QUESTION 1

James mainly sells confectionery items, newspapers, magazines and cigarettes in

his convenience store. Noting his small business is not thriving, he thought of

selling hot pies and rolls too.

Suppose the total cost function for rolls and pies is,

TC = 800 + 53, = 1 + 2

where 1 and 2 denote the quantities of rolls and pies respectfully. If 1 and 2

denote the corresponding prices, then the inverse demand equations are:

1 = 73 1 and 0.52 = 100 2

REQUIRED:

a) If James decides to charge the same price for rolls and pies per day (that is,

1 = 2), how many of rolls and pies in total should he make in order to

maximize the profit of a particular day?

b) If James decides to charge different prices as above for rolls and pies per day

(that is, 1 2), how many of rolls and pies should he make in order to

maximize the profit of a particular day?

c) Which of the above options (a) or (b) is more profitable? Provide the rationale

for your answer.

d) If James decides to make a total of 51rolls and pies per day and charges

different prices as above (that is, 1 2 ), how many of rolls and pies each

should he make in order to maximize the profit of a particular day? Estimate the

increase in maximum profit which results when the total number of rolls and pies

per day (51) is increased to 52 [note: assume second-order conditions are

satisfied].

e) The COVID-19 pandemic saw the lockdown of many cities to reduce the

spread of the virus. This unprecedented move can be viewed as a negative demand

shock. Explain the impact of the lockdown of the city where James' convenience

store is located on the demand functions of rolls and pies