Het Rajeshkumar Patel

200595225
24F Microeconomics-05
Marisa McGillivray
9th November 2024
 Question 1:
a. An article on the 2024 outlook of Canada's oil and gas
industry has piqued my interest. Strong demand for
drilling services and higher investments, especially in
upstream oil production, are predicated to force the
growth of the industry at an upbeat pace. Companies are
expecting better revenues on account of improvement in
worldwide pricing for natural gas and oil, despite volatility
in markets and obstacles put up by regulators.
https://www.bnnbloomberg.ca/
b. The Canadian oil and gas industry can be considered an
oligopoly because there are a few dominating companies,
huge barriers to entry and thus rather limited
competition.
c. Companies at a market price of $25 per unit would sell
slightly higher, say between $28 and $30, depending on
the prevailing market conditions and other complementing
production costs.
d. Owing the fact that oil and gas represents necessities that
have few close substitutes, demand in this sector is
usually inelastic. Consumers are not deterred from buying
owing to the changes in prices.
e. Factors to Consider in Profit Maximization:

Efficiency of Cost: Through the use of technology, firms

can cut down on their production costs.

Price Optimization: Prices are predetermined with a

strategic vision in line with global market trends.

Investment in innovation is necessary to reduce risk by

diversifying in changing market conditions. Moving into
renewable energy can have a positive effect on long-term
profitability.
Question 2:
a. APL= Q/L
L(Labour) Q(Output) APL=Q/L MPL= Δ,Q/ Δ,L [ Δ,Q= Q(new)-Q(old) and ΔL= L(new
8 16 2 -
16 36 2.25 2.5
24 65 2.71 3.63
32 97 3.03 4
40 137 3.43 5
48 177 3.69 5
56 209 3.73 4
64 233 3.64 3
72 349 4.85 14.5
80 257 3.21 -11.5

Chart Title
400
350
300
250
Output

200
150
100
50
0
8 16 24 32 40 48 56 64 72 80

Labour

Q(Output)

The Total Product curve typically has three phases:

increasing returns to scale, diminishing returns to scale,
and negative returns.
Initially, when labor is increased, output rises at an
increasing rate due to specialization and efficiency gains.
After a certain point, the marginal returns begin to
decrease (diminishing returns), and eventually, too much
labor reduces output due to overcrowding or inefficiencies.
L O TVC=W*L AVC=TVC/ MC=ΔTVC/ΔO
8 16 80 5_
16 36 160 4.44 4
24 65 240 3.69 2.76
32 97 320 3.3 2.5
40 137 400 2.92 2
48 177 480 2.71 2
56 209 560 2.68 2.5
64 253 640 2.75 3.33
72 349 720 2.06 0.69
80 257 800 3.11 -0.87

L O TC=TVC+FATC=TC/O
8 16 1080 67.5
16 36 1160 32.22
24 65 1240 19.08
82 97 1320 13.61
40 137 1400 10.22
48 177 1480 8.36
56 209 1560 7.46
64 233 1640 7.04
72 349 1720 6.91
80 257 1800 7
 Total Average Cost
2000
1800
1600
1400
1200
1000
800
600
400
200
0
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Question 3:
a. Economic Profit = Total Revenue-Total Cost

Given the market price of $20 and the quantity of

10,000 units:

Total Revenue = Price x Quantity = $20 x 10,000 =

$200,000

To calculate Total Cost, we need to find the average

total cost (ATC) at the production level of 10,000 units.
From the graph, we can see that at this level, the ATC is
approximately $15.75.

Total Cost = ATC x Quantity = $15.75 x 10,000 =

$157,500

Economic Profit = $200,000 - $157,500 = $42,500

The Company is currently making a positive economic

profit of $42,500.
 The firm has to be producing at the level where MC =
MR in order for it to know that it is optimizing
profitability. From the graph below, it can be seen that
MC and MR intersect at the joint of the red line and the
ATC curve. for this point, there are approximately
10,000 copies available at a price of $15.75. True, the
firm is maximizing profits because it currently is
producing.

b. At $12.50 ATC is not covered, so financial losses are

accumulating. The price does remain above average
variable cost. The firm should continue producing in the
short-run so long as the price received is greater than
AVC. In producing, the firm reduces its losses because
some of its fixed costs are covered as well as all of its
variable costs.

c. We would expect business to leave the Canadian barley

market as the losses persist and mount. The supply loss
created from enterprises leaving the market will tend to
drive the market price upwards. This will continue until
the market price rises to a point were no business are
able to make any money.

In the long run, the profits of the individual firm are

expected to decrease and eventually fall to zero. For
this reason, firms operating under a perfectly
competitive market can earn only average profits in the
long term.

Question 4:
a. Ticket sales' elasticity relative to the local population

Because this elasticity is 0.7, for every 1% increase in

local population, ticket sales will rise by 0.7%. In
other words, ticket sales are reasonably responsive to
 the local population.

b. Predicted change in revenue from ticket sales

The population has risen by 1,500-that is it has

increased by 2.5% (1,500/60,000).

c. The % change in ticket sales we would expect

With elasticity equal to 0.7 we expect for every 1%

rise in the price of tickets that ticket sales fall by 0.7
* 2.5% = 1.75%.

d. The expected % change in ticket sales

The price has risen from $10 to $11, this means it

has risen by 10%.
With a price elasticity of demand equal to -0.6 we
expect a 0.6 * 10% = 6% fall in ticket sales.

Would ticket sales rise or fall?

We can determine whether or not this will happen by

calculating the percent change in total revenue.
$10/ticket * Q tickets = $10Q was the original
revenue.
$11/ticket * 0.94Q tickets = $10.34Q is the new
revenue.
We anticipate that ticket sales will increase because
the new revenue is higher.

e. Comment on the proposal to raise the price of the

tickets.

There are other Long-

term considerations even where an initial increase in
price proves to be positive, such as:

1. Long-term effect: If the prices are raised too

 high, the fans will stop coming, which in turn eventua
lly reduces attendance.
2. Competitors: If the price goes beyond a certain
limit, audiences may turn to other sports
entertainment venues.
Economic conditions: A price rise is all it takes to
further depress demand when the local economy is
sufficiently weak.

f. If -1.2 were the price elasticity

Because of a greater price elasticity of demand, a

10% increase in price would be associated with a
12% decline in ticket sales (-1.2).

Original revenue: $10/ticket * Q tickets = $10Q

New revenue: $11/ticket * 0.88Q tickets = $9.68Q

Revenue from the tickets would, in that case, decline.

The higher the price elasticity of demand in this case,

the less wise it would be to raise the prices of the
tickets. As a matter of fact, for making any informed
pricing decision, estimates of price elasticity need to
be as accurate as possible.

Question 5:
a. How to Maximize Profit by Optimizing Output

When MC = MR, monopoly maximizes profits. From

the graph this intersection occurs at an output of
approximately 80 units.

b. Profit-Maximizing Output with Average Total Cost

and Average Revenue
 For 80 units of output the average cost would
be read off by moving the vertical line upwards.
The ATC would be the reading given on the price
axis. Suppose it is $4.5 mil.
Because we are a monopoly, price is equal
to average revenue (AR). Up the vertical line to the
demand curve,
we have 80 units of output where profits are maxi
mized. Those consumers pay the corresponding
price or AR. Assume it is roughly $5 million.

c. Derive Profit-Maximizing Total Cost (TC) and Total

Revenue:

TC = ATC * Quantity = 80 units * $4.5 million/unit

= $360 million.
Total Revenue (TR): TR = AR * Quantity = 40
million dollars ($5 million per unit) * 80 units

d. Maximum Profit:

Profit=TR - TC = $400 million - $360 million = $40

million.

e. Elasticity of demand and price implication:

Luxury goods incorporate customized Rolls-

Royces, and therefore, from this
understanding, we will find the demand to be
relatively inelastic. This means simply that
its consumers are insensitive to an increase in
prices.

If demand were more price elastic, the monopolist

would have to reduce prices
to achieve higher sales. This would cut the unit
profit
 margin. The result would be smaller profits at a lo
wer price for the monopolist.

f. Factors Affecting Profit: Demand Elasticity:

More Competition: Because of the increasing

number of firms in the luxury car market which
provide similar or substitute products, the demand
for Rolls-Royce motors will be highly elastic.
Sometimes it is also called price-sensitive because
of the alternatives available. Price and profitability
would hence be less in the control of a monopolist.

Shifting Consumer Tastes: Suppose consumers

began to have a preference for products and
activities other than luxury cars. From that point
forward, Rolls-Royce automobiles would be in
lower demand. A monopolist would sacrifice
profitability along with market power.

A monopolist's mark-up or margin of profit as well

as the price that might be achieved in either of the
first two situations would be controlled by demand
elasticity.

Question 6:
a. McDonald’s Pricing Strategy:

McDonald's applies the technique of price discri

mination Depends on how much they are
willing to pay,
different groups of customers are given different
pricing. Previously, the rates were set by the res
taurant overheads. This is a cost-
oriented pricing technique. There will
be profitability, but the revenue is not
maximized.
 By setting prices based on socioeconomic
characteristics, McDonald will be in
a better position to adjust prices to demand and
willingness to
pay. Business shall, therefore, have greater chan
ces of reaping more excess from clients in high-
income areas while keeping the products at a
reasonable price in low-income areas.

b. Price increases in various locations:

Prices are marked up differently due

to geography or demographic region based
on variables including consumer behavior,
competition, and income
levels. For instance, customers in low-
income areas might be more sensitive towards
prices and less willing to pay
a higher markup. Despite such regions,
McDonald's could still charge a higher
markup for the following reasons:

1. Limited rivalry: In locations where there is

little competition to dine, McDonald's would
have greater price power.
2. Some Products Are Not Price
Elastic: For some products, such as kid-friendly
meals, consumers are price sensitive; for other
products, they are not.

c. Pricing Strategy for Happy Meals:

Some reasons are as follows, that explains why

Kid's Happy Meals are more costly:
1. Rise in Cost: The inflation of labor and
components creates a proportional rise in
production costs.
2. Margin of Profit: Generally, Happy Meals are
considered a passageway to a future
consumption pattern. With a price increase,
McDonald's can increase the margin of profit on
the meals.
3. Price Insensitivity: Children, being less
sensitive to the price factor as compared to
adults, become victims of higher prices.
The optimal pricing strategy for McDonald's is
always to maximize the pricing strategy based
on various factors like cost structures,
competition, and consumer behavior to obtain
maximum revenue and profits.