# solution

A manager makes a statement that output should be expanded as long as average revenue exceeds average cost. Does this strategy makes sense? Explain. 2. As a business/economic consultant to the dominant firm in a particular market, you have discovered that, at the current price and output, demand for your clients’ product is price inelastic. What advices would you give to the manager regarding the price setting and profit maximizing? 3. The total revenue function for two goods is given by the equation Find the number of units of each good which must be sold if the firm is subject to a budget constraint, . [Use the substitution method] 4. A firm’s total profit equation is : Where X and Y represent the output levels for the two product lines. (a) Using Lagrange multiplier method, determine the profit-maximizing output levels of goods X and Y given that the sum of the two product lines equal 500 units. (b) Calculate the firm’s total profits. (c) What is the interpretation of the Lagrange multiplier? 5. Suppose that a firm produces a certain product that can be sold directly to retail outlets or wholesalers. The demand functions for each of the market is Where and are the prices charged and and are the quantities sold in the respective markets. The firm’s total cost function for the manufacture of this product is a) What are the profit-maximizing price and output levels for the product in the two markets? b) What are the firm’s total profits if the firm is effectively able to charge different prices in the two markets? c) Calculate the profit-maximizing level of price and output if the firm is required to charge the same price per unit in each market. How much is the profit level under this condition?

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