1. Suppose you are the economist of Didier Enterprises - a firm that manufactures ballistic missiles. Based on the estimates provided by a consultant, you know that the relevant demand and cost functions for the missiles are Q= 25 -.5P and MC = 2. Assume that MC is equal to average costs.
a. What is the firm's inverse demand function?
b. What is the firm's marginal revenue when producing 4 units of output?
c. What are the levels of output and price when you are maximizing profits?
d. What will be the level of your profits?
2. You are the economist of a firm with market power. The inverse demand for your product is given by P= 200 -10Q and your marginal cost is 5 + Q.
a. What is the profit-maximizing level of output?
b. What is the profit-maximizing price?
3. Three families who want to buy a SUV have the following marginal benefit for options:
Turbo Engine Driver-less Capability
Family 1 1,000 500
Family 2 800 300
Family 3 100 800
Assuming costs are zero, how much would the dealer make if it priced driver-less capability at $800, priced turbo engines at $200, and sold the bundle for $1,300?