Question

Question Two Owen sells six packs of beer. He regards the market as highly competitive and considers the current $2.50 per six pack selling price to be beyond his control. Bud's total and marginal cost functions are as the following: TC = 2000+ 0.000502 MC = 0.0010, ,where Q refers to the number of six packs sold per week. a) Calculate the profit maximizing output for Owen. What is his profit? b) The town council has voted to impose a tax of $.50 per six pack sold in the town, hoping to discourage beer consumption. What impact will the tax have on Owen's profit? Should he continue to operate? Why?

Question Two Owen sells six packs of beer. He regards the market as highly competitive and considers the current $2.50 per six pack selling price to be beyond his control. Bud's total and marginal cost functions are as the following: TC = 2000 + 0.0005Q2 MC = 0.001Q, ,where Q refers to the number of six packs sold per week. a) Calculate the profit maximizing output for Owen. What is his profit? b) The town council has voted to impose a tax of $.50 per six pack sold in the town, hoping to discourage beer consumption. What impact will the tax have on Owen’s profit? Should he continue to operate? Why?

Answer 1

Price (P) = $2.50 . : Total cost (T.() = 2000+ 0.00050 Marginal cost (moc) = 6oola I a) 0.001 At profit maximizang: Pz moc (marginal cast) 2.5=0.00110 2.5 =ce 52500 = 6 ] Profit= P. l- Toc (2) So )( 25 ) - [Revo + 0 - 0 0 5 5 qJ 6250 - [2000 t o.000s (2500)? ] 6250 - [ 2000 + 31.25] = 6250 - [ 5125 I Profit = $.1125 by now tax At profit t = $0.50 maximization : P = .mc tt 2.50 = 0o volie + 0.50 2 = 0obole T2000 = ce ] Profit= P.o-T-C =(2.5) (2010) - [2000t Ooooos (2000)?] - 5000 [2000 + 2000] . [Profit - 5000- yoou = $1000 ] ... Profit has reduced by $125 Yes, he should continue to operate as he is earning positive profit