Managerial Economics

MANAGERIAL ECONOMICS
MOD 4
Start by reading and following these instructions:
1. Quickly skim the questions or assignment below and the assignment rubric to help you focus.
2. Read the required chapter(s) of the textbook and any additional recommended resources. Some answers may require you to do additional research on the Internet or in other reference sources. Choose your sources carefully.
3. Consider the discussions and any insights gained from it.
4. Create your Assignment submission and be sure to cite your sources, use APA style as required, check your spelling.
Assignment:
1. An article in Business Week warned of the dangers of deflation as the collapse of numerous Asian economies was creating worries that Asia might try to “export its way out of trouble” by oversupplying everything from automobiles to semiconductors. Evidence that deflation had become a genuine concern for managers was provided by a statement in the article by John Smith, chairman and CEO of General Motors Corporation: “Fundamentally, something has changed in the economy. In today’s age, you cannot get price increases.” The article offers advice to managers: “Productivity growth lets companies boost profits even as prices fall.” Using short-run production and cost theory comment on this advice.
2. Oversize Transport Inc. supplies custom delivery service for very large construction equipment in the southeast region of United States. The most common lead of the specialty trucker is the Caterpillar model 740 dump truck, which is about 258 feet long. The owner of Oversize Transport, who also drives the firm’s single 275-foot long tractor-trailer rig, chooses to lease this huge piece of capital equipment under a five-year contract requiring monthly lease payments of $5,500 per month. Oversize Transport could not service this profitable market with any rig shorter than 275 feet. A typical delivery takes about a day and a half, so Oversize Transport can make at the most only 20 deliveries per month with its one tractor-trailer rig. Under what circumstances is the tractor-trailer a fixed input? A quasi fixed input?
3. Explain the following terminologies in economics
• Spreading the overhead.
• A break-even level of production.
• The efficiency of mass production?
• How does the theory of efficient production apply to managers of government bureaus or departments that are not run for profit? How about non-profit clubs that collect just enough dues from their members to cover the cost of operation?
4. The production function is:

where a > 0 and b > 0.
a. The marginal product of labor is:

b. The marginal product of labor is:

c. The marginal rate of technical substitution is

d. Show that the isoquants for this production function are convex. (Show that MRTS diminishes as L increases. Why?)
e. Derive the equation for the long-run expansion path.
5. You are planning to estimate a short run production function for your firm, and you have collected the following data on labor usage and output:

a. Does a cubic equation appear to be suitable specification given these data? You may wish to construct a scatter diagram to help you answer this question.
b. Using a computer for regression analysis, estimate your firm’s short run production function using the data given here. Do the parameter estimates have the appropriate algebra signs? Are they statistically significant at the 5% level?
c. At what point do you estimate marginal product begins to fall?
d. Calculate estimates of total, average and marginal products when the firm employs 23 workers.
e. When the firm employs 23 workers, is short-run marginal cost (SMC) rising or falling? How can you tell?

MOD 5
Start by reading and following these instructions:
1. Quickly skim the questions or assignment below and the assignment rubric to help you focus.
2. Read the required chapter(s) of the textbook and any additional recommended resources. Some answers may require you to do additional research on the Internet or in other reference sources. Choose your sources carefully.
3. Consider the discussions and any insights gained from it.
4. Create your Assignment submission and be sure to cite your sources, use APA style as required, check your spelling.
Assignment:
1. Insurance agents receive a commission on the policies they sell. Many states regulate the rates that can be charged for insurance. Would higher or lower rates increase the incomes of agents? Explain, distinguishing between the short-run and the long-run.
2. During a coffee-room debate among several young MBAs who recently graduated, one of the young executives flatly stated, “The most this company can lose on its Brazilian division is the amount it invested (its fixed costs).” Not everyone agreed with this statement. In what sense is this statement correct? Under what circumstances could it be false? Explain.
3. Even if firms in a monopolistically competitive market collude successfully and fix price, economic profit will still be competed away if there is unrestricted entry. Explain. Will price be higher or lower under such an agreement in long-run equilibrium than would be the case if firms didn’t collude? Explain.
4. Antitrust authorities at the Federal Trade Commission are reviewing your company’s recent merger with a rival firm. The FTC is concerned that the merger of the two rival firms in the same market will increase market power. A hearing is scheduled for your company to present arguments that your firm has not increased its market power through the merger. Can you do this? How? What evidence might you bring to the hearing?
5. Dr. Leona Williams, a well-known plastic surgeon, has a reputation for being one of the best surgeons for reconstructive nose surgery. Dr. Williams enjoys a rather substantial degree of market power in this market. She has estimated demand for her work to be:

where Q is the number of nose operations performed monthly and P is the price of a nose operation.
a. What is the inverse demand function for Dr. Williams’ services?
b. What is the marginal revenue function?
The average variable cost function for reconstructive nose surgery is estimated to be:

where AVC is the average variable cost (measured in dollars), and Q is the number of operations per month. The doctor’s fixed cost per month is $8,000.
c. If the doctor wishes to maximize her profit, how many nose operations should she perform each month?
d. What price should Dr. Williams charge to perform a nose operation?
e. How much profit does she earn each month?

MOD 6
Start by reading and following these instructions:
1. Quickly skim the questions or assignment below and the assignment rubric to help you focus.
2. Read the required chapter(s) of the textbook and any additional recommended resources. Some answers may require you to do additional research on the Internet or in other reference sources. Choose your sources carefully.
3. Consider the discussions and any insights gained from it.
4. Create your Assignment submission and be sure to cite your sources, use APA style as required, check your spelling.
Assignment:
1. Find the solution to the following advertising decision game between Coke and Pepsi by using the method of successive elimination of dominated strategies.
Pepsi’s Budget
Coke’s Budget

2. Alpha and Beta, two oligopoly rivals in a duopoly market, choose prices of their products on the first day of the month. The following payoff table shows their monthly payoffs resulting from the pricing decisions they make.
Alpha’s Price
Beta’s Price

• Is the pricing decision facing Alpha and Beta a Prisoner’s Dilemma? Why or why not?
• What is the cooperative outcome? What is the non-cooperative outcome?
• Which cells represent cheating in the pricing decision? Explain.
• If Alpha and Beta make their pricing decision just one time, will they choose the cooperative outcome? Why or why not?
• Can Alpha make a credible threat to punish Beta with a retaliatory price cut? Can Beta also adopt a similar retaliatory price cut?
3. The secretary general of OPEC, Ali Rodriquez, stated that it would be easier for OPEC nations to make future supply adjustments to fix oil prices that are too high, than it would be to rescue prices that are too low. Evaluate this statement.
4. Two firms A and B produce goods A and B, respectively. The linear demands for the two goods are, respectively,

Production costs are constant but not equal:

• Using calculus, derive the equations for best response curves.
• Sketch a graph of the two best-response curves. Label both axes and response curves.
• If firm A expects firm B to set its prices at $20, what is firm A’s best response? If firm B predicts firm A will price good A at $36, what is firm B’s best response?
• What is the Nash equilibrium price and quantity for each firm?
• How much profit does each firm earn in Nash equilibrium?
• If firm A and firm B set prices of $22 and $35 respectively, how much profit does each firm earn? Why don’t they choose these prices then?
5. Thomas Selling, an expert on nuclear strategy and arms control, observed in his book The Strategy of Conflict (Cambridge, MA: Harvard University Press, 1960), “The power to constrain an adversary depends upon the power to bind oneself.” Explain this statement using the concept of strategic commitment.

MOD 7
Start by reading and following these instructions:
1. Quickly skim the questions or assignment below and the assignment rubric to help you focus.
2. Read the required chapter(s) of the textbook and any additional recommended resources. Some answers may require you to do additional research on the Internet or in other reference sources. Choose your sources carefully.
3. Consider the discussions and any insights gained from it.
4. Create your Assignment submission and be sure to cite your sources, use APA style as required, check your spelling.
Assignment:
1. Price discriminate sounds like a socially “bad” thing. Can you think of any reasons why price discrimination could be viewed as a socially “good” thing?
2. As markets for some products and services experience greater global competition, what is the likely consequence for the incidence of price discrimination? Do you think global competition fosters or impedes price discrimination? Can you give any examples from your own work experience?
3. Although there is relatively little difference in the cost of producing hardcover and paperback books, these books sell for very different prices. Explain this pricing behavior.
4. A bar offers female patrons a lower price for a drink than male patrons. The bar will maximize profits by selling a total of 200 drinks (a night). At the current prices, male customers buy 150 drinks, while female customers buy 50 drinks. At this allocation between markets, the marginal revenue from the last drink sold to a female customer is $0.50.
• What should the bar do about its pricing?
• If the bar sells 151 drinks to males and 49 to females, what will be the increase (decrease) in total revenue?
5. EZ Sharp Industries, Inc., manufactures the Kleen Edge(TM) line of diamond-abrasive cutlery sharpeners for home use. EZ Sharp holds a patent on its unique design and can earn substantial economic profit if it prices its Kleen Edge(TM) products wisely. EZ Sharp sells two models of its Kleen Edge(TM) sharpeners: the Classic, which is the entry-level model, and the Professional, which has a sonic sensor that controls the speed of the sharpening wheels.
Short run production of sharpeners is subject to constant costs: AVC = SMC for both models. The constant costs of production at EZ Sharp Industries are estimated to be:

Total fixed costs each month are $10,000. The sole owner of EZ Sharp also manages the firm and makes all pricing decisions. The owner-manager believes in assuring himself a 200% profit margin by using the cost-plus pricing methodology to set prices for his two product lines. At these prices, EZ Sharp is selling 3,750 units of Classic model per month and 2,000 units of the Professional model per month.
a. Using the cost-plus technique, compute the prices the owner-manager charges for the Classic and the Professional models, based on his required 200% profit margin.
b. How much profit is EZ Sharp earning each month using the cost-plus prices in part a?
The owner-manager is ready to sell the firm, but he knows the value of the firm will increase if he can increase the monthly profit somehow. He decides to hire Andrews Consulting to recommend ways for EZ Sharp to increase its profits. Andrew reports that production is efficient, but pricing can be improved. Andrews argues a new pricing plan based on optimal pricing techniques (i.e., the MR = MC rule).
To implement the MR = MC methodology, Andrews undertakes a statistical study to estimate the demands for two Kleen Edge (TM) products. The estimated demands are:

Where QC and QP are the monthly quantities demanded of Classic and Professional models, respectively, and PC and PP are prices of Classic and Professional models, respectively. Andrews Consulting solved the demand equations simultaneously to get the following inverse demand functions, which is why Anderson gets paid the “big bucks”:

c. Find the two marginal revenue functions for the Classic and Professional model sharpeners.
d. Set each marginal revenue function in part c equal to the appropriate cost and solve for the profit-maximizing quantities.
e. Using the results from part d, what prices will Andrews Consulting recommend for each model?
f. When the owner-manager sees the prices recommended by Andrews Consulting, he brags about how close his simple cost-plus pricing method had come to their suggested prices. Compute the profit EZ Sharp can earn using the consultants’ prices in part d. Is there any reason for the owner-manager to brag about his cost-plus pricing skills?

MOD 8
Signature Assignment Title: Analytical Essay
Signature Assignment Description/Directions:
In this 2000 words analytical essay, you are to identify an industry or business in which you are interested. This could be a career interest area or even an organization that could serve as the context for your Capstone Project (See PLANS Depot).
What economic principles and associated analytical perspectives/tools are most helpful in deeply understanding the changes that are occurring in the strategic context of the industry in question? Provide a specific example of an economic insight that could be gained and subsequently leveraged to heighten the organization’s competitive performance. What are some of the kinds of macro-economic changes that will be difficult to predict with existing economic models?