03 Jun Question Part 1: (60 points total) Pretend that you have a lemonade stand and that the demand for lemonade in your neighborhood is
Question
Part 1: (60 points total)
Pretend that you have a lemonade stand and that the demand for lemonade in your neighborhood is
estimated to be:
Q = 60 – 100 P
Just like in the lecture, you get all the materials to make the lemonade for free so we assume that the costs
of production are zero. Your goal, your objective, is to maximize profits which is the same as
maximizing total revenue given the zero cost assumption.
a) (5 points) What is the profit (revenue) maximizing price and quantity (in cups) of lemonade and
the corresponding maximum profit.
Suppose that there was a demand shock so that the new estimated demand function for lemonade in your
neighborhood changes to:
Q = 100 – 100 P
b) (5 points) Name and support two reasons why demand would change like this.
c) (5 points) Solve for the new profit (revenue) maximizing price and quantity (in cups) of lemonade
and the corresponding profit.
d) (5 points) Compare your quantity sold and your profit in part c) to the quantity sold and profit if
you kept ‘sticky’ lemonade prices – that is, what would be the quantity sold and profit if you did
not change prices?
GRAPHICS (30 points total for a correct and completely labeled diagram)
Just like in the lecture on the lemonade stand, draw a demand curve in your top diagram and a
total revenue function below making sure that you exploit the fact that the horizontal axis is the
same in the top and bottom diagrams. Label the initial equilibrium points according to your
answer in part a) as points A. Then, label on both diagram as points B, the answer you gave in
part c). We can think of this as the long run since you will increase price in the long run. Then,
label as point C, the quantity sold and profit if you did not change price (i.e., your work from part
d).
e) (5 points) On a separate diagram, draw a supply curve that pertains to your behavior from points
A to B and another supply curve that pertains to points A and C. Pretending that these are shortrun aggregate supply curves, under which curve would macroeconomic (demand side) policies
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