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business
managerial economics

Questions and Answers of Managerial Economics

4. A real estate development company is considering building a new office building in downtown. Above 20,000 square feet, the company’s managers believe they can generate approximately $600,000 in
3. Your company is in the same position as that in the previous question, but Products A and B are now complements. How should you handle pricing?a. Raise price on both products with a larger
2. Your company produces and sells Product A, which has an associated elasticity of demand of –1.8. You acquire as a substitute product B, which has an associated elasticity of demand of –2.0.
1. You own two products, each of which is a substitute for the other. You raise price on the first product. What happens to marginal revenue?a. MR for the first product falls but increases for the
16.5 Explain why common property resources and public goods are underproduced and how government can reduce market failure created by nonexcludability.
16.4 Discuss pollution as a negative externality and show how government regulation can create incentives for firms to choose the optimal level of pollution.
16.3 Identify deadweight loss associated with market power and discuss ways antitrust policy, second-best pricing, and two-part pricing can reduce the cost of market power.
16.2 Explain the concept of market failure and explain why it provides an economic justification for government intervention in markets.
16.1 Define social economic efficiency and explain why wellfunctioning competitive markets achieve social economic efficiency without government regulation.
15.5 Make decisions under uncertainty using the maximax rule, the maximin rule, the minimax regret rule, and the equal probability rule.
15.4 Explain expected utility theory and apply it to decisions under risk.
15.3 Employ the expected value rule, mean-variance rules, and the coefficient of variation rule to make decisions under risk.
15.2 Compute the expected value, variance, standard deviation, and coefficient of variation of a probability distribution.
15.1 Explain the difference between decision making under risk and under uncertainty.
14.6 Understand why cost-plus pricing usually fails to maximize profit.
14.5 Determine the profit-maximizing prices when a firm sells multiple products related in consumption and explain how firms can profitably bundle two or more products to sell for a single price.
14.4 Explain how to practice third-degree price discrimination.
14.3 Explain how to practice second-degree price discrimination by using either two-part pricing or declining block pricing.
14.2 Explain how to practice first-degree price discrimination to earn greater revenue and profit than charging a uniform price.
14.1 Explain why uniform pricing does not generate the maximum possible total revenue and how price discrimination can generate more revenue.
13.4 Explain why it is difficult, but not impossible, to create strategic barriers to entry by either limit pricing or capacity expansion.
13.3 Understand and explain why cooperation can sometimes be achieved when decisions are repeated over time and discuss four types of facilitating practices for reaching cooperative outcomes.
13.2 Employ the roll-back method to make sequential decisions, determine existence of first- or second-mover advantages, and employ credible commitments to gain first- or second-mover advantage.
13.1 Employ concepts of dominant strategies, dominated strategies, Nash equilibrium, and best-response curves to make simultaneous decisions.
\\12.7 Select production levels at multiple plants to minimize the total cost of producing a given total output for a firm.
12.6 Employ empirically estimated or forecasted demand, average variable cost, and marginal cost to calculate profit-maximizing output and price for monopolistic or monopolistically competitive firms.
12.5 Find the profit-maximizing price and output under monopolistic competition.
12.4 Find the profit-maximizing input usage for a monopolist.
12.3 Find the profit-maximizing output and price for a monopolist.
12.2 Explain why barriers to entry are necessary for market power in the long run and discuss the major types of entry barriers.
12.1 Define market power and describe how own-price elasticity, the Lerner index, and cross-price elasticity are used to measure market power.
11.6 Employ empirically estimated or forecasted values of market price, average variable cost, and marginal cost to calculate the firm’s profit-maximizing output and profit.
11.5 Find the profit-maximizing level of usage of a variable input.
11.4 Explain the characteristics of long-run competitive equilibrium for a firm, derive long-run industry supply curves, and identify economic rent and producer surplus.
11.3 Find short-run profit-maximizing output, derive firm and industry supply curves, and identify the amount of producer surplus earned.
11.2 Explain why the demand curve facing a perfectly competitive firm is perfectly elastic and serves as the firm’s marginal revenue curve.
11.1 Discuss three characteristics of perfectly competitive markets.
10.4 Specify and estimate a short-run cost function using a cubic specification.
10.3 Discuss two important problems concerning the proper measurement of cost: correcting for inflation and measuring economic (opportunity) costs.
10.2 Employ regression analysis to estimate a short-run production function.
10.1 Specify and explain the properties of a short-run cubic production function.
9.7 Show the relation between long-run and short-run cost curves using long-run and short-run expansion paths.
9.6 Explain how a variety of forces affects long-run costs: scale, scope, learning, and purchasing economies.
9.5 Calculate long-run total, average, and marginal costs from the firm’s expansion path.
9.4 Construct the firm’s expansion path and show how it relates to the firm’s long-run cost structure.
9.3 Apply optimization theory to find the optimal input combination.
9.2 Construct isocost curves for a given level of expenditure on inputs.
9.1 Graph a typical production isoquant and discuss the properties of isoquants.
8.4 Relate short-run costs to the production function using the relations between (a) average variable cost and average product, and (b) shortrun marginal cost and marginal product.
8.3 Examine the structure of short-run costs using graphs of the total cost curves, average cost curves, and the short-run marginal cost curve.
8.2 Examine the structure of short-run production based on the relation among total, average, and marginal products.
8.1 Explain general concepts of production and cost analysis.
7.6 Discuss and explain several important problems that arise when using statistical methods to forecast demand.
7.5 Use dummy variables in time-series demand analysis to account for cyclical or seasonal variation in sales.
7.4 Forecast sales and prices using time-series regression analysis.
7.3 Employ linear regression methodology to estimate the demand function for a single price-setting firm.
7.2 Specify an empirical demand function, either a linear or nonlinear functional form, and explain the mathematical properties of each type.
7.1 Explain the strengths and weaknesses of direct methods of demand estimation.
6.6 Define and compute the income elasticity of demand and the crossprice elasticity of demand.
6.5 Relate marginal revenue to total revenue and demand elasticity and write the marginal revenue equation for linear inverse demand functions.
6.4 Calculate price elasticity over an interval along a demand curve and at a point on a demand curve.
6.3 List and explain several factors that affect price elasticity of demand.
6.2 Explain the role price elasticity plays in determining how a change in price affects total revenue.
6.1 Define price elasticity of demand and use it to predict changes in quantity demanded and changes in the price of a good.
5.7 Identify and measure the substitution and income effects of a price change.
5.6 Define a corner solution and explain the condition that creates a corner solution.
5.5 Use indifference curves to derive a demand curve for an individual consumer and construct a market demand curve by horizontally summing individual demand curves.
5.4 Derive and interpret the equilibrium conditions for an individual consumer to be maximizing utility subject to a budget constraint.
5.3 Construct a consumer’s budget line and explain how to rotate or shift the budget line when either prices or income change.
5.2 Define the concept of indifference curves and explain the properties of indifference curves and indifference maps.
5.1 Explain the concept of utility and the basic assumptions underlying consumer preferences.
4.6 Use linear regression techniques to estimate the parameters of two common nonlinear models: quadratic and log-linear regression models.
4.5 Set up and interpret multiple regression models that use more than one explanatory variable.
4.4 Evaluate how well a regression equation “fits” the data by examining the R 2 statistic and test for statistical significance of the whole regression equation using an F-test.
4.3 Determine whether estimated parameters are statistically significant using either t-tests or p-values associated with parameter estimates.
4.2 Estimate intercept and slope parameters of a regression line using the method of least-squares.
4.1 Set up and interpret simple linear regression equations.
3.3 Employ marginal analysis to find the optimal levels of two or more activities in constrained maximization and minimization problems.
3.2 Use marginal analysis to find optimal activity levels in unconstrained maximization problems and explain why sunk costs, fixed costs, and average costs are irrelevant for decision making.
3.1 Define several key concepts and terminology.
2.6 Examine the impact of government-imposed price ceilings and price floors.
2.5 Predict the impact on equilibrium price and quantity of shifts in demand or supply.
2.4 Measure gains from market exchange using consumer surplus, producer surplus, and social surplus.
2.3 Explain why market equilibrium occurs at the price for which quantity demanded equals quantity supplied.
2.2 Identify supply functions and distinguish between a change in supply and a change in quantity supplied.
2.1 Identify demand functions and distinguish between a change in demand and a change in quantity demanded.
1.5 Discuss the primary opportunities and threats presented by the globalization of markets in business.
1.4 Explain the difference between price-taking and price-setting firms and discuss the characteristics of the four market structures.
1.3 Describe how separation of ownership and management can lead to a principal–agent problem when goals of owners and managers are not aligned and monitoring managers is costly or impossible for
1.2 Explain the difference between economic and accounting profit and relate economic profit to the value of the firm.
1.1 Understand why managerial economics relies on microeconomics and industrial organization to analyze business practices and design business strategies.
6. If the monopoly municipal water utility in Technical Problem 5 does not face any kind of government regulation of price or output:a. The water utility will charge $ per 1,000-gallon unit, sell
3. Under the demand and supply conditions given in Technical Problem 1, suppose that the mayor of NYC asks the city council to impose a price ceiling on bagels sold in NYC.If the ceiling price is set
2. Using the demand and supply conditions given in Technical Problem 1, answer the following questions concerning consumer, producer, and social surplus in the New York City bagel market.a. For the
4. Remox Corporation is a British firm that sells high-fashion sportswear in the United States. Congress is currently considering the imposition of a protective tariff on imported textiles. Remox is
1. Consider a firm that is deciding whether to operate plants only in the United States or also in either Mexico or Canada or both. Congress is currently discussing an overseas investment in new
8. The manager in Technical Problem 5 receives an offer from another party to buy the rights to the risky project described in that problem. This party offers the manager$3,200, which the manager
7. Suppose the manager in Technical Problem 4 can avoid the risky decision in that problem by choosing instead to receive with certainty a sum of money exactly equal to the expected profit of the
6. Derive your own utility function for profit for the range of profits shown in the following table:Profit Utility Marginal outcome index utility of profit$1,000 0.0 —2,000 3,000 3,200 4,000 1.0a.
5. Suppose the manager of a firm has a utility function for profit of U( ) 20 ln( ), where is the dollar amount of profit. The manager is considering a risky project with the following profit payoffs

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