Managerial Economics By Mark Hirschey 12e

Homework Assignment #1

Q1) Is it reasonable to expect firms to take actions that are in the public interest but are detrimental to stockholders? Is regulation always necessary and appropriate to induce firms to act in the public interest? (5pts)

Q2) McDonald's restaurants do the bulk of their business at lunchtime, but have found that promotionally-priced meals at breakfast and dinner make a significant profit contribution. Does the success of McDonald's restaurants in this regard reflect an effective application of the marginal profit concept or the incremental profit concept? Explain. (5pts)

Q3) Demand and Supply Curves. Demand and supply conditions in the market for unskilled labor are important concerns to business and government decision makers. Consider the case of a federally mandated minimum wage set above the equilibrium, or market clearing, wage level. Some of the following factors have the potential to influence the demand or quantity demanded of unskilled labor. Influences on the supply or quantity supplied may also result. Holding all else equal, describe these influences as increasing or decreasing, and indicate the direction of the resulting movement along or shift in the relevant curve(s). (10pts)

A. An increase in the quality of secondary education.

B. A rise in welfare benefits.

C. An increase in the popularity of self-service gas stations, car washes, and so on.

D. A fall in interest rates.

E. An increase in the minimum wage.

Q4) Average Cost-Minimization. Pharmed Caplets is an antibiotic product with monthly revenues and costs of: (10pts)

TR = $900Q - $0.1Q2TC = $36,000 + $200Q + $0.4Q2

MR = TR/Q = $900 - $0.2Q MC = TC/Q = $200 + $0.8Q

A. Set up a spreadsheet for output (Q), price (P), total revenue (TR), marginal revenue (MR), total cost (TC), marginal cost (MC), average cost (AC), total profit (), and marginal profit (M). Establish a range for Q from 0 to 1,000 in increments of 100 (i.e., 0, 100, 200, ..., 1,000).

B. Illustrate by Using the spreadsheet a graph with MR, MC, and AC as dependent variables and units of output (Q) as the independent variable. At what price/output combination is total profit maximized? Why? At what price/output combination is average cost minimized? Why?

C. Determine these profit-maximizing and average-cost minimizing price/output combinations analytically. In other words, use revenue and cost equations to confirm your answers to part B.

D. Compare the profit-maximizing and average-cost minimizing price/output combinations, and discuss any differences. When will average-cost minimization lead to long-run profit maximization?