Tutorial 1

AGW 614/3 Managerial Economics Graduate School of Business University Science Malaysia Tutorial 1 (5 Questions- 15 marks for each question. Please submit on March 18, 2013)

1. Suppose the quantity demanded of good (Qd) depends only on the price of the good (P), monthly income (M), and the price of a related good R (PR): Qd =180-10P - 0.2M +10PR a. Construct the (direct) demand curve for the good when M = $1,000 and PR = $5. Interpret the intercept and slope parameters for the demand equation b. Let income decrease to $950. Construct the new demand curve. Is this a normal good? c. Let the price of good R increase to $6 (income remaining at $950). How do you describe good R, is this a substitute or complement good? d. For the demand curve in part c, find the equilibrium price and quantity when supply is Qs= -10+10P e. Find the consumer surplus, producer surplus and social surplus for d. Why do you think social surplus is important to a firm?

2. Joy’s Frozen Yogurt shops have enjoyed rapid growth in Northeastern states in recent years. From the analysis of Joy’s various outlets, it was found that the demand curve per week follows this pattern:Q=200-300P +120 I + 65T -250 Ac +400 Aj where Q= number of cups served per week; P=average price paid for each cup; I =per capital income in the given market (Thousands); T= average outdoor temperature; Ac Competition’s monthly advertising expenditures (thousands); Aj = Joy’s own monthly advertising expenditures (thousand). One of the outlets has the following conditions: P=1.50; I=10; T=60; Ac=15; Aj=10 a. Estimate the number of cups served per week by this outlet. Also determine the outlet’s demand curve. b. What would be the effect of a $5,000 increase in the competitor’s advertising expenditure? c. What would Joy’s advertising expenditure have to be to counteract this effect in order to maintain similar quantity of number of cups served as in a?

3. Q=100P-0.3 represents a demand curve. Derive a demand schedule and a demand curve. What types of products might exhibit this type of non-linear demand curve? Explain from cost, price and competition perspective.

4. The government imposes minimum wage. Derive a demand curve and supply curve to reflect this policy. What are the three possible problems when implementing minimum wage policy? 5. John Elsenki has been briefed by his various department staffs on the following scenarios on the following issues. John knows that he has to answer to various parties about the value of the company, if he has to make decision following information given by his staffs. Production department has pressured John to accept a proposal to install new equipment to reduce air pollution. The department also suggested new machine is necessary to lower manufacturing costs. On the other hand, the manager in business analysis unit has proposed to John to increase prices for the firm’s products, and predicted that quantity demanded in the short run will be unaffected, but in the longer run, unit sales are expected to decline. The manager proposal is based on the argument that there will be an expected increase in inflation. It is uncertain the center bank of the country will lower interest rates dramatically to curb the expected inflation. As John’s personal advisor, advise John on the above effects on the firm’s value.

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