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business
managerial economics

Questions and Answers of Managerial Economics

6. What conditions are necessary to implement discrimination? to implement complete price
5. How does complete price discrimination increase profit as compared with uniform pricing?
4. Book publishers typically set prices by the number of pages multiplied by a standard price per page. Comment on this pricing policy.
3. Using a new manufacturing process, Saturn Tire has reduced the marginal cost of a tire from $50 to $40. Should it reduce the selling price of a tire by $10?
2. Sol Electric manufactures low-energy light bulbs. The marginal production cost is $2 per unit, while the price elasticity of demand is -1.25. With uniform pricing, what is the profit-maximizing
1. Many supermarkets sell both branded and own-label merchandise. A supermarket estimates that the demand for its own-label cola is less elastic than the demand for Coca-Cola. Should it set a higher
Appreciate the choice between alternative pricing policies.
Apply indirect segment discrimination.
Apply direct segment discrimination.
Understand complete price discrimination.
Appreciate how price discrimination can increase profit beyond uniform pricing.
Apply uniform pricing.
15. Compare purchases and price with a monopsony and perfectly competitive buyers.
14. A buyer with market power restrains its purchases to reduce the market price. True or false?
13. For a monopoly, the incremental margin percentage would be infinite. True or false?
12. Explain the profit-maximizing rule for R&D expenditure relative to sales revenue.
11. What factors affect the R&D elasticity of demand?
10. For a medical device, the advertising to sales ratio exceeds the incremental margin percentage multiplied by the advertising elasticity of demand. How can the manufacturer increase profit?
9. The profit-maximizing price for a new electronic device is $100. At that price, the advertising elasticity of demand is 0.1 and sales are 500,000 units a year. The marginal cost of production is
8. Why should a seller take account of both the marginal revenue and the marginal cost when considering how to adjust price following a change in demand?
7. Why should a seller take account of both the marginal revenue and the marginal cost when considering how to adjust price following a change in costs?
6. A software publisher has priced a new database program such that its marginal revenue is more than its marginal cost. Advise the company how to raise its profit.
5. True or false? A seller with market power can either set the price and let the market decide how much to buy, or set the quantity to sell and let the market decide the price, but not set both
4. For a seller with market power, why is marginal revenue less than or equal to price?
3. Explain how economies of scale can contribute to market power.
2. What are the major forms of intellectual property?
1. By way of an example, explain how product differentiation contributes to market power.
For a buyer with market power, identify the scale of purchases that maximizes profit.
Apply the incremental margin percentage to measure market power.
Appreciate that sellers with market power restrict sales to raise margins and profit.
R&D expenditure that maximize profit.
For a seller with market power, identify the levels of advertising and
Appreciate how to adjust sales to changes in demand and costs.
For a seller with market power, identify the scale of production/sales that maximizes profit.
Appreciate how to gain market power.
15. Explain the fixed-cost fallacy in the context of producing a newspaper.
14. What are the strategic implications of the experience curve?
13. Draw an experience curve with a learning percentage of 100%.
12. What are the strategic implications of economies of scope?
11. Explain the difference between economies of scale and economies of scope.
10. What are the strategic implications of economies of scale?
9. Explain the difference between fixed cost and sunk cost.
8. The most substantial cost in family medicine practice is human resources. To treat twice as many patients, a clinic will probably need twice as many doctors, nurses, and other professional staff.
7. In which situation are sunk costs more significant: (a) Tre Stagioni, which has a permanent staff of two chefs and five waiters; or (b) Campus Deli, which relies mainly on part-time workers, hired
6. "Our costs are very high because of the huge pensions of our retirees." Are the pensions of retired employees relevant for forward-looking business decisions?
5. Mercury Transport is wholly equity-financed, while Jupiter Trucking has borrowed from banks to finance its business. The two businesses are otherwise identical. Jupiter is losing money, while
4. Luna Biotech's manufacturing division uses a unique patent-protected process to culture drugs. Presently, the division is operating at full capacity. How should it price its services to Luna's
3. There is a perfectly competitive market for lumber. How much should Saturn's residential development group pay the building materials division for lumber?
2. A social enterprise provides free primary school education in West Africa. It charges fees to just cover costs. The enterprise is completely financed by European charities. Compare the school's
1. A salesman buys lunch for a potential client. Why is this lunch not free for the client?
Recognize and avoid behavioral biases in cost decisions.
Understand the experience curve and apply in business decisions.
Understand economies of scope and apply in business decisions.
Understand economies of scale and apply in business decisions.
Appreciate that sunk costs should be ignored in business decisions.
Apply the concept of opportunity cost to the cost of capital and transfer pricing.
Understand opportunity costs and apply in business decisions.
15. Free Duty offers tax-free sales of liquor and tobacco products at Hong Kong International Airport. Do you expect any difference in the pre- tax prices of liquor and cigarettes between the airport
14. Travelers can reduce costs for airlines by booking tickets through online channels rather than travel agents. How would you assess whether airlines or consumers benefit from the lower cost?
13. Referring to Figure 6.3(a), under what condition of the price elasticity of demand would the incidence of the tax on consumers be the lowest?
12. Consider two otherwise identical e-commerce retail markets. In one, vendors offer free shipping, while in the other, vendors charge for shipping. What is the difference for the price (including
11. Buyers of residential property must pay a percentage of the house price as a commission to the agent. In this context, explain the difference between the payment and incidence of the brokerage
10. Explain the difference between CF pricing and FOB pricing.
9. A real estate group operates a chain of department stores using its own buildings. Why should the group charge rent to the department store?
8. An integrated oil producer both produces crude oil and refines the oil for sale as gasoline, diesel, and other products in the retail market. In this context, explain the concept of a transfer
7. Explain the meaning of outsourcing. What is the opposite of outsourcing?
6. To limit inflation, some governments impose controls on increases in the prices of rice and other essential foods. Explain the impact on economic efficiency in the market for rice.
5. Consider a competitive finance market. Explain how the invisible hand ensures that the allocation of investment funds is economically efficient.
4. In some countries, self-employed people can evade income tax while people employed by the government and large organizations must pay income tax in full. Comment on the economic efficiency of the
3. In a World War II camp, every prisoner of war received an identical parcel containing cigarettes, chocolate, pen, and writing paper. Comment in terms of economic efficiency.
2. The external auditor of the local school system has found that some schools pay 20% more for cleaning services than other schools. Which condition of economic efficiency is being violated?
1. The government of the Soviet Union subsidized bread. In 1987, the Soviet leader Mikhail Gorbachev complained that children were kicking bread in football games. Comment on the economic efficiency
Appreciate the incidence of intermediation on buyers and sellers.
Appreciate the incidence of changes in demand or supply on buyers and sellers.
Apply transfer pricing and outsourcing in decentralization of an organization.
Appreciate the invisible-hand role of price in competitive markets.
Apply the conditions for economic efficiency.
Appreciate economic efficiency as a benchmark for maximizing value.
15. How does the difference in short- and long-run effects of an increase in demand depend on the difference between short- and long-run price elasticities?
14. Suppose that demand increases. Why does production increase more in the long run than in the short run?
13. Suppose that demand increases. Why does the price increase more in the short run than in the long run?
12. Explain why the effect of an increase in wages of waiters and kitchen staff on the market price of restaurant meals depends on the price elasticity of demand.
11. Under what conditions on the price elasticities of demand and supply would a reduction of supply (shift in supply curve to the left) have a larger effect on the quantity produced?
10. Under what conditions on the price elasticities of demand and supply would a reduction of supply (shift in supply curve to the left) have a larger effect on the price?
9. Consider an increase in consumer incomes that shifts the demand to the right (at every price, consumers want to buy more). Explain why the effect on the production of cars depends on the price
8. Under what conditions of the price elasticities of demand and supply would an upward shift in demand (due to buyers getting more benefit)have a larger effect on the quantity consumed?
7. Under what conditions of the price elasticities of demand and supply would an upward shift in demand (due to buyers getting more benefit) have a larger effect on the price?
6. Explain why the effect of an increase in consumer incomes on the market price of clothing depends on the price elasticity of supply.
5. If the market is in excess demand, what will happen to the price?
4. If the market is in excess supply, what will happen to the price?
3. How would the requirement for a government license affect the competitiveness of an industry?
2. To what extent does the market for plywood meet the conditions for perfect competition?
1. To what extent does the market for dry cleaning meet the conditions for perfect competition?
Appreciate the short- and long-run effects of shifts in demand on production.
Appreciate the short- and long-run effects of shifts in demand on market price.
Apply the price elasticities of demand and supply to predict the impact of shifts in demand on market price and production.
Apply the price elasticities of demand and supply to predict the impact of shifts in supply on market price and production.
Appreciate the impact of excess demand on the market price.
Appreciate the impact of excess supply on the market price.
15. Consider the price elasticity of the market supply of taxi service. Do you expect supply to be relatively more elastic with respect to the fare in the short run or long run?

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