MBA 500 Managerial Economics 1st Unit Case 1 1.

Tickets were sold last year = $100 million $1 = 100 million. 2. Price elasticity of demand is 0.4, So,
dQ Q = 0.4 = 0.4 100 million = 40,000,000 dP P
dP 1 = dQ 40,000,000

i.e. Slope =

Demand function: P = a bQ, When P = $1, Q = 100 million, b = 1=a( a = 3.5

1 100,000,000) 40,000,000

Demand function: P = 3.5 40,000,000 Q Demand Table: P Q 3. $1 100m $1.1 96m $1.2 92m $1.3 88m $1.4 84m $1.5 80m

When both ends meet, total revenue = total cost, We know that: P =
0

dP 0 dQ ,Q= , Q P

dQ 0 0 0 Q Q d then E = = 0 , Q = 0.4 P dP P P

100,000,000(1 + P )(1 + Q ) = 120,000,000 => 100,000,000((1 + P )(1 0.4 P ) = 120,000,000

0 => 2 P -3P -1=0

=> P = 0.5 or P = 1 Therefore, when the price is adjusted to $1.5 or $2, the company can be breakeven. 4. To maximize the operating profits for the company: From part (2), P = 3.5
1 Q 40,000,000

TR = P Q = P (140,000,000 40,000,000P) = 140,000,000P 40,000,000P2

P = $1.75

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Case 2

A.

E AB

dQ A Q = A dPB PB

PB' PB 55 65 = = 0.1667 ' ( PB + PB ) / 2 (65 + 55) / 2

' QA QA 8,000 10,000 = = 0.2222 ' (Q A + Q A ) / 2 (8,000 + 10,000) / 2

E AB =

0.2222 = 1.3329 0.1667

B. C. D.

Shoes produced by these two firms are substitutes because E AB > 0 . They are close substitutes because E AB = 1.3329( > 1) . If the Arc price elasticity of demand for As shoes is 2, The change rate of quantity = 0.2222 = 2 ' PA 60 => ' ( PA + 60) / 2
' = 53.685 PA The price should be set at $53.685.

10,000 8,000 = 0.2222 (10,000 + 8,000) / 2

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Case 3 US Export 1,000 computers US$3,000 each 1. British 150 autos 10,000 each

Original exchange rate: US$2/, or US$1 = 0.5 If dollars exchange value depreciates by 10%, i.e. US$1 = 0.45 (= 0.5 x 90%). The computer price in pound = 3,000 x 0.45 = 1,350
Ed =
3 =

2.

% Qd %P

%Qd 10% %Qd = 30%

3.

The auto price in US$ = 10,000

1 = US $22,222.22 0.45

% Qd %P

%Qd 11.11% %Qd = 22.22%

4.

After the dollars 10% depreciation, For US export revenue will increase and import spending will decrease because the US goods are cheaper but British goods are more expensive. For British it will be opposite, export revenue will decrease and import spending will increase, the reason is that US goods are cheaper, British is willing to spend more.

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2nd Unit Case 1 a) From the graph, we can find out: Breakeven point: TR = TC (profit = 0), Output = 10,000, TR = $300,000 The CVP graph already drew in the question. Complete the table below Total Sales TR = 3Q Total Cost TC = 100,000 + 2Q Average Cost AC =
100,000 +2 Q

b)

Profit Function = Q 100,000

Let TR = a + bQ From the graph, it is obvious that a = 0. From the graph, when Q = 100, TR = 300, substitute into TR = a + bQ 300 = 0 + 100b, => b = 3 TR = 3Q Let TC = a + bQ From the graph, when Q = 0, TC = 100, so a = 100,000 When Q = 100, TC = 300, substitute into TC = a + bQ 300,000 = 100,000 + 100,000b, => b = 2 TC = 100,000 + 2Q
100 + 2Q 100 = +2 Q Q

AC = TC Q =

Profit = TR TC = 3Q (100,000 + 2Q) = Q 100,000 c) Operating leverage = TFC/TVC Output Leverage 2,500 2 5,000 1 7,500 0.6667 10,000 0.5 12,500 0.4 15,000 0.3333 17,500 0.2857

When output = 2,500, operating leverage =

100,000 =2 20 2,500

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When output = 5,000, operating leverage = When output = 7,500, operating leverage =

100,000 =1 20 5,000 100,000 = 0.6667 20 7,500 100,000 = 0.5 20 10,000 100,000 = 0.4 20 12,500 100,000 = 0.3333 20 15,000 100,000 = 0.2857 20 17,500

When output = 10,000, operating leverage = When output = 12,500, operating leverage = When output = 15,000, operating leverage = When output = 17,500, operating leverage =

d)

Let Q be the output, when profit = 60,000: 60,000 = Q 100,000 Q = 160,000 Total sales = 3Q = 3 x 160,000 = $480,000

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Case 2 TR function (TR) = Price (P) x Quantity (Q) = 2Q (P = $2 from the question provided). Cost function (TC) = Fixed cost + Variable cost = 20,000 + 1.5Q (from question provided).
20,000 +1.5Q Q

Average cost (AC) = Cost function Quantity =

Profit function = TR TC = 2Q (20,000 + 1.5Q) = 0.5Q 20,000

DOL = dQ
Q

dQ ( P AVC ) /[Q ( P AVC ) TFC ] dQ = Q

= =

dQ ( P AVC ) Q Q ( P AVC ) TFC dQ Q( P AVC ) Q( P AVC ) TFC

P AVC TVC + TFC = P Q

P AVC P AC

2 1.5 20,000 +1.5Q = 2 Q

Figure out degree of operational leverage at each output Output Leverage 60,000 3 80,000 2 100,000 1.66 120,000 1.5

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For Company B TR function 2Q Cost function 40,000 + 1.5Q 60,000 6.15 Average cost
40,000 +1.2Q Q

Profit function 0.8Q 40,000

DOL
2 1.2 2 (1.2Q + 40,000) / Q

Output Leverage For Company C TR function 2Q

80,000 2.66

100,000 2

120,000 1.73

Cost function 60,000 + Q

Average cost
60,000 + Q Q

Profit function Q 60,000

DOL
2 1 2 (Q + 60,000) / Q

Output Leverage

60,000 0

80,000 4

100,000 2.5

120,000 2

Conclusion: Yes, the three conclusions are valid. It can be seen from Company C, it has the highest fixed costs and the lower rate of change in variable costs, so the breakeven point is higher than Company A and Company B. However, after the breakeven point, the increase in profit of Company C will also be higher than the other two companies.

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Case 3 1) The isocost curve can be found from the graph in the question.

K
10

S
15

K = 750 75 = 10 S = 750 50 = 15 2) Process 1 = 6 x 75 + 2 x 50 = 550 Process 2 = 3 x 75 + 3 x 50 = 375 Process 3 = 2 x 75 + 6 x 50 = 450 So Mr Wang should use process 2 because it has lowest cost incurred. The maximum number of garments could dry = 100 garments. Mr Wang can incur expenses up to $750. For process 2, the cost is $375, so he can double the number of garments under process 2 ($750/$375 = 2), so the maximum number of garments being dried = 50 x 2 = 100.

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3)

Complete the table below Process 1 TC per day Labor hired Machine rented Garments dry cleaned $750
750 2 = 2.72 550 750 6 = 8.18 550 750 50 = 68.18 550

Process 2 $750
750 3 = 6 375 750 3 = 6 375 750 50 = 100 375

Process 3 $750
750 6 = 10 450 750 2 = 3.33 450 750 50 = 83.33 450

4)

Process 1 = 6 x 62.5 + 2 x 62.5 = 500 Process 2 = 3 x 62.5 + 3 x 62.5 = 375 Process 3 = 2 x 62.5 + 6 x 62.5 = 500 Again, Process 2 should be used due to its lowest cost among three processes. The maximum number of garments to be dry-clean still remains at 100. The calculation is same as part (2) above (50 x 2 = 100).

5)

The new isocost curve is as below:

K
12

S
12

K = 750 62.5 = 12 S = 750 62.5 = 12

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3rd Unit Case 1 1. Let H be the output of heating oil and G be the output of gasoline. Target function (P) is to maximize the profit of the company. P: 20H + 30G Subject to: 1H + 1G 10 (Labor constraint) 0.5H + 1G 7 (Capital constraint) 1/3H + 1G 6.5 (Crude oil constraint) H, G 0 Answer 2, 3 and 4 There are three combination to solve the H and G, also it can also be found the optimal point by graph. (a) Solve the equation of labor constraint and crude oil constraint: H + G = 10 (1) 1/3H + G = 6.5 (2) (1) (2) 2/3H = 3.5 H = 5.25 G = 10 5.25 = 4.75 Profit = 20 x 5.25 + 30 x 4.75 = 247.5 (b) Solve the equation of labor constraint and capital constraint: H + G = 10 (1) 0.5H + G = 7 (2) (1) (2) 0.5H = 3, H = 6 G = 10 6 = 4 Profit = 20 x 6 + 30 x 4 = 240
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(c) Solve the equation of capital constraint and crude oil constraint: 0.5H + G = 7 (1) 1/3H + G = 6.5 (2) (1) (2) 0.1667H = 0.5, H = 3 G = 7 0.5 x 3 = 5.5 Profit = 20 x 3 + 30 x 5.5 = 225 Therefore, the company should produce 5.25 barrel of heating oil and 4.75 barrel of gasoline in order to maximize the profit. Of course, if the company must produce exact number of barrels, then the company should produce 6 barrel of heating oil and 4 barrel of gasoline, and the maximized profit is $240.

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4th Unit Case 1 1. USA $ Gun Butter 2. 20 6.67 Y 1,000 333.5 $ 16 8 China Y 800 400

According to the law of comparative advantages, USA should export butter because it has lower opportunity cost than China ($6.67 in USA < $8 in China), and China should export Gun with the same reason ($16 in China < $20 in USA). To reduce the US imports from China to zero, the production cost between the two countries should be the same. Let y be the new exchange rate 20y = 1,600 2 y = 40 So, the US$ should be depreciated by (40 50)/50 x 100% = 20%

3.

4.

Same principle as part (3). Let X be the new wage rate 50X = 1,600 2 X = 16 So, the wage rate should reduced by 20% [(16 20) / 20 = -20%], and the new productivity of US labor should be $20/$16 = 1.25 gun per unit of labor, i.e. the productivity increases by (1.25 1)/1 x 100% = 25%

5.

If the products are homogenous, the price between two countries will finally be the same by exchange rate movement or the domestic wage rate.

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Case 2 1. 1st demand curve less elastic, observed from the slope of demand curve. (In fact, not really understand what the question asks.) 2nd demand curve more elastic.

2.

3. and 4. Solve the following two equations of 1st demand curve and 2nd demand curve. P1 = 7 0.025Q1 (1) P2 = 10 0.1Q2 (2) If two demand curves cross each other, P1 = P2 and Q1 = Q2 (2) (1) 0 = 3 0.075Q Q = 40 P = 7 0.025 x 40 = 6 So, quantity is 40 and price is 6. 5. Upper limit: MR1 = 7 0.05 x 40 = 5 Lower limit: MR2 = 10 0.2 x 40 = 2 Yes, MC fall into the MR gap. TC = 2Q + 0.025Q2 By differentiation:
dTC = MC dQ

6.

MC = 2 + 0.05Q MC = 2 + 0.05 x 40 = 4, it is between 2 and 5, so MC falls into MR gap. 7. It implies that price is stable because they are not willing to change price. This often finds in oligopolistic markets

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Case 3 1. From the information of the question, the satisfaction can be quantified, so: A = 20 B=5 D=0 Cost of sufficient preparation = 10 Cost of insufficient preparation = 6

2.

The answers for 3, 4, 6, and 7 (5 is missing from the question) can be shown in the following payoff matrix. Bob Time (Cost = 10) Others Time (Cost = 10) Time (Cost = 6) B(-5), B(-5) D(-6), A(14) Time (Cost = 6) A(14), D(-6) B(-1), B(-1)

For top right cell, the Bob and others spend same effort, so all can get B grade, and the payoff is satisfaction less cost, i.e.5 10 = 5. Same principle applies to other three cells. For example, at the bottom left cell, Bob spends sufficient time but others not, so others only get D grade but Bob can get A grade. The payoff of others = 0 6 = 6 and the payoff of Bob = 20 6 = 14 It has dominant strategy at the top left cell, i.e. B(-5), B(-5). 8. The cooperation is difficult to achieve because others will think that if Bob really spends less time, they will get A grade if they spend much time in studying. At the same time, Bob will worry about others if they study hard, so for safety, Bob will study hard too. It clearly illustrates Nash equilibrium.

9.

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5th Unit Case 1 1.

600.07 600 599.97

D 3,999.7 4,000 Q

2.

Before tax: P = 1,400 0.2Qd P = 200 + 0.1 Qs P* = 600, Q* = 4,000 After tax: P = 1,400 0.2Qd P = 200 + 0.1 Qs + 0.1 = 200.1 + 0.1 Qs P* = 600.07, Q* = 3,999.7

3.

From part (1) and (2), we solve that Equilibrium output = 3,999.7 Equilibrium price = $600.07

4. Total consumer spending Price charged after tax The total net sales Total taxes paid or charged = 600.07 x 3,999.7 = 2,400,099.98 = 600.07 = 599.97 x 3,999.7 = 2,399,700 = 0.1 x 3,999.97 = 399.97
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 5. True cost of this tax for the society = 0.1 x (4,000 3,999.7) 2 = 0.015

= (600.07 600) x 3,999.7 = 279.979 = (0.1 0.07) x 3,999.7 = 119.99

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Case 2 Items 1. 2. 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Demand Supply Equilibrium price before trade Equilibrium quantity before trade Import or export function Consumer surplus before trade Producer surplus before trade Total surplus before trade Price per trade Import or export volume Consumer surplus after trade Producer surplus after trade Total surplus after trade Price when $0.5 tariff is levied Trade volume when $0.5 tariff is levied Consumption after tariff Domestic production after tariff Consumer surplus after tariff Producer surplus after tariff Tariff revenue Tariff burden Total surplus after tariff Home D = 100 20P, P = 5 0.05D S = 20 + 20P, P = -1 + 0.05S 2 60 I 90 90 180 1.5 10 122.5 87.5 210 1.75 10 65 55 105.625 89.375 10 x 0.5 = 5 +0.25 195 Foreign D* = 80 20P, P = 4 0.05D S* = 40 + 20P, P = -2 + 0.05S* 1 60 E 90 90 180 1.5 10 62.5 87.5 150 1.25 10 55 65 75.625 89.375 10 x 0.25 = 2.5 -0.25 165

Item 3 Home: 100 20P = 20 + 20P, P = 2 Foreign: 80 20P = 40 + 20P, P = 1 Item 4 Home: 5 0.05Q = -1 + 0.05Q, Q = 60 Foreign: 4 0.05Q = -2 + 0.05Q, Q = 60

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Item 6 From the graph at the end Home: Area of triangle = [60 x (5 2) 2] = 90 Foreign: Area of triangle = [60 x (4 1) 2] = 90

Item 7 From the graph Home: Producer surplus = [60 x (2 + 1) 2] = 90 Foreign: Producer surplus = [60 x (1 + 2) 2] = 90 Item 8 = Item 6 + Item 7 Home: Total surplus before trade = 90 + 90 = 180 Foreign: Total surplus before trade = 90 + 90 = 180 Item 9 D = 100 20P S = 40 + 20P In equilibrium, D = S, then solve the above equation: 100 40 = 20P + 20P 40P = 60 P = 1.5 Item 10 From the graph, after trade at price = 1.5: Home import = 60 (home demand) 50 (home supply) = 10 units Foreign export = home import = 10 units Item 11 Home = [70 x (5 1.5) 2] = 122.5 Foreign = [50 x (4 1.5) 2] = 62.5 Item 12 Home = [70 x (1.5 + 1) 2] = 87.5 Foreign = Same as Home = 87.5 Item 13 = Item 11 + Item 12 Home = 122.5 + 87.5 = 210 Foreign = 62.5 + 87.5 = 150
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Item 14 From the graph, Home = 1.75 and Foreign = 1.25. Item 15 From graph, it can be found the trade volume of Home and Foreign is 10. Item 16 From graph, it can be found that consumption after tariff: Home = 65 Foreign = 55 Item 17 From graph, it can be found that domestic production after tariff: Home = 55 Foreign = 65 Item 18 Consumer surplus after tariff (from graph): Home (area of triangle) = [(5 1.75) x 65 2] = 105.625 Foreign = [(4 1.25) x 55 2] = 75.625 Item 19 Producer surplus after tariff (from graph): Home = [(1.75 + 1) x 65 2] = 89.375 Foreign = [(1.25 + 2) x 55 2] = 89.375 Item 22 = Item 18 + Item 19 Home = 105.625 + 89.375 = 195 Foreign = 75.625 + 89.375 = 165

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