Timber sales has total costs of sh450, 000 and it is currently producing 5,000 units of wooden racks a month. It has examined its cost structure and has found that, of its variable costs, half vary in a linear relationship with output; the other variable costs increase by sh1 for every 1,000-unit increase in output. Fixed costs are sh100, 000, and these determine the capacity of 6,000 units. The market price is sh100.

(i) Determine the MC, AVC and ATC functions for the firm

(ii) If the output is 5000 units determine the amount of MC, AVC and ATC

(iii) Determine the current profit of the company.

The market demand and supply equations for a commodity are

Q_D = 50 - 10P and Q_S = 20 + 2.5P

(i) What is the equilibrium price and equilibrium quantity?

(ii) Suppose the government imposes a price ceiling on the commodity of $3.00 and demand increases to Q_D = 75 - 10P. What is the impact on the market of the government's action?