximum?

d) At what value of X will Diminishing Returns set in?

A) MP = 30X - 3X2, MP =120 when X=8;

B) AP = 72 + 15X – X2, AP=126 when X=6;

C) Q at a maximum when MP is 0, or X =12 [-2 has no meaning;]

D) Diminishing returns sets in when MP at a maximum value, or X = 5.

5. You've been hired by an unprofitable firm to determine whether it
should shut down its operation. The firm currently uses 70
workers to produce 300 units of output per day. The daily wage
(per worker) is 100 ETB, and the price of the firm's output is 30
ETB. The cost of other variable inputs is 500 ETB per day.
Although you don't know the firm's fixed cost, you know that it is
high enough that the firm's total costs exceed its total revenue.
You know that the marginal cost of the last unit is 30 ETB. Should
the firm continue to operate at a loss? Carefully explain your
answer.

 Total revenue = (30) * (300) = 9,000 Birr. Variable cost = (70) * (100) + 500 =
7,500 Birr. Average variable cost = 7,500/300 = 25 Birr. Since 30 > 25, P>AVC,
and the firm should not shut down in the short run since they are covering
variable costs and some of fixed costs. There is not enough information to tell
what the firm should do in the long run.

6. A perfectly competitive firm has the cost function TC = 1000 + 2Q

+ 0.1 Q2. What is the lowest price at which this firm can break
even?

A perfectly competitive firm will be earning an economic profit of zero in the

long run and, therefore, the break-even point will be where the Average cost
curve intersects the Marginal cost curve. The lowest price will be at that point
where MC = ATC.

ATC is the TC equation divided by q, while MC is the derivative of Total cost

with respect to quantity.

First, derive MC:

TC = 1000 + 2Q + 0.1Q2=
MC = ∂TC/∂Q = 2 +0.2Q

Then derive ATC:

ATC = 1000+2Q+0.1Q2 / Q

ATC = 1000/Q + 2Q + 0.1Q2

Now set: MC = ATC

2 + 0.2Q = 1000/Q + 2Q + 0.1Q2

0.2Q – 0.1Q = 1000/Q + 2 - 2

0.1Q = 1000/Q

0.1Q2 = 1000

Q2 = 1000/0.1

Q2 = 10,000

Take the square root of both sides and find:

Q = 100

We know that the firm produces were Price = MR = MC, so we will derive the

lowest price from the MC function:

MC = 2 + 0.2Q

We know Q = 100: Substitute in the equation

MC = 2 + 0.2 (100) = 2 + 20 = 22

Price = 22

Therefore, the lowest price at which the firm can break even is 22.
7. Assume a firm engaging in selling its product and promotional
activities in monopolistic competition face short run demand and
cost functions as Q = 20-0.5P and TC= 4Q2-8Q+15, respectively.
Having this information (5 marks)

a) Determine the optimal level of output and price in the short

run.

b) Calculate the economic profit (loss) the firm will obtain

(incur).

c) Show the economic profit (loss) of the firm in a graphic

representation.

A) The demand function is given by

Q = 20 − 0.5P or P = 40 − 2Q

In addition, the cost function is given by

TC = 4Q2 − 8Q + 15

Since, in monopolistic competition, equilibrium takes place where Marginal

Revenue (MR) = Marginal Cost (MC),

I find MR and MC and equate them. To find our equilibrium P and Q.

MR= d/dQ (Total Revenue)

= d/dQ (P x Q)

= d/dQ (40Q – 2Q2)

= 40 – 4Q

And,

MC= d/dQ (Total cost)

= d/dQ (TC)
 = d/dQ (4Q2 – 8Q + 15)

= 8Q – 8

Equating MC and MR, we get,

MC=MR

8Q−8=40−4Q

12Q=48

Q=4

Hence, number of quantities produced (Q) = 4.

Therefore, the price (P) = 40 − 2Q = 40 − (2 × 4) = 40 − 8 = 32 per unit.

B) Now, the profit function of the firm, can be written as,

π (Q)= Total Revenue −Total Cost

= (P × Q) − (TC × Q)

If the above expression is calculated for a numerical value, the following is obtained.

π (4) = (32 × 4)−[(4 × 42)−8(4)+15]

= 128 − [64−32+15]

=128−47

=81

The economic profit is calculated to be 81 units.

 C) The economic profit can be shown diagrammatically as the following,

Pc is the competitive price and Pmc is the price under monopolistic competition.
Qmc is the equilibrium output. The grey shaded area is the total amount of profit.