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University of Nottingham
Time allowed ONE hour THIRTY minutes
Candidates must NOT start writing their answers until told to do so
Answer THREE questions
Only silent, self-contained calculators with a single-line display are permitted in this examination.
Dictionaries are not allowed with one exception. Those whose first language is not English may use a
dictionary to translate between that language and English provided that neither language is the subject of
this examination.
A firm faces the inverse demand function:
P = 150 – 6Q
And the average cost function
AC  31 Q 2  5Q  35  10
where Q is the quantity produced and sold and P is the price of a unit of the good.
Derive and sketch the firm’s revenue function and explain its shape in economic terms.
Find the levels of output and the corresponding prices where zero revenue is earned.
Find via differentiation the level of output and the corresponding price level at which the
firm maximises total revenue.
Explain what is meant in general by a firm’s profit function. Derive the profit function for
the firm in this question.
Find the level of output and the corresponding price level which maximise profit.
Explain, with the use of an appropriate sketch, why the firm produces more to maximise
revenue than it does to maximise profit.
A firm has the production function:
f(K, L) = 10K0.5L0.5
where K and L are the amounts of the capital and labour inputs employed respectively.
Write down, in a form in which K appears as the dependent variable, the isoquant for an
output level of 500. Hence find the quantity of capital which, in conjunction with a labour
usage of 10 units, yields an output level of 500.
Find, using the method of Lagrange, the combination of labour and capital which
minimise the cost of producing 500 units of output, given that the price of a unit of labour
and capital are 10 and 5 respectively.
Without doing any extra work, state what is the marginal cost of producing 500 units for
this firm. Justify your answer.
In the following model of the market for free-range eggs Qd and Q8 represent quantities demanded
and supplied respectively, P represents the market price of eggs, a, b, c and d are unknown
Qd = Qs
Qd = a + bP
Qs = c + dP
State the economic meaning of the constants b and c.
What restrictions should be placed on the values taken by a, b, c and d?
Solve, in terms of the unknown constants, the equilibrium market price and quantity
Provide a sketch illustrating your answer to 3(c).
Use your answer to 3(c) to deduce the effect on market price and quantity traded of an
increase in c. Briefly interpret your results.
A price discriminating monopolist sells the same type of good to people in work and to the
unemployed at different prices. Let x and y denote the amounts sold to the unemployed and
employed respectively, and let px and py denote the respective prices charged to each market
segment. The demand functions in each segment are
x = 20 – 0.5px
y = 10 – 0.125py
The cost function faced by the firm is:
C(Q) = Q2 + 3Q + 50
where Q is the total quantity produced. It may be assumed that the entire amount produced is also
sold, so that Q = x + y
Find the inverse demand functions for x and y, and hence write down the monopolist’s
total revenue function in terms of x and y.
Find an expression for the monopolist’s profit as a function of x and y.
Determine the amounts the monopolist should sell in each market segment if profit is to be
maximised. In addition, find the prices charged. Explain why the firm charges different
prices in each segment.
Find the profit earned if the monopolist is adopting a profit maximising strategy.
A firm’s Total Cost function is given by
TC(Q) = 6Q2 + 25Q + 10
What is the economic significance of the fact that TC(0) = 10?
Find the marginal cost function.
Find the average cost function.
Find the output level where average cost is minimised.
Find the marginal and average cost at this output level. Comment.