Managerial Economics: Practice Questions and Solutions

Task 1

Question 1
a.Using your knowledge of managerial economics, elaborate on the following statements:
i.The amount of profits is entirely under the control of the manager.
ii.  A firm may sacrifice short-run profits for long-run growth and profitability.

Question 2
a.Describe market equilibrium using relevant graphs and discuss market surplus and market shortage. 
b.Suppose there are 100 identical self-service gasoline stations in the city selling the same types of gasoline. Totalmarket demand (QD) and total market supply (Qs) functions for gasoline in the market are as follows:
QD = 60,000 – 25,000P
Qs= 25,000P
where P is expressed in $ per litre.

i. Based on the given information, calculate the equilibrium price and quantity of gasoline in the market.

ii. Explain the meaning of price elasticity of demand and the reasons business estimate it for their products. Provide a relevant example to support your explanation.

iii. The provided demand curve is a downward sloping demand curve but it is not known whether it is inelastic or elastic. Assume that the provided demand curve may have either degree of elasticity. Draw both types of demand curve (in separate diagrams) and compare the slope of the demand curves.

Question 3
a.Determine whether the following production functions exhibit constant, increasing, or decreasing returns to scale. Provide relevant workings to support your answers.
i.Q = 0.25X + 5Y + 30Z
ii.Q = 4L2 + 6LK + 3K2
iii.Q = 2L0.2K0.6
b. Describe the condition of finding the optimum level of single input and multiple inputs.    Illustrate and discuss the concept of finding the optimum level of multiple inputs. 

Task 2
Question 1 (CLO3)

a.The Five Forces model of business strategy identifies threat of substitutes, threat of entry, power of buyers, power of suppliers, and the intensity of rivalry as the determinants of sustainable incumbent profitability in a particular industry. Discuss each of the Five Forces and provide relevant examples to support your answers.
(10)
b.Jane manages a small bakery that bakes only "make-to order" cakes. Her total cost (TC) and total revenue (TR) functions are as follows:TC = 50 + 80Q - 10Q2 + Q3
TR = 100Q - 8Q2

The bakery has a capacity of handling 30 units at any one time.
i.Determine the price she should charge if she wants to maximise total revenue.
ii.Compute the price she should charge if she wants to maximise profits.

Question 2
You have been presented with the following data and asked to fit statistical demand functions:

PERIOD    QUANTITY    PRICE    INCOME    ADVERTISING
1    120    8.00    10    3
2    165    4.00    22    7
3    120    7.00    20    5
4    165    3.00    20    8
5    180    4.00    30    8
6    90    10.00    19    6
7    150    4.00    18    10.2
8    190    1.60    25    9.3
9    160    5.00    30    8
10    200    2.00    35    9.5

a.Linear Relationship
i.Use any multiple regression packages to estimate a linear relationship between the dependent variable and the independent variables.
ii.Is the estimated demand function “good”? Why or why not?
iii.Discuss the economic implications of the various coefficients.
b.Non-linear relationship. 
i.Select and estimate any form of non-linear relationship. (double the price) 
ii.Is the estimated demand function “good”? Why or why not? Compare with the linear form above. Elaborate.

Question 3
Assuming there are two companies selling personal computers,Company Jackfruit Computers and Company Mangoes Computer. They both have an inventory of personal computers that they would like to sell before a new generation of faster, cheaper machines is introduced. The Question facing each competitor is whether or not they should widely advertise a “close out” sale on these discontinued items, or instead let excess inventory work itself off over the next few months. The net revenue to each firm in millions of $, is depicted in the payoff matrixbelow:

Mangoes
Jackfruit        Advertise    Don’t advertise
  Advertise    M:       $5
J:         $5    M:       $2
J:         $20
    Don’t advertise    M:       $20
J:         $2    M:        $10
J:          $10

a.Determine the dominant strategy for each firm.
b.Would collusion work in this case? Explain.