Please follow the instructions on the syllabus indicating how to complete and turn in this assignment.  Graphs are essential when asked for – write them clearly and label everything!

  1. (2 points)  Is the following statement true or false?  Why?  “If MC is positive and demand is downward sloping, then it is always true that the revenue maximizing output level is greater than the profit maximizing output level.”
  • Suppose I estimate the following demand function for a watch I produce and sell:

Q = 10000 – 4P +200PR


Q = quantity demanded in units

P = price in dollars

PR = number of YouTubers who positively review my watch

We are currently operating at the following values:

P = $400

PR = 10

In addition, suppose MC is $300.

Given all this, please answer the following questions:

  1. (1 point) Derive the firm’s current demand curve and calculate and interpret the firm’s current price elasticity of demand.  Be as precise as you can with your elasticity interpretation.
  • (1 point) Given you answer in b, should the firm increase or decrease output in order to maximize profits (NOT revenues)?  Explain and show your work on a well labeled graph.  Hint:  your graph should indicate the current output level as well as the profit maximizing output level.
  • (2 points)  What is the profit maximizing output and price?  Show and explain all your work and match up your answer to your work in part b.
  • (2 points)  Suppose I want to also incorporate YouTubers who give a negative review.  How would I go about doing so and what do you think the impact of this would be relative to positive reviews?  Note:  there isn’t just one clear answer – there are lots of ways to do this.
  •  (2 points)  What is the conceptual difference between an increase in demand and demand becoming more inelastic?  Provide an example of a factor that could cause and increase in demand, and then provide a different example of a factor that caused demand to become more inelastic.

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