Economics Managerial Examples 2 & 3

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ECON560 1. The demand for good X is given by 1 1 𝑄𝑥𝑑 = 7,000 − 𝑃𝑥 − 𝑃𝑦 + 9𝑃𝑧 + 𝑀 3 8 Research shows that the prices of related goods are given by 𝑃𝑦 = $5,500 and 𝑃𝑧 = $150, while the average income of individuals consuming this product is 𝑀 = $63,000. a. Indicate whether goods Y and Z are substitutes or complements for good X. b. Is X an inferior or a normal good? c. How many units of X will be purchased when 𝑃𝑥 = $5,230? d. Find the inverse demand function for good X. e. Explain the difference between how the demand curve and the inverse demand curve is displayed graphically. 2. Explain the differences between First- Second- and Third-Degree price discrimination. Provide a real-world example that approximates each type; discuss whether (and which) consumers are better or worse-off with price-discriminating producers. 3. Sluis Van Shipyards along with Electric Boat produce submarines for navies around the world in a tacit Cournot duopoly. Worldwide demand for submarines is: 𝑃 = 30 − 2𝑄𝑊𝑜𝑟𝑙𝑑 ; SVS cost function is 𝐶(𝑄𝑆𝑉𝑆 ) = 15𝑄𝑆𝑉𝑆 . a. What is Sluis Van’s Marginal Revenue function? b. What is Sluis Van’s reaction function? c. If EB’s cost function were 𝐶(𝑄𝐸𝐵 ) = 7𝑄𝐸𝐵 , what is the equilibrium production level of Sluis Van Shipyards? d. If EB’s cost function were to increase, at what marginal cost would the submarine shipbuilding industry devolve into a monopoly in the long-run? e. Explain the potential for collusion between Sluis Van and Electric Boat to increase profits within a Cournot duopoly. f. Explain what problems the collusive firms must solve to make the partnership stable. 4. Demand for good X is given by 𝑄𝑥𝑑 = 5,000𝑃𝑥−2 𝑃𝑦−.4 𝑃𝑧5 𝑀.003. a. What is the own price elasticity of demand for X? b. Is good Y a complement or substitute for X? Why? c. Is good Z a complement or substitute for X? Why? d. Is good X a normal or inferior good? Why? e. Should the seller of this good raise or lower the price of X to increase revenues? Why? 5. Find the derivative of f(x) with respect to x of the following equations: a. 𝑓(𝑥) = 11 + 2𝑥 + 20𝑥 2 − 13𝑥 − 7𝑥 −3 b. 𝑓(𝑥, 𝑦) = 14 + 23𝑥 − 10𝑥 2 + 13𝑥𝑦 − 45𝑦 3 c. 𝑓(𝑥, 𝑦) = 3𝑥 ∗ 2𝑥 2 ∗ 5𝑥𝑦 1 2 d. 𝑓(𝑥, 𝑦) = 7𝑥 3 𝑦 3 e. 𝑓(𝑥) = 𝑔(𝑥) ∗ ℎ(𝑥) i. 𝑔(𝑥) = 10 + 𝑥 − 𝑥 2 ii. ℎ(𝑥) = 32𝑥 3 + 10𝑥 6. Plexicorp, LLC manufactures specialized emergency pilings used when uncommonly strong weather events damage or destroy commercial docks. The key component in these pilings, transparent aluminum, is sourced from Doohan Engineering based on renewable 5-year contracts. a. Describe a circumstance that might lead to Plexicorp electing to not renew the contract when it expires, instead purchasing the component in spot-exchanges. b. Describe a circumstance that might lead to Plexicorp electing to negotiate a 10year contract with DE. c. Describe a circumstance that might lead to Plexicorp acquiring DE for the purpose of sourcing its component in-house. d. With reference to the graph provided below, offer a real-world example producing the result that contract length is shortening. 7. Consider a Bertrand Oligopoly consisting of 3 firms that produce an identical product at a marginal cost of $100. The inverse market demand for this product is 1000-4Q. a. What is the equilibrium output level in this market? b. What is the equilibrium market price? c. What are the profits of each firm? 8. What is the difference between the short-run and long-run average total cost curves? Which is more useful for identifying the likely industry concentration? Explain. 9. Demonstrate mathematically that the marginal cost curve intersects the average cost curve at the minimum using the following formula: 𝐶(𝑄) = 20,000 − 45𝑄 + .5𝑄 2 Hint: average cost is 𝐶(𝑄) 𝑄 10. The current market shares for U.S. airlines is as follows: Airline Market Share Delta 16.3% United 15.7% Southwest 15.4% American 12.8% US Airways 8.4% JetBlue 5.1% Alaska 4.1% a. Use this information to calculate the current Herfindahl - Hirschman Index (HHI) in this industry (assume any other smaller airlines don’t matter in the calculations). b. Identify a merger of two or three of these airlines that would not be acceptable to Department of justice regulations along HHI grounds. 11. “The long-run expectations for a perfectly competitive market is that firms will earn an economic profit of zero.” Assuming this statement is true, explain how firms in markets with attributes similar to the assumptions of the perfectly competitive market may indeed earn economic profits period after period. 12. “A binding price floor is allocatively inefficient.” Do you agree or disagree? Explain. 13. “A Stackelberg Oligopolist will maximize his long-run revenues by not maximizing his short-run revenues.” Do you agree or disagree? Explain. Managerial Economics 1. It is estimated that over 100,000 students will apply to the top 30 MBA programs in the United States this year. a. Using the concept of net present value and opportunity cost, explain when it is rational for an individual to pursue an MBA degree. b. What would you expect to happen to the number of applicants if the starting salaries of managers with MBA degrees remained constant but salaries of managers without such degrees decreased by 20%? Why? 2. Jaynet spends $30,000 per year on painting supplies and storage space. She recently received two job offers from a famous marketing firm—one offer was for $110,000 per year and the other was for $80,000. However, she turned both jobs down to continue a painting career. If Jaynet sells 25 paintings per year at a price of $8,000 each, a. What are her accounting profits? b. What are her economic profits? 3. Two months ago, the owner of a car dealership significantly changed his sales manager’s compensation plan. Under the old plan, the manager was paid a salary of $6,000 per month; under the new plan, she receives 2% of the sales price of each car sold. During the past two months, the number of cars sold increased by 40%, but the dealership’s margins (and profits) significantly declined. According to the sales manager, “Consumers are driving harder bargains and I have had to authorize significantly lower prices to remain competitive.” What advice would you give the owner of the dealership? 4. The demand for good X is given by 𝑄𝑥𝑑 = 6,000 − 𝑃𝑥 − 𝑃𝑦 + 9𝑃𝑧 + 𝑀 Research shows that the prices of related goods are given by 𝑃𝑦 = $6,500 and 𝑃𝑧 = $100, while the average income of individuals consuming this product is 𝑀 = $70,000. a. Indicate whether goods Y and Z are substitutes or complements for good X. b. Is X an inferior or a normal good? c. How many units of X will be purchased when 𝑃𝑥 = $5,230? d. Find the inverse demand function for good X and draw a graph of it. 5. Consider a market where supply and demand are given by 𝑄𝑥𝑑 = 92 − 2𝑃𝑥 𝑄𝑥𝑠 = −16 + 𝑃𝑥 a. b. c. d. What is equilibrium quantities supplied and demanded? What is equilibrium price? What is the social (consumer + producer) surplus? Suppose the government imposes a price floor of $40 on this market. What is the size of the dead weight loss as a percentage of the social surplus? 6. Some have argued that higher cigarette prices do not deter smoking. While there are many arguments both for and against this view, some find the following argument to be most persuasive of all: “The laws of supply and demand indicate that higher prices are ineffective in reducing smoking. In particular, higher cigarette prices will reduce the demand for cigarettes. This reduction in demand will push the equilibrium price back down to its original level. Since the equilibrium price will remain unchanged, smokers will consume the same number of cigarettes.” Do you agree or disagree with this view? 7. Demand for good X is given by 𝑄𝑥𝑑 = 6,000𝑃𝑥−2𝑃𝑦−.5𝑃𝑧4𝑀.002. a. What is the own price elasticity of demand for X? b. Is good Y a complement or substitute for X? Why? c. Is good Z a complement or substitute for X? Why? d. Is good X a normal or inferior good? Why? e. Should the seller of this good raise or lower the price of X to increase revenues? Why? 8. Killian’s Irish Pub is being sold for $2 million. The pub’s income statement indicates profits are currently $40,000, which have not yet been paid out in dividends. Assuming that the pub remains profitable indefinitely and that the interest rate remains at 5%, at what constant rate does the new buyer believe profits will grow? Does this sound reasonable? Explain. 9. Suppose the true inverse demand relation for good X is 𝑄𝑥𝑑 = 𝛽0 + 𝛽1𝑃𝑥 + 𝛽2𝑀 + 𝑒. You estimated the parameters to be β0-hat = 22, β1-hat = -1.8, 𝜎β0−hat = 2.5, 𝜎β1−hat = 0.7. a. What are the t-statistics for parameters 𝛽0 𝑎𝑛𝑑 𝛽1? 10. 11. 12. 13. b. What are the 95% confidence intervals for parameters 𝛽0 𝑎𝑛𝑑 𝛽1? Using indifference analysis and by providing a graph including the consumer’s budget constraint between goods X and Y, provide a model where good X becomes less expensive and where X and Y are substitutes. Using indifference analysis and by providing a graph including the consumer’s budget constraint between goods X and Y, derive the market demand for X. A worker views leisure and income as “goods” and has an opportunity to work at an hourly wage of $15/hour. a. Illustrate the worker’s opportunity set in a given 24-hour period. b. Assuming convex preferences, model the indifference curve of this worker that will lead her to prefer working 10 hours a day to 7. Using indifference analysis between goods X and Y, demonstrate the difference between the income effect and substitution effect arising from a change in the price of X.
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Running head: FINAL ANSWER

Managerial Economics

Final answer

FINAL ANSWER

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1. a) after three years
b) the number will decrease

2. Accounting profit
200000-30000 = 170,000
Economic profit
Offer 1 : 170,000- 80,000 = 90,000
Offer 2: 170,000 – 50,000 = 120,000

3. By using the commitment mechanism where it alters incentives confronting potential
entrant in a way that favourably changes the business environment.

4. 𝑄𝑥𝑑 = 6,000 −

𝑃𝑥 − 𝑃𝑦 + 9𝑃𝑧 +...


Anonymous
Really great stuff, couldn't ask for more.

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