Question

Use the following information to answer questions 1 - 6. Suppose there is one buyer located at points 1 through 11, one unit of distance apart. These buyers purchase at most one unit of the product when its price is less than or equal to $10. Assume the MC and AC of producing the product is 5. Transport costs are constant per unit of distance and the seller is located at point 6.

t=transport costs

Answer 1

4).

Consider the given problem here there are one buyer located at points 1 through 11, one unit of distance apart implied there are total 11 buyers. Now, of the buyers want to spend maximum “$10” for the good. Now, if the “t=1” and “P=$7” implied buyers at point “1, 2, 10, 11” will not able to purchase the good, since their cost price more than “$10”. So, for “P=$7” the corresponding quantity is “q=7”, => total profit is “(7-5)*7 = $14”.

If the “t=1” and “P=$8” implied buyers at point “1, 2, 3, 9, 10, 11” will not able to purchase the good, since their cost price more than “$10”. So, for “P=$8” the corresponding quantity is “q=5”, => total profit is “(8-5)*5 = $15 >$14”. If the seller increase the price further then the profit will decreases implied for “t=1” the optimum price is “P=$8” and the corresponding quantity is “q=5”.

5, 6).

If the “t=2” and “P=$7” implied buyers at point “1, 2, 3, 4, 8, 9, 10, 11” will not able to purchase the good, since their cost price more than “$10”. So, for “P=$7” the corresponding quantity is “q=3”, => total profit is “(7-5)*3 = $6”. If the “t=2” and “P=$8” implied buyers at point “1, 2, 3, 4, 8, 9, 10, 11” will not able to purchase the good, since their cost price more than “$10”. So, for “P=$8” the corresponding quantity is “q=3”, => total profit is “(8-5)*3 = $9 > $6”. If the seller increase the price further then the profit will decreases implied for “t=2” the optimum price is “P=$8” and the corresponding quantity and profit are “q=3” and “$9” respectively.