MEM 708 MANAGERIAL ECONOMICS and INDUSTRIAL ORGANIZATION

SYLLABUS UNIT 1 Introduction: Circular flow of economic activity, Nature of firm, Concept of economic profit, Economics and decision making, Functional relationships and Economic Models; Total Average and Marginal functions; Money, Bank and Exchange. UNIT 2 Demand Analysis: Meaning of demand; Type of demand; Determinants of demand; Demand elasticities; Factors influencing demand UNIT 3 Production Function: Input-output relationship; Least cost combination of inputs; Factor productivities and Return to scale; Managerial uses of production function. UNIT 4 Cost Analysis: Economic concept of cost; Production and Cost; Cost functions. Market structure: Perfect Competition; Monopoly; Profit maximization price and output in short run and long run. UNIT 5 Pricing: Definitions; Determinants of price; Pricing under different market structures SUGGESTED READING: 1. Mote, VL, and Paul Samuel 2. Vasudevan, and Ghosh 3. Peterson, HC, and Lewis, WC 4. Dwivedi, DN

Managerial Economics Concepts and Cases Managerial Economics Managerial Economics Managerial Economics

Question Bank
UNIT-I-INTRODUCTION 1. 2. Explain how firms and individuals participate and interact in the product market and in the factor market. Describe the difference between the accounting and the economic concept of profit. How might accounting practices be changed to make financial statements and reports more useful for managerial decision-making? Why is it important to state a managerial objective? Could the assumption that managers objective is profit maximization be useful even if their real objective is maximizing market share or their salaries? What might be the objective or objectives of each of the following nonprofit institutions? i) The engineering college at a major state university ii) A police department in a city iii) The emergency room of a hospital iv) A museum A recent engineering graduate turns down a job offer of $30,000 per year to start his own business. He will invest $50,000 of his own money that has been in a bank account earning 7 percent in interest per year. He also plans to use a building he owns that has been rented to another business for $1,500 per month. Revenue during the first year was $107,000, while expenses were: Advertising $ 5,000 Rent 10,000 Taxes 5,000 Employees salaries 40,000 Supplies 5,000 Prepare two income statements, one using the traditional accounting approach and one using the opportunity cost approach to determine profit. Sharon Smith is a full-time homemaker and also is an excellent seamstress. She has material for which she paid $5 per yard several years ago. The material has increased in value during that time and could be sold back to the local fabric shop for $15 per yard. Sharon is considering the use of that material to make dresses that she would sell to her friends and neighbors. She estimates that each dress would require four yard of materials and four hours of her time, which she values at $10 per hour. If the dress could be sold for $90 a piece, could Sharon earn an economic profit by making and selling the dresses? Tempo Electronics, Inc., has an inventory of 5,000 unique electronic chip originally purchased at $2.50 each; their market value is now $ 5 each. The production department has proposed to use these by putting each one together with $6 worth of labor and other materials to produce a wristwatch that would be sold for $10. Should that proposal be implemented? Explain from the viewpoints of economic profit and opportunity costs. What do you understand by exchange of two commodities? What are the necessary conditions for exchange? Explain Barter exchange. Discuss the problems associated with "Barter Exchange". Define Money and further explain its types and functions. Mention the Gold Standard and explain its advantages and disadvantages. Define bank. Justify the statement "Bank is the nerve center of modern world. Explain in details about: (i) Retail Banks and Retail banking products (ii) Investment Banks and Business banking products
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Discuss nature of economic prices, opportunity costs, and efficiency. Suppose that the demand and supply equations have been estimated and that the demand and supply curves are given by QD = 14 - 2P & Qs = 2+ 4P; Determine the equilibrium price and quantity. Consider an independent businessperson who has an MBA degree and is considering investing $100,000 in a retail store that she would manage. There are no other employees. The projected income statement for the year as prepared by an accountant is as below Sales $90,000 Less: Cost of Goods Sold 40,000 Gross Profit 50,000 Less: Advertising 10,000 Depreciation 10,000 Utilities 3,000 Property Tax 2,000 Miscellaneous Expenditure 5,000 Sub total 30,000 Net Accounting Profit is 50,000 - 30,000 = 20,000 As an Economist you recognize other costs, defined as implicit costs. What are they? If you include them in the above statement will you show profit or loss? Illustrate with your own implicit costs. Explain the concept of an economic model. Why do economists and managers use such models as part of the decision-making process? Explain the relationship among the total, average and marginal functions in the most generalized way. Intuitively explain why any intersection of the average and marginal function will occur at a maximum or a minimum point on the average function. Given the following supply and demand equations QD = 100 5P QS = 10 + 5P a) Determine the equilibrium price and quantity. b) If the government sets a minimum price of $10 per unit, how many units would be supplied and how many would be demanded? c) If the govt. sets a maximum price of $5 per unit, how many units would be supplied and how many would be demanded? d) If the demand increases to QD = 200 5P Determine the new equilibrium price and quantity. Given the following demand equation Q = 20 0.10P Complete the following table: Quantity 1 2 3 4 5 6 Price Total Revenue Average Revenue Marginal Revenue

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Given the total cost function TC = 150 Q 3Q2 + 0.25Q3

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Complete the following table by computing the total, average, and marginal costs associated with each quantity indicated. Quantity 1 2 3 4 5 6 Total Cost Average Cost Marginal Cost

UNIT-II-DEMAND ANALYSIS

20. Explain clearly the meaning of demand. What are the various types of demands? Explain with the suitable examples the individuals & market demand for a commodity. 21. Differentiate clearly between: i) demand function and demand schedule ii) demand for normal and inferior goods iii) autonomous and derived demand iv) demand for durable and non-durable goods. 22. What do you mean by determinants of demand. How do the changes in following factories affect the demand for a commodity: a) Price b) Income c) Advertisement d) Population e) Price of the substitute 23. Define and distinguish between: a) Arc elasticity and point elasticity b) Price elasticity and cross elasticity c) Income elasticity and price elasticity 24. Explain the law of demand and its importance. Explain the various exceptions to the law of demand. 25. What do you understand by demand function? Explain Linear demand function Non-linear demand function Shift in demand curve 26. Which of the following pairs of goods are substitutes and which are complements? Razor and Razor blades Hot dogs and tomato ketchup Television and videocassette recorder Rice and potatoes 27. Given the total revenue function TR = 50Q - 0.5 Q2 and the total cost function TC = 2000 + 200Q - 0.2Q2 + 0.001Q3 Find the marginal revenue and the marginal cost functions. 28. Explain Income Elasticity and Cross Elasticity. R.J. Smith Corporation is a publisher of novels. The Corporation hires an economist to determine the demand for its product. After months of hard work, the analyst tells the company that the demand for the firm's novels (Qx) is given by the following equation:
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Qx = 12,000 - 5,000Px + 5I + 500Pc Where Px is the price charged for the R.J. Smith novels, I is income per capita and P c is the price of books from competing publishers. Using this information the board of directors want you to (a) Determine what effect a price increase would have on total revenues. (b) Evaluate how sales of the novels would change during a period of rising incomes. (c) Assess the probable impact if competing publishers raise their prices. Assume initial values of Px, Pc and I are $5, $10,000 and $6 respectively. 29. Suppose the market demand for playing cards is given by the equation Q = 6,000,000 1,000,000P where Q is the number of decks of cards demanded each year and P is the price in dollars. For a price increase from $2 to $3 per deck, what is the arc price elasticity? 30. Max, a graduating senior, has accumulated an impressive file of tests during his college career. But now he needs to sell his test collection to obtain money for his impending marriage. Three wealthy friends express interest in buying some of the tests. Max determines that their individual demand equations are as follows: Q1 = 30.00 1.00P Q2 = 22.50 0.75P Q3 = 37.50 1.25P Where the quantity subscripts denote each of the three friends and price is measured in dollars per test. What is the market demand equation for Maxs tests, and how many more tests can he sell for each 1-dollar decrease in price? If he has a file of 60 tests, what price should he charge to sell his entire collection? 31. It is known that quantity demanded decreases by 2 units for each $1 increase in price. At a price of $5, quantity demanded is 10 units. i) What will be the quantity demanded if price is zero? ii) Write an equation for quantity demanded as a function of price. iii) Write an equation that expresses price as function of quantity. iv) Write an equation for total revenue. 32. A market consists of two individuals. Their demanded equations are Q1 = 16- 4P and Q2 = 20 2P, respectively. What is the market demand equation? At a price of $2, what is the point price elasticity for each person and for the market? 33. The demand equation faced by DuMont Electronics for its personal computers is given by P == 10,000 4Q. (a) Write the marginal revenue equation. (b) At what price and quantity will marginal revenue be zero? (c) At what price and quantity will total revenue be maximized? (d) If price is increased from $6,000 to $7,000, what will be the effect on total revenue? What does this imply about price elasticity? 34. Sailright Inc. manufactures and sells sailboards. Management believes that the price elasticity of demand is 3.0. Currently, boards are priced at $500 and the quantity demanded is 10,000 per year. (a) If the price is increased to $600, how many sailboards will the company be able to sell each year? (b) How much will total revenue change as a result of the price increase? 35. Demand for a managerial economics text is given by Q = 20,000 300P. The book is initially priced at $30: i) Compute the point price elasticity of demand at P= $30.
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If the objective is to increase total revenue, should the price be increased or decreased? Explain. iii) Compute the arc price elasticity for a price decrease from $30 to $20. iv) Compute the arc price elasticity for a price decrease from $20 to $15. 36. A consultant estimates the price-quantity relationship for New World Pizza to be P = 50 5Q. i) At what output is demand unitary elastic? ii) Over what range of output is demand is elastic? iii) At the current price, 8 units are demanded each period. If the objective is to increase total revenue, should the price be increased or decreased? Explain. 37. The price elasticity for rice is estimated to be 0.4 and the income elasticity is 0.8. At a price of $0.40 per pound and a per capita income of $20,000, the demand for rice is 50 million tons per year. i) Is rice an inferior good, a necessity, or a luxury? Explain. ii) If per capita income increases to $20,500, approximately what will be the quantity demanded rice? 38. The McNight Company is a major producer of steel. Management estimates that the demand for the companys steel is given by the equation: Qs = 5,000 1,000Ps + 0.1I + 100Pa Where Qs is steel demand in thousands of tons per year, Ps is the price of steel in dollars per pound, I is income per capita, and Pa is the price of aluminum in dollars per pound. Initially, the price of steel is $1 per pound, income per capita is $20,000, and the price of aluminum is $0.80 per pound. (a) How much steel will be demanded at the initial prices and income? (b) What is the point income elasticity at the initial values? (c) What is the point cross elasticity between steel and aluminum? Are steel and aluminum substitute or complements? (d) If the objective is to maintain the quantity of steel demanded as computed in part (a), what reduction in steel prices will be necessary to compensate for a $0.20 reduction in the price of aluminum? 39. The Inquiry Club at Jefferson University has compiled a book, which expose the private lives of many of the professors on campus. Economics majors in the club estimate that total revenue from sales of books is given by the equation TR = 120Q 0.1Q3 i) Over what output range is demanded elastic? ii) Initially, the price is set at $71.60. To maximize total revenue, should the price be increased or decreased? Explain. 40. The demand equation for a product is given by P = 30 0.1Q2 i) Write an equation for the point elasticity as a function of quantity. ii) At what price is demand unitary elastic? 41. The demand equation for a product is given by Q = (20I) / (P), where I is income and P is price. i) Write an equation for the point price elasticity. For what values of I and P demand is unitary elastic? Explain. ii) Write an equation for the point income elasticity. For what values of I and P is the good a necessity? Explain. 42. Consider a world in which there are only two goods. An individual has an income of $9,000, the price of deodorant is $3 per bottle, and the price of mouthwash is $2 per bottle. i) Expressing deodorant as the dependent variable, where the equation for the budget constraint. ii) What is the slope of the budget constraint?
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iii) If the price of mouthwash increases to $4, write the new equation for the budget constraint. 43. Assume that the budget constraint is given by the equation Q1 = 1,000 5Q2, where Q1 and Q2 represent quantities of two goods. Normally, indifference curves are convex to the origin, but assume in this case that they are linear with a constant slope of 2. i) Graph the budget constraint (with Q1 on the vertical axis). ii) Draw in a set of indifference curves and label the utility-maximizing point. iii) Where would the utility-maximizing point have been if the indifference curves had a constant slope of 6?

UNIT-III- PRODUCTION FUNCTIONS 44. Define production function and describe the underlying assumptions. 45. Distinguish between laws of returns and laws of returns to scale. 46. What is meant by optimum combination of inputs? What are the technical conditions of optimal combinations of inputs? 47. What do you understand by the law of diminishing return? What are its various applications? 48. What are isoquant curves? What are the properties of isoquants? 49. Using map of isoquants and isocosts show the role of relative input prices and relative productivities in the determination of least cost combination. 50. How will you define economics of scale? What are the sources of internal and external economics? 51. Suppose that a firm has the production function Q = 2K1/2 L1/2 Assume that the capital stock is fixed at 9 units (i.e. K = 9). If the price of output (P) is $6 per unit, and the wage rate (w) is $2 per unit, determine the optimal or profit-maximizing rate of labor to be hired. What labor-input rate is optimal if the wage rate increased to $3 per unit? 52. The marginal product of labor function for Central Milling Inc. is given by the equation MPL = 10 (K/L) 0. 5 Currently, the firm is using 100 units of capital and 121 units of labor. Given the very specialized nature of the capital equipment, it takes six to nine months to increase the capital stock, but the rate of labor input can be varied daily. If the price of labor is $10 per unit and the price of output is $2 per unit, is the firm operating efficiently in the short run? If not, explain why, and determine the optimal rate of labor input. 53. For each of the following production functions, determine whether returns to scale are decreasing, constant, or increasing. i) Q = 2k + 3L + KL ii) Q = 20 K0.6 L0.5 iii) Q = 100 + 3K + 2L iv) Q = 5Ka Lb, Where a+ b = 1 v) Q = K/L 54. The revenue department of a state government employs certified public accountants (CPAs) to audit corporate tax returns and bookkeepers to audit individual returns. CPAs are paid $31,200 per year, while the annual salary of a bookkeeper is $18,200. Given the current staff of CPAs and bookkeepers, a study made by the departments economist shows that devoting one-year of a CPAs time to auditing corporate returns results in an average additional tax collection of $52,000. In contrast, the bookkeepers only achieve additional tax collection of $41,600 per year of a bookkeepers time.
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i) If the departments objective is to maximize tax revenue collected, is the present mix CPAs and bookkeepers optimal? Explain. ii) If the present mix of CPAs and bookkeepers is not optimal, explain what reallocation should be made. That is, should the department hire more CPAs and fewer bookkeepers or vice-versa? 55. The production function for Superlite Sailboats, Inc., is Q = 20K 0.5 L 0.5 with marginal product functions MPK = 10 (L/K) 0.5 and MPL = 10(K/L) 0.5 If the price of capital is $5 per unit and the price of labor is $4 per unit, determine the path for the firm. The firm currently is producing 200 units of output per period using input rates of L = 4 and K = 25. Is this an efficient input combination? Why or why not? If not, determine the efficient input combination for producing an output rate of 200. 56. For the production function Q = 20 K0.5 L0.5 determine four combinations of capital and labor that will produce 100- and 200-units of output. Plot these points on a graph and use them to sketch the 100- and 200-unit isoquants. 57. Suppose the price of labor is 10 and the price of capital is 2.5. i) Use this information to determine the isocost equations corresponding to a total cost of $200 and $500. ii) Plot these two isocost lines on a graph. iii) If the price of labor falls from $10 per unit to $8 per unit determine the new $500 isocost line and plot it on the same diagram used in part (b). 58. Given the production function Q = A K L N where Q is the rate of output and K, L, and N represent inputs of capital, labor and land, respectively, determine: i) The specific conditions under which returns to scale would be increasing, constant, and decreasing. ii) The equation for the marginal product function for each input. 59. A production process uses only one input, labor, and is described by the following production function: Q = 25 L2 (L3 / 3) (Note: This function is applicable only for labor input rates between 0 and 75.) Over what output ranges are marginal returns increasing, decreasing (but still positive), and negative? 60. Squaretire, Inc., a small producer of automobile tires, has the following production function: Q = 100 K0.5 L0.5 During the last production period, the firm operated efficiently and used input rates of 100 and 25 capital and labor, respectively. i) What are the marginal product of capital and the marginal product of labor based on the input rates specified? ii) If the price of capital was $20 per unit, what was the wage rate? iii) For the next production period, the price per unit of capital is expected to increase to $25 while the wage rate and the labor input will remain unchanged under the terms of the labor contract with the United Rubber Worker Local No. 25. If the firm maintains efficient production, what input rate of capital will be used? 61. Given the production function Q = 30 K0.7 L0.5 and input prices r = 20 and w = 30, determine the expansion path.
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UNIT-IV- COST ANALYSIS AND MARKET STRUCTURE 62. Explain the relationship between the average product and average cost functions and between the marginal product and marginal cost functions. 63. What is meant by each of the following terms: marginal cost, incremental cost, and sunk cost? 64. Explain why short run average cost can never be less than long run average cost. 65. Use the following data to write equation for total cost, total variable cost, total fixed cost, average total cost, average variable cost, average fixed cost and marginal cost to determine equations for all of the relevant total and per unit cost functions. Production Period 1 2 3 4 5 Rate of Output (Q) 10 0 4 2 7 Total Cost (TC) 1.80 1.00 1.32 1.16 1.56

66. Based on a consulting economists report, the total cost function for Advance Electronics, Inc. is TC = 200 + 5Q 0.04Q2 + 0.001Q3 P.R. Swensen, president of the company, determines that knowing only this equation is inadequate for decision-making. You have been directed to do the following: i) Determine the level of fixed cost (if any) and equation for average total cost, average variable cost, and average fixed cost. ii) Determine the rate of output that results in minimum average variable cost. iii) If fixed costs increase to $500, what output rate results in minimum average variable cost? 67. Why is concrete sold in local markets, while cement powder is sold in a national market 68. Does product differentiation always refer to real differences between products? Use an example to explain your answer. 69. Basically, perfectly competitive firms and monopolists use the same rule to determine the profit-maximizing output. True or False? Explain. 70. How is the dead weight loss from monopoly affected by the slope of the demand curve? 71. A new pizza place, Fredricos opens in New York City. The average price of a medium pizza in New York is $10 and, because of large number of pizza sellers, this price will not be affected by the new entrant in the market. The owner of the Fredricos estimates that monthly total costs, including a normal profit will be TC = 1000 + 2Q + 0.01Q2 To maximize total profit, how many pizzas should be produced each month? In the short run, how much economic profit the business will earn each month? 72. A bicycle manufacturer faces a horizontal demand curve. The firms total costs are given by the equation TVC = 150Q 20Q2 + Q3 Below what price should the firm shut down operations? 73. Suppose that the total cost equation (TC) for a monopolist is given by TC = 500 + 20Q2 Let the demand equation be given by P = 400 20Q What are the profit-maximizing price and quantity?
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74. In the long run, firms in a perfectly market produce at the minimum point on their average cost curves. However, the long run profit maximizing output for a monopolist will not be at point of minimum average cost. Does this mean that competitive firms can produce at a lower average cost than the monopolist? Explain.

UNIT-V- PRICING 75. Write a short note on: (i) Ramsey Pricing (ii) Pricing of Multiple products (iii) Price Discrimination 76. A rancher sells hides and beef. The two goods are assumed to be jointly produced in fixed proportions. The marginal cost equation for the beef-hide product package is given by MC = 30 + 5Q The demand and marginal revenue equations for the two products are: BEEF P = 60 1Q MR = 60 2Q HIDES P = 80 4Q MR = 80 4Q

What prices should be charged for beef and hides? How many units of the product package should be produced? 77. A firm sells in two markets and has constant marginal costs of production equal to $2 per unit. The demand and marginal revenue equations for two markets are as follows: MARKET I MARKET II P1 = 14 2Q1 PII = 10 QII MRI = 14 4QI MRII = 10 2QII Using third-degree price discrimination, what are the profit maximizing prices and quantities in each marker? Show that greater profits results from price discrimination than would be obtained if a uniform price were used. 78. An automobile manufacturer estimates that total variable costs will be $500 million and total fixed costs will be $1 billion in the next year. In setting price it is assumed that sales will be 80 percent of the firms 125,000 vehicle per year capacity, or 100,000 units. The target rate of return is 10 percent, which is to be earned on an investment of $2 billion. If prices are set on a cost-plus basis, what prices should be charged for each automobile? 79. Macmillan Manufacturing produces razor blades and razors. Propose a pricing strategy that would allow the firm to maximize its profit on the two goods. Explain. 80. Why should goods produced in fixed proportions be regarded as a product package in developing production and pricing strategies? 81. A small firm traps rabbits for their fur and feet. Each rabbit yield one pelt and two feet (only the hind feet are used to make good-luck charms). The demand for pelts is given by Pp = 2.00 0.001Qp and the demand for rabbits feet is given by PF = 1.60 0.001QF The marginal cost of trapping and processing each rabbit is $0.60. i) What are the profit-maximizing prices and quantities of pelts and rabbits feet? ii) If the demand for rabbits feet is PF = 1.00 0.001QF, what are the profitmaximizing prices and rates of output? 82. Mikes shear Shop provides 4,000 hair cuts each month at average price of $5.00 per haircut. The common costs of operating the store are $12,000 per month. The business is considering hiring a photographer who would take pictures of customers after they had their
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hair cut. The price of the photographs would be $2.50 and it estimated that 2,000 customers would purchase the service each month. The total extra cost of the photographic service is 1,000 + 1Q per month, where Q is the number of photographs sold. i) If the decision is to be based on incremental revenue and incremental cost, should the service be offered? Explain. ii) If the decision is to be made on the basis of fully distributed costs and if the $12,000 in monthly common costs is to be apportioned based on the revenues from haircuts and photo sold each month, should the new service be offered? Why or not? 83. Write-Right, a vertically integrated firm produces both paper and writing tablets. The demand for tables is given by PT = 1.00 0.001Q where Q is the quantity of tablets. The marginal cost of producing the paper necessary for tablet is MCP = 0.20 + 0.001Q It costs the firm $0.10 to make the paper into a writing tablet. If there is no external market for the paper, what transfer price should top management set for the paper? 84. A firm has found a way of using first-degree price discrimination. Demand for its product is given by P = 20 2Q Marginal cost is constant and equal to $6. i) With first-degree discrimination, what will be the profit-maximizing rate of output? How much economic profit will the firm earn? ii) What will be the profit-maximizing rate of output if the firm does not discriminate and sets one price for all customers? How much economic profit will the firm earn in this case? 85. Smith Distributing sells videocassettes in two separable markets. The marginal cost of each cassette is $2. For the first market, demand is given by Q1 = 20 - 5P1 The demand equation for the second market is Q2 = 20 2P2 i) If the firm uses third-degree price discrimination, what will be the profit-maximizing price and quantity in each market? How much economic profit will the firm earn? ii) If the firm charges the same price in both markets, what will be the profit-maximizing price and total quantity? How much economic profit will the firm earn? 86. The manager of a sporting goods store uses cost-plus pricing to determine the profitmaximizing price of bicycles. The cost of a bicycle to the store is $80. The manager estimates that the price elasticity of demand is 3.0. What is the profit-maximizing price? 87. Grass-cutter Inc. makes a product used to trim lawns. The firm has fixed costs of $100,000 per year. Management expects to sell 2,000 units per year and at that rate of output, total variable costs will be $50,000. The firm uses cost-plus pricing to earn target rate of return on an investment of $200,000. If the price is set at $100, what is the target rate of return? 88. The House of Music sells low cost turntables and speakers. The total revenue equation for sales the two products is given by TR = QT 6QT2 + 100 QS 4QS2 + QTQS where QT and QS are quantities of turntables and speakers, respectively. The marginal cost of turntables is $20 and the marginal cost of speakers is $10. i) Are the two goods substitutes or complements? ii) What is the profit-maximizing rate of output for each good? iii) What would be the profit-maximizing rate of output if there were no demand interdependence between the two goods? 89. Culture Extravaganza produce ballets in Boston and New York. Monthly total revenue are given by TRB = 1,000 QB0.5 and TRN = 2,000 QN0.5
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where QB is the monthly number of Boston patrons and QN is the monthly number of New York ballet attendees. Salaries of the performers are based on attendance and the firm estimates that the marginal cost is $10 per attendee in each city. i) If Culture Extravaganza attempts to practice third-degree price discrimination, what will be the profit-maximizing prices and rates of output in each city? ii) Will the firm earn more profit using price discrimination than if a uniform price is set? Explain. 90. What do you understand by pricing? What are the objectives of firms and various market models for analyzing pricing theory? 91. Explain the following in relation to the theory of price determination(a) Price determination under perfect competition (b) Price determination under monopoly. 92. Distinguish between market period short run and long run. Does the consideration of period affect the price policy?

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