Suppose that Professor David Savage wants new textbook. Given his understanding of economics he estimates the long-run total cost of writing to be:

LTC = 2, 000 Q - 100Q² + Q³

His long-run marginal cost is LMC = 2, 000 - 200 Q + 3Q², where Q is measured as thousands of words.

1) Calculate Professor Savage's long-run average cost (of writing) by dividing the total cost by Q.

2)Calculate the quantity where LAC is at a minimum, using the relationship between LMC and LAC.

3)What is the lowest possible average cost at which Professor Savage can write?

4)Calculate the ranges over which Professor Savage experiences economies of scale and diseconomies of scale.

Question 2 Cecil is a student and has a food budget of $50 a month, which he spends on noodles (at $2 per packet) and coffee ($5 per bag).

1. Draw Cecil's budget constraint ( coffee on the horizontal axis) and include the intercept points.

1. If Cecil buys 4 bags of coffee per month, how many packets of noodles does he buy? (Assume that Cecil is a utility maximiser.) Draw a graph diagram with the budget line, indifference curve and label his choice as A.

1. Assume now that the price of coffee decreases to $2 per bag. Cecil increases consumption to 8 bags per month. Draw a diagram with the new budget line, indifference curve and label his choice as B. (You can draw on the same diagram as in the previous question using different colours to make it clear, or else you can draw a new graph diagram for this question. The objective is to make your answer clear. )

1. Assume now there is a major supply disruption to coffee, and it increases to $10 per bag. As a result, Cecil decreases his consumption of coffee to 2 bags per month. Draw the new budget constraint line and the new indifference curve. Label this as C.

1. Draw a new diagram below your indifference curve diagram. Use your previous answers to draw Cecil's demand for coffee. Indicate the quantities demanded at prices of $2, $5 and $10. Is there an inverse relationship between price and quantity demanded?