Questions .

Managerial economics uses File to help managers solve problems, explain.

____2.What is the relationship between economic and accounting profit?

____3.The difference between accounting and economic profit is:

____4.Managers may make decisions that are not consistent with the goals of stockholders. This is referred to as the File problem.

____5.Managers may choose to pursue goals other than maximization of a firm's value. This is referred to as the File problem.

____6.The price of computers has fallen, while the quantity purchased has remained constant. This implies that the demand for computers has:

____7.J. D. Power, the big management consulting firm, extols the reliability of Dell computers; this causes the: ____8.In the following figure, there will be an excess supply at any price:

File

____9.In the accompanying figure, the equilibrium price and quantity are:

File

____10.In the following figure, there will be an excess demand at any price:

____11.The market demand schedule shows the quantities that would be purchased, holding all other factors constant, from a group of firms during a given time period:

____12.A graphical representation of the demand function is called a:

____13.The demand curve's usual slope implies that consumers:

have tastes that sometimes change.

____14.In the article "Colombia, Brazil Advance Proposal to Withhold 10 Percent of Export Output" (The Wall Street Journal, September 23, 1991, p. B6), a Colombian delegate to the International Coffee Organization said that if all its members withheld 10% of export output, the international price would rise 20%. This statement implies that the price elasticity of demand for coffee is approximately:

____15.As we move down a linear demand curve, demand becomes:

____16.The formula for the arc elasticity of demand can be written as:

____17.The demand for cough medicine is Q = 10 - 2P. At a price of $2.50, the price elasticity of demand is:

____18.The demand for answering machines is Q = 1,000 - 150P + 25I. Assume that per capita disposable income I is $200. When the price of answering machines is P = $10, the price elasticity of demand is:

____19.The demand for textbooks is Q = 200 - P + 25U - 50Pbeer. Assume that the unemployment rate U is 8 and the price of beer Pbeer is $2. When the average price of a textbook is P = $100, the price elasticity of demand is:

____20.Suppose that the demand curve for compact disks is given by P = 600 - Q and that the supply curve is given by P = 0.5Q, where Q is the quantity of compact disks and P is their price. What is the price elasticity of demand at the equilibrium price and quantity?

____21.The demand for fax machines in thousands of units has been estimated to be Q = 1,000 - 1.5P + 5L, where P is the price of the machines and L is the average cost of a 10-minute midday call from Los Angeles to New York. At a fax machine price of $400 and a phone call cost of $10, the price elasticity of demand for fax machines is:

____22.The demand for space heaters is Q = 250 - P + 2COOL, where COOL is the absolute value of the difference between the average overnight low temperature and 40F. Assume that the average overnight low is 0F. When the price of space heaters is P = $30, the price elasticity of demand is:

____23.The demand for space heaters is Q = 250 - P + 2COOL, where COOL is the absolute value of the difference between the average overnight low temperature and 40F. Assume that the average overnight low this month is 40F. When the price of space heaters is P = $50, the price elasticity of demand is?

Lease versus Buy Sadik Industries must install $1 million of new machinery in its Texas plant. It can obtain a 6-year bank loan for 100% of the cost at a 14% interest rate with equal payments at the end of each year. Sadik's tax rate is 33%. The equipment falls in the MACRS 3-year class. Year 3-year MACRS 33.33% N 44.45% W 14.81% A 7.41% Alternatively, a Texas investment banking firm that represents a group of investors can arrange a guideline lease calling for payments of $320,000 at the end of each year for 3 years. Under the proposed lease terms, the Sadik must pay for insurance, property taxes, and maintenance. Sadik must use the equipment if it is to continue in business, so it will almost certainly want to acquire the property at the end of the lease. If it does, then under the lease terms it can purchase the machinery at its fair market value at Year 3. The best estimate of this market value is $170,000, but it could be much higher or lower under certain circumstances. If purchased at Year 3, the used equipment would fall into the MACRS 3-year class. Sadik would actually be able to make the purchase on the last day of the year (i.e., slightly before Year 3), so Sadik would get to take the first depreciation expense at Year 3 (the remaining depreciation expenses would be from Year 4 through Year 6). On the time line, Sadik would show the cost of purchasing the used equipment at Year 3 and its depreciation expenses starting at Year 3. To assist management in making the proper lease-versus-buy decision, you are asked to answer the following questions: a. What is the net advantage of leasing? Should Sadik take the lease? (Round your answer to the nearest dollar.) Explain. Net advantage to leasing $ Since the cost of leasing the machinery is | less *than the cost of owning it, the firm should | lease the equipment. b. Consider the $170,000 estimated residual value. How high could the residual value get before the net advantage of leasing falls to zero? (Round your answer to the nearest dollar.) $1) In the following problem, use appropriate diagrams to show the changes in producer and consumer surplus as the situation evolves. a) Begin with a market for rice in the small country of Buras. The Buras rice market is supplied only by domestic farmers with differing cost curves so that the rice industry has a standard upward sloping supply curve. Consumers have a standard downward sloping demand curve and market equilibrium is reached at $1.05/lb. Illustrate the consumer surplus and producer surplus in your diagram. b) Now assume that the Buras opens itself up to international trade. The world market price for rice is $.90 per pound. Because Buras is small, its demand will have no effect on the world price so you can assume it faces an international supply curve for rice that perfectly elastic at $.90 per pound. Show what changes occur in Buras consumers' surplus and the Buras farmer's producer surplus because of this international trade. (Do not consider the producer surplus of farmers in other countries). c) Bowing to the protests of Buras rice farmers, the government imposes a $.15 per pound tariff on imported rice so that each pound of imported rice has $.15 added to its price. Using appropriate diagrams show what changes this tariff makes in the consumer surplus and Buras farmers' producer surplus you had in (b). Can you identify the tariff revenue in your graph?Answer the following elasticity-related questions. (a) Given the inverse demand curve p = 120 - 2Q", what is the own-price elasticity of demand when the price is $30 per unit? What is the own-price elasticity of demand when the price is $40 per unit? (b) Revnol, a manufacturer of cosmetics, prices its popular pink lipstick at $8. On the basis of test-marketing, Revnol believes that women between the ages of 18 and 20 have an own-price elasticity of -1.2 and that 60 percent of them are likely to purchase the product. In the age group from 21 to 25 years, the own-price elasticity is -0.8 and 50 percent of them are likely to buy. (i) In a market with 25,000 women aged 18 to 20, and 15,000 aged 21 to 25, how many lipsticks can the firm expect to sell at a price of $8 per unit? lipsticks (ii) If Revnol were to cut prices by 14 percent, approximately how many more pink lipsticks would it expect to sell? lipsticks (c) On a certain product market, 400 units are demanded at a price of $50. The own-price elasticity is -2.5. What is the equation of a linear inverse demand that passes through the point (400, 50)? P(Q)= (d) What is the equation of a constant-elasticity demand function that has an own-price elasticity of -2 and passes through the point (500, 10)? Q(p) =(e) The demand for good x depends on its price, p., the price of good y, py, and the average income level, m. An economist estimates the demand function to be Of= 720 - 1.5px - 2py + 0.001m. Suppose px = $300 per unit, Py = $100 per unit, and m = $60,000. (Round your answers to two decimal places.) (I) What is the own-price elasticity for good x, Exx? Exx= (il) What is the cross-price elasticity of demand for good x, Exy? Exy = Are x and y complements or substitutes or unrelated goods? O complement goods O substitute goods unrelated goods (ili) What is the income elasticity of demand for good x, 1x? Is good x normal or inferior? normal Qinferior 08) inlog arts rio (f) Show that any linear inverse supply that passes through the origin (l.e., an inverse supply with the functional form p = cQ5 with c > 0) has a price elasticity of supply equal to one. Show that any linear inverse supply curve with a positive intercept (I.e., having the functional form p = k + cQ5 with c, * > 0) must be elastic.Es = dos dp If p=k + cQ. . When k = 0, this implies that Es 7 6 1, so its price elasticity of supply is ---Select-.. . When k > 0, this implies that es 7 9) 1, so its price elasticity of supply is -.-Select-.. 0 . -77 points BanerjeeEcon1 1.R.006. G My Notes Ask Your Teacher The demand for milk in the US is given by p = 1200 - Q . Milk is supplied by small farmers whose inverse supply is given by p = 1.505 as well as by large farmers whose inverse supply is given by p = Q1. (a) Calculate the market equilibrium price, p*, and quantity Q*. p* = $ Q* (b) The government imposes a production quota of 420 units of milk on the large farmers only, i.e., the maximum milk that can be supplied by the large farmers is 420 units. Calculate the new market equilibrium price, p**, and quantity, Q**, how much is produced by small farmers, Q**, and how much by large farmers, Q(**. D* * $ (* * = Q * * (c) Are the large farmers better off or worse off? Explain your reasoning briefly! They are better off because they have higher revenues. O It is not possible to tell because we do not know the cost of production. They are worse off because they have lower revenues