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business
managerial economics

Questions and Answers of Managerial Economics

14. If the supply curve slopes upward, the price elasticity of supply will be positive. True or false?
13. For a given increase in price of the product, will the increase in seller surplus be smaller or larger if the supply is more elastic? (Hint: Draw two supply curves, one more elastic than the
12. How would (a) a higher price of lumber, and (b) lower wages affect the supply of furniture?
11. Explain the differences between the short-run and long-run decisions to continue in business.
10. Explain why the following two conditions for long-run break-even are equivalent: (i) revenue covers total cost; and (ii) price covers average cost.
9. Some companies continue in business even though they are losing money. Are they making a mistake?
8. Explain why the following two conditions for short-run break-even are equivalent: (i) revenue covers variable cost; and (ii) price covers average variable cost.
7. Does the following analysis under- or overestimate the change in profit? The price of eggs is 60 cents per dozen and Farmer Luke produces 10,000 dozen eggs a month. If the price of eggs rises to
6. Presently, Jupiter Oil is producing 2,000 barrels of crude oil a day. The market price is $15 per barrel. Its marginal cost is $20 per barrel. Explain how the company can increase its profit.
5. Under what conditions would a seller's marginal revenue equal the market price of its product?
4. Advertising is an important input into the marketing of shampoo. Explain the meaning of the marginal product of advertising for a manufacturer of shampoos.
3. Farmer Axel's fixed cost of growing corn is higher than that of Farmer Julia. What, if anything, does this imply for the difference in their marginal costs of growing corn?
2. Comment on the following statement: "It costs our factory an average of $5 to produce a shirt. I cannot accept any order for less than $5 per shirt."
1. Explain the distinction between the short run and long run. How is this related to the distinction between fixed and variable costs?
Apply the concept of price elasticity of supply.
Appreciate the concept of seller surplus and apply it in purchasing.
Appreciate that, in the long run, businesses can adjust by entering or exiting the industry.
Appreciate how to decide, in the long run, whether to continue in business, and if so, the scale of production.
Understand the concepts of marginal cost and marginal revenue.
Distinguish fixed and variable costs in the short run.
Appreciate how to decide, in the short run, whether to continue in business, and if so, the scale of production.
Appreciate why producers supply more at higher prices.
15. Compare the own-price elasticity of the demand for a particular brand of inkjet cartridges: (a) before the user has bought an inkjet printer; and (b) after the user has bought the printer.
14. How does the sunk-cost fallacy affect the elasticity of demand?
13. Suppose that the income elasticity of the demand for cars is 0.285 in the short run and 0.391 in the long run. Compare the effect of a 10% rise in incomes on the demand for cars in the short and
12. Consider the effect of changes in fares on the quantity demanded of taxi services. Do you expect demand to be more elastic with respect to fare changes in the short run or in the long run?
11. Suppose that the advertising elasticity of the demand for one brand of cigarettes is 1.3. If the manufacturer raises advertising expenditure by 5%, by how much will the demand change?
10. Explain why the advertising elasticity of the market demand for beer may be less than the advertising elasticity of the demand for one particular brand.
9. Tire manufacturers use both natural and synthetic rubber to produce tires. Suppose that the cross-price elasticity of demand for natural rubber with respect to changes in the price of synthetic
8. Changes in the price of an item may affect the income elasticity of demand. True or false?
7. Consider a good that you buy frequently. (a) Suppose that your income is 10% higher. How much more would you buy each year? (b) Calculate the income elasticity of your demand.
6. The own-price elasticity of the demand for one brand of frozen vegetables is -1.5. Suppose that the manufacturer reduces price by 5%. What would be the percentage effect on the volume of sales?
5. Suppose that the own-price elasticity of the market demand for food is -0.7 and that, as a result of a severe drought, the price of food rises by 10%. Will expenditure on food rise or fall?
4. Consider the intuitive factors that influence the own-price elasticity of demand. Apply the factors to gauge the own-price elasticity of demand for air travel among executives traveling at the
3. Under what conditions is demand price elastic or price inelastic?
2. Explain why the own-price elasticity is a pure number with no units and is negative.
1. Consider a service that you buy frequently. (a) Suppose that the price is 5% lower. How much more would you buy each year? (b) Calculate the own-price elasticity of your demand.
Appreciate how behavioral biases affect the elasticity of demand.
Understand the impact of adjustment time on the elasticity of demand for non-durables and durables.
Appreciate that, if demand is inelastic, the seller can increase profit by raising the price.
Appreciate the intuitive factors underlying the elasticity of demand.
Distinguish price elastic and price inelastic demand.
Understand the concepts of own-price elasticity, income elasticity, cross-price elasticity, and advertising elasticity of demand.
15. What is two-part pricing? How can a broadband service provider use two-part pricing to increase profit?
14. What is a package deal? How can a broadband service provider use package deals to increase profit?
13. "Summer sale: the more you buy, the more you save." Comment.
12. The price of mobile telephone calls is 10 cents a minute. Antonella buys 200 minutes a month. Illustrate her demand curve and identify her buyer surplus.
11. Passengers on a London to Sydney flight compared fares and discovered that they had paid different prices for the same flight. Explain how this illustrates that the market demand curve is
10. Buyer surplus applies to consumer demand but not business demand. True or false?
9. Explain the meaning of buyer surplus.
8. Why are automated teller machines (ATMs) relatively more common in countries with higher labor costs?
7. A key component of mobile phones is the microprocessor. Explain how changes in consumer incomes affect Apple's demand for microprocessors.
6. How does Pepsi advertising affect the demand for: (a) Pepsi; and (b) Coca-Cola?
5. A new birth-control device protects women against pregnancy but not sexually transmitted diseases. How will this new product affect the demand for: (a) male condoms; (b) birth-control pills?
4. Define what is meant by (a) a substitute, and (b) a complement, and give examples to illustrate your definition.
3. Think of a good or service that you bought recently. Would you have bought more or less of the item if your income had been lower? Explain why or why not.
2. Define (a) normal product, and (b) inferior product, and give examples to illustrate your definition.
1. Think of a good or service that you bought recently. Would you have bought less of the item if the price had been lower? Explain why or why not.
Apply package deals and two-part pricing to extract buyer surplus.
Appreciate the concept of buyer surplus.
Understand differences between consumer and business demand.
Appreciate the impact on demand of changes in the prices of substitutes and complements.
Distinguish consumer demand for normal products and inferior products.
Appreciate why consumers and business buyers buy more at lower prices.
4. In each of the following instances, discuss whether horizontal or vertical boundaries have been changed, and whether they were extended or shrunk. (a) The Canadian manufacturer of regional jets,
should you purchase the extended warranty? (c) Would your decision be different if your discount rate were 1% per year?
3. Ford offers a three-year or 36,0000-mile warranty on the Explorer car. Consumers must pay for extended warranties beyond the manufacturer's warranty period. The Auto Club offers an extended
2. Alan and Hilda are clerks at a department store. The store pays each clerk $10 per hour for a basic eight-hour day, $15 per hour for overtime of up to four hours, and $20 for overtime exceeding
1. Mercy Hospital provides healthcare at subsidized prices and is so popular that patients wait in long queues. Revenue is $75 million a year, while the cost of providing service is $100 million a
15. Should managers operating in an imperfect market: (a) set high prices to make up for the imperfection; or (b) act strategically to resolve the imperfection?
14. What distinguishes a manufacturer with market power from one without market power?
13. What is another name for the model of competitive markets?
12. True or false? (a) In every market, all buyers are consumers. (b) In every market, all sellers are businesses.
11. Explain the difference between: (a) the market for electricity; and (b) the electricity industry.
10. In the context of manufacturing Apple iPhones, explain the difference between outsourcing and vertical integration.
9. Describe the horizontal boundaries of your university. In what ways could the horizontal boundaries be expanded or reduced?
8. Describe the vertical boundaries of your local cable television provider. In what ways could the vertical boundaries be expanded or reduced?
7. Referring to the net present value example in Section 4 above on timing, under what circumstances, if any, could the NPV be positive?
6. Explain why an employer expecting $1 million of future pension costs need not provide $1 million today in order to meet the pension fund's future obligations.
5. Why do individuals act with bounded rationality?
4. Give an example in which the marginal is less than the average value.
3. Give an example in which the marginal exceeds the average value.
2. Consider a charity that gives free mosquito nets to poor people. Since the charity receives no revenue while mosquito nets are costly, does the free distribution mean that the charity is
1. Explain the difference between value added and economic profit.
Distinguish competitive markets, market power, and imperfect markets.
Understand the vertical and horizontal boundaries of an organization.
Apply net present value to evaluate benefits and costs that flow over time.
Appreciate the effect of bounded rationality on decision-making.
Apply marginal benefit and marginal cost to decide extent.
Apply total benefit and total cost to decide participation.
Understand value added and economic profit.
Appreciate the objective of managerial economics.
5. In Figure 3.1, the total benefit and total cost curves are represented by the following mathematical functions:anda. Find the marginal benefit function. Verify that pointsc, b, and d in Figure 3.2
4. A decision maker wishes to minimize the cost of producing a given level of total benefit, B = 288. The cost function is C = 6x + 3y and the total benefit function is B = xy. Set up the Lagrangian
1. Assume the only choice variable is x. The total benefit function is B(x)= 170x − x2, and the cost function is C(x) = 100 − 10x + 2x2.a. What are the marginal benefit and marginal cost
2. The world market for newly smelted primary aluminum (i.e., excluding scrap or recycled sources) recently experienced a period of rising inventories and falling prices. The Wall Street Journal
1. Bloomberg Businessweek recently declared that we had entered the Age of the Internet and observed that when markets for goods or services gain access to the Internet, more consumers and more
9. A new processing technology makes it economically feasible to turn natural gas into a liquid petroleum that yields superclean gasoline, diesel fuel, or any other product derived from crude oil.
8. Construct a graph showing equilibrium in the market for movie tickets.Label both axes and denote the initial equilibrium price and quantity as P0 and Q0. For each of the following events, draw an
7. California voters, in an attempt to halt the rapid increase in the state’s automobile insurance rates, approved Proposition 103. The measure proposes to roll back auto insurance rates by 20

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