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business
managerial economics

Questions and Answers of Managerial Economics

4. A manager’s utility function for profit is U( ) 20 , where is the dollar amount of profit. The manager is considering a risky decision with the four possible profit outcomes shown here. The
3. Suppose in Technical Problem 2 that the price probabilities are reversed: The manager expects a price of $15 with a probability of 60 percent and a price of $20 with a probability of 40 percent.
2. A firm is making its production plans for next quarter, but the manager of the firm does not know what the price of the product will be next month. He believes that there is a 40 percent
1. Consider the following two probability distributions for sales:Distribution 1 Distribution 2 Sales probability probability(thousands of units) (percent) (percent)50 10 10 60 20 15 70 40 20 80 20
10. Berkley Golf & Tennis Club offers golf and tennis memberships. Marketing analysis of the local neighborhood served by Berkley Golf & Tennis Club shows that there are two types of families that
7. EZ Sharp Industries, Inc., manufactures the Keen Edge™ line of diamond-abrasive cutlery sharpeners for home use. EZ Sharp holds a patent on its unique design and can earn substantial economic
9. Look again at Zicon Manufacturing—a firm that produces products that are substitutes in consumption. Suppose that the production manager changed the estimates of the total and marginal cost
8. Suppose the manager in Technical Problem 7 decides to price-discriminate. The longrun marginal cost is estimated to bea. How many units should the manager produce and sell?b. How should the
7. A manager faces two separate markets. The estimated demand functions for the two markets are anda. Find the inverse marginal revenue functions.b. Find the total marginal revenue functions.c. Draw
5. Using Figure 14.6, verify that total revenue is higher at points v and v than at points w and w by calculating total revenue for both allocations of 500 units.
4. In Figure 14.5, the declining five-block pricing plan can be expressed as a set of five successive, two-part pricing plans:Block 1: A1 and f1.Block 2: A2 and f2.Block 3: A3 and f3.Block 4: A4 and
3. Suppose Northvale Golf Club in Technical Problem 2 also has a second group of 100 identical golfers, weekend players, who wish to play at the club. The demand for rounds of golf by each one of the
1. Suppose the firm in Figure 14.1 sets a uniform price for its product.a. What is the maximum profit the firm can earn by setting a uniform price?b. What is the maximum profit the firm could earn if
17. Samsung wants to prevent Whirlpool from entering the market for high-priced, frontload washing machines. Front-load washing machines clean clothes better and use less water than conventional
16. The two largest diner chains in Kansas compete for weekday breakfast customers. The two chains, Golden Inn and Village Diner, each offer weekday breakfast customers a “breakfast club”
18. Alpha and Beta in Technical Problem 15 repeat their pricing decision on the first day of every month. Suppose they have been cooperating for the past few months, but now the manager at Beta is
17. In the pricing decision in Technical Problem 15, can Alpha make a credible threat to punish Beta with a retaliatory price cut? Can Beta make a credible threat of a retaliatory price cut?
16. For the weekly decision by AMD and Intel to set the prices of their semiconductor chips, verify in Table 13.5 that AMD can credibly threaten to make a retaliatory price cut if Intel cheats.
15. Alpha and Beta, two oligopoly rivals in a duopoly market, choose prices of their products on the first day of the month. The following payoff table shows their monthly payoffs resulting from the
14. Consider again the sequential technology choice game in Technical Problem 13 in which Sony chooses its cell phone technology before Motorola. Motorola makes the most profit for itself if both
13. In the technology choice game presented in Figure 13.4, draw the game tree when Sony makes its technology decision first. Find the outcome of the game using the roll-back method. Does Sony
12. Using the payoff table for Castle Pizza and Palace Pizza in Table 13.2, draw the game tree for a sequential decision situation in which Palace makes its pricing decision first.a. Find the
11. Managers at Firm A and Firm B must make pricing decisions simultaneously. The following demand and long-run cost conditions are common knowledge to the managers:and and The accompanying figure
9. Carefully explain why Arrow Airlines and Bravo Airways are not likely to choose the pair of prices at point R in Figure 13.2. Do not simply state that point R is not at the intersection of the
8. Following the procedure illustrated in Panel A of Figure 13.1, show that when Arrow Airlines believes Bravo Airways is going to charge $200 per round-trip ticket, Arrow’s best response is to
7. Verify that each of the following decision pairs is a Nash equilibrium by explaining why each decision pair is strategically stable:a. Cell D of the prisoners’ dilemma in Table 13.1.b. The
5. Verify the following statement: “The solution to the prisoners’ dilemma in Table 13.2 is equivalent to the solution found by elimination of dominated strategies.”
11. Dr. Leona Williams, a well-known plastic surgeon, has a reputation for being one of the best surgeons for reconstructive nose surgery. Dr. Williams enjoys a rather substantial degree of market
3. The El Dorado Star is the only newspaper in El Dorado, New Mexico. Certainly, the Star competes with The Wall Street Journal, USA Today, and the New York Times for national news reporting, but the
19. Suppose the firm in Technical Problem 18 faces the following demand function:a. Write the equation for the inverse demand function.b. Find the marginal revenue function.c. How much output should
18. Consider a firm that is using two plants, A and B, with these MC functions:anda. Find the inverse marginal cost functions.b. Set MCA MCT and MCB MCT, and find the algebraic sum QA QB QT.c. Take
16. For the firm in problem 15, the manager estimated the average variable cost function as where AVC was measured in dollars per unit and Q is the number of units sold.a. What is the estimated
15. The manager of a monopoly firm obtained the following estimate of the demand function for its output:From an econometric forecasting firm, the manager obtained forecasts for the 2011 values of M
11. In the following table, columns 1 and 2 make up a portion of the production function of a monopolist using a single variable input, labor. Columns 2 and 3 make up the demand function facing the
6. A monopolist faces the following demand and cost schedules:Price Quantity Total cost$20 7 $36 19 8 45 18 9 54 17 10 63 16 11 72 15 12 81a. How much output should the monopolist produce?b. What
3. For each of the following products, could consumer lock-in or network externalities (or both) create a barrier to entry? Explain why or why not.a. Toothpaste.b. Long-play (LP) record albums.
3. The manager of All City Realtors wants to hire some real estate agents to specialize in selling housing units acquired by the Resolution Trust Corporation (RTC) in its attempt to bail out the
2. Redstone Clayworks, Inc., a small firm located in Sedona, manufactures clay fire pits that homeowners place on their patios for decoration and light-duty heating. Redstone is one of 53 firms
10. Suppose that the manager of a firm operating in a competitive market has estimated the firm’s average variable cost function to be AVC 10 0.03Q 0.00005Q2 Total fixed cost is $600.a. What is the
9. Consider a price-taking firm that has total fixed cost of $50 and faces a marketdetermined price of $2 per unit for its output. The wage rate is $10 per unit of labor, the only variable input.
3.a. In a competitive industry, the market-determined price is $12. For a firm currently producing 50 units of output, short-run marginal cost is $15, average total cost is$14, and average variable
2. Answer the questions below using the cost curves for the price-taking firm shown in the following graph:a. If price is $7 per unit of output, draw the marginal revenue curve. The manager should
2. Dimex Fabrication Co., a small manufacturer of sheet-metal body parts for a major U.S.automaker, estimates its long-run production function to be where Q is the number of body parts produced
1. The production function is Q ALaKb, where a 0 and b 0.a. The marginal product of labor is MPL.b. The marginal product of capital is MPK.c. The marginal rate of technical substitution is MRTS .d.
5. Gamma Corporation, one of the firms that retains you as a financial analyst, is considering buying out Beta Corporation, a small manufacturing firm that is now barely operating at a profit. You
2. Total cost (TC) and total variable cost (TVC) are parallel, yet average total cost (ATC) and average variable cost (AVC) are not parallel.a. Demonstrate mathematically that ATC and AVC are not
5. An article in BusinessWeek warned of the dangers of deflation as the collapse of numerous Asian economies was creating worries that Asia might try to “export its way out of trouble” by
9. Fill in the blanks in the following table:
8. The following table shows the amount of total output produced from various combinations of labor and capital:Units of Units of capital labor 1 2 3 4 1 50 120 160 180 2 110 260 360 390 3 150 360
7. Refer to Table 8.2 and explain precisely why using 10 units of labor and 2 units of capital is not economically efficient.
6. Fill in the blanks in the following table:314 P A R T III Production and Cost Analysis Units of labor Total product Average product Marginal product 1 40 2 48 3 138 4 44 5 24 6 210 7 29 8 27
3. Jetways Airline flies passengers between New York and Miami, making one round-trip daily using a leased Boeing 727 aircraft. Consider the number of passengers served daily as the output for the
2. Firms A and B both produce good X, and each firm plans to produce 1,000 units per day of good X. The firms can choose either of the two following production processes(i.e., input combinations) to
1. “When a manager is using a technically efficient input combination, the firm is also producing in an economically efficient manner.” Evaluate this statement.
3. Rubax, a U.S. manufacturer of athletic shoes, estimates the following linear trend model for shoe sales:where Qt sales of athletic shoes in the tth quarter t 1, 2, . . . . , 28 [2004(I), 2004(II),
8. Describe the major shortcomings of time-series models.
7. Consider a firm subject to quarter-to-quarter variation in its sales. Suppose that the following equation was estimated using quarterly data for the period 2003–2010 (the time variable goes from
6. A linear trend equation for sales of the form was estimated for the period 1996–2010 (i.e., t 1996, 1997, . . . , 2010). The results of the regression are as follows:a. Evaluate the statistical
4. A linear industry demand function of the form Q a bP cM dPRa. Is the sign of as would be predicted theoretically? Why?b. What does the sign of imply about the good?c. What does the sign of imply
3. The empirical demand function for good X is estimated in log-linear form as where is the estimated number of units of good X demanded, P is the price of X, M is income, and PY is the price of
2. The estimated market demand for good X is where is the estimated number of units of good X demanded, P is the price of the good, M is income, and PZ is the price of related good Z. (All parameter
8. The demand curve for haircuts at Terry Bernard’s Hair Design is where Q is the number of cuts per week and P is the price of a haircut. Terry is considering raising her price above the current
2. Assume a consumer with the utility function and the budget constrainta. Set up the constrained maximization problem, and derive the first-order conditions.b. Find the amounts of goods X and Y the
1. Assume a consumer with the utility function and the typical budget constrainta. Set up the constrained maximization problem and derive the first-order conditions.b. Derive the consumer’s demand
5. In terms of the consumer theory set forth in this chapter, can you explain the meaning of the following statements?a. “I think you get more for your money from Nike than from Reebok.”b. “I
2. Suppose Bill is on a low-carbohydrate diet. He can eat only three foods: Rice Krispies, cottage cheese, and popcorn. The marginal utilities for each food are tabulated below.Bill is allowed only
4. The manager of Collins Import Autos believes the number of cars sold in a day (Q) depends on two factors: (1) the number of hours the dealership is open (H) and (2) the number of salespersons
2. In his analysis of California’s Proposition 103 (see Illustration 4.2), Benjamin Zycher notes that one of the most important provisions of this proposition is eliminating the practice by
4. Evaluate the following statements:a. “The smaller the standard error of the estimate, the more accurate the parameter estimate.”b. “If is an unbiased estimate ofb, then equals b.”c. “The
1. A simple linear regression equation relates R and W as follows:a. The explanatory variable is , and the dependent variable is .b. The slope parameter is , and the intercept parameter is .c. When W
5. In Figure 3.1, the total benefit and total cost curves are represented by the following mathematical functions:TB TB(A) 8A 0.004A2 and TC TC(A) A 0.006A2a. Find the marginal benefit function.
3. A decision maker wishes to maximize total benefit, B 3x xy y, subject to the cost constraint, Set up the Lagrangian and then determine the values of x and y at the maximum level of benefit, given
2. The only choice variable is x. The total benefit function is B(x) 100x 2x2, and the total cost function isa. What are the marginal benefit and marginal cost functions?b. Set up the net benefit
9. Joy Land Toys, a toy manufacturer, is experiencing quality problems on its assembly line. The marketing division estimates that each defective toy that leaves the plant costs the firm $10, on
7. Janice Waller, the manager of the customer service department at First Bank of Jefferson County, can hire employees with a high school diploma for $20,000 annually and employees with a
5. U.S. Supreme Court Justice Stephen Breyer’s book Breaking the Vicious Circle: Toward Effective Risk Regulation (1993) examines government’s role in controlling and managing the health risks
1. Using optimization theory, analyze the following quotations:a. “The optimal number of traffic deaths in the United States is zero.”b. “Any pollution is too much pollution.”c. “We cannot
10. Firewood prices in places from northern California to Boston and suburban New Jersey have remained steady even though the supply of firewood has been diminished by environmental restrictions on
19. Use the following graph to answer these questions.a. What are the equilibrium price and quantity?b. What is the effect of a ceiling price of $40?c. What is the effect of a floor price of $50? A
18. In problem 12, suppose the city council decides rents are too high and imposes a rent ceiling of $400.a. The ceiling on rent causes a of apartments per month.b. How many more renters would have
17. Suppose that the general demand function for good X is where Qd quantity of X demanded Px price of X M (average) consumer income PR price of a related good Ra. Is good X normal or inferior?
16. Suppose that a pair of events from problem 15 occur simultaneously. For each of the pairs of events indicated below, perform a qualitative analysis to predict the direction of change in either
13. Suppose that the demand and supply functions for good X area. What are the equilibrium price and quantity?b. What is the market outcome if price is $2.75? What do you expect to happen? Why?c.
12. The following table presents the demand and supply schedules for apartments in a small U.S. city:Quantity demanded Quantity supplied Monthly rental rate (number of units (number of units (dollars
10. Using a graph, explain carefully the difference between a movement along a supply curve and a shift in the supply curve.
9. The following general supply function shows the quantity of good X that producers offer for sale (Qs):where Px is the price of X, PI is the price of labor, T is an index measuring the level of
4. Recall that the general demand function for the demand curves in Figure 2.2 is Derive the demand function for D2 in Figure 2.2. Recall that for D2 income is $52,000 and the price of the related
2. Consider the general demand function:a. Derive the equation for the demand function when M $30,000 and PR$50.b. Interpret the intercept and slope parameters of the demand function derived in part
1. The general demand function for good A is where Qd quantity demanded of good A each month, PA price of good A, M average household income, PB price of related good B, ranging in value from 0 to 10
3. The National Enquirer reported that, in their divorce settlement, Burt Reynolds offered Loni Anderson $10 million spread evenly over 10 years but she instead demanded$5 million now. If the
6. An article in The Wall Street Journal reported that large hotel chains, such as Marriott, are tending to reduce the number of hotels that they franchise to outside owners and increase the number
1. At the beginning of the year, an audio engineer quit his job and gave up a salary of$175,000 per year in order to start his own business, Sound Devices, Inc. The new company builds, installs, and
2. During a year of operation, a firm collects $175,000 in revenue and spends $80,000 on raw materials, labor expense, utilities, and rent. The owners of the firm have provided$500,000 of their own
When the armed forces downsized in the 1990s, the Department of Defense offered thousands of military personnel a choice of severance packages. The individual could accept an immediate lump-sum
a. As part of a joint venture, another firm extends your firm money up front in return for a share of future profits. The cash flow pattern for your firm is +$5,000, -$3,000,-$4,000. Compute the
A software firm has 130 programmers to be assigned to different projects. Due to a scarcity of experienced programmers, the firm cannot hire new ones in the near future. Each project requires a
Consider a firm that is funded entirely by equity. It is considering a risky investment project. The treasury bill rate is 6 percent, and the expected return on the stock market is 12 percent.a. If
A company is trying to decide which of two computer systems to install. System A costs $1 million and will increase operating profits by $500,000 per year. Its useful life is five years. Because of
A firm is attempting to decide which of two machines to purchase. The machines serve exactly the same purpose, so the only issue is their cost.Machine A costs $30,000; it will last three years and
Your firm is considering two mutually exclusive projects with the following cash flows. Year 0 (Today) Years 1-11 Year 12 Project A -$400,000 Project B -120,000 $41,000 17,000 $400,000 165,000a.

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