Carleton University Department of Economics ECON 2009 C Managerial Economics Fall 2013 Instructor: Maoqiong Lin Assignment 1 (Due:

4:00pm Oct. 2, 2013)

1. (10 points) Recently, a major airline offered a one-year membership in its Air Club for $125. Alternatively, one could purchase a three-year membership for $300. Many managers and executives join air clubs because they offer a quiet place to work or relax while on the road; thus, productivity is enhanced. Lets assume you wish to join the club for three years. Should you pay the up-front $300 fee for a three-year membership or pay $125 per year for three years for total payments of $375? For simplicity, lets suppose the airline will not change the annual fee of $125 over the next three years. If you pay annually, you pay $125 today, $125 one year from today, and $125 two years from today. The interest rate is 5%. i) Is paying for all three years in advance profitable when you take the time value of money into account? Why? ii) If the three-year membership cost is $370, will you buy a one-year membership or three-year membership? Why? 2. (10 points) Caviar and champagne are complements. Recently pollution has been a problem in the Volga River, where much of the world's caviar originates. The sturgeon that live in these waters are laying fewer eggs than before. Show graphically and explain the effects on the market for caviar and the market for champagne.

3. (10 points) Apples and oranges are substitutes. A freeze in Florida destroys most of the orange crop. What would you expect to happen to the market for the following: i) Oranges? ii) Apples? iii) Orange juice?

4. (10 points) When Iraq invaded Kuwait, the market price of crude petroleum jumped from $21.54 per barrel to $30.50 per barrel - an increase of almost 42 percent. Your boss is puzzled, because the price increase actually occurred before there was a physical reduction in the current amount of oil available for sale. i) ii) Use shifts of demand and supply to explain why the price of oil increased so rapidly. One year after the invasion, the price of oil fell to $21.32 per barrel, its prewar level. Explain why.

5. (10 points) Suppose the following estimates of demand and supply:

i) ii) iii)

Graph the supply and demand curves. What are the equilibrium quantity and equilibrium price? How much consumer surplus exists in this market?

6. (10 points) The demand for Wanderlust Travel Services (X) is estimated to be Qx = 22,000 - 2.5Px + 4Py - 1M + 1.5Ax, where Ax represents the amount of advertising spent on X and the other variables have their usual interpretations. Suppose the price of good X is $450, good Y sells for $40, the company utilizes 3,000 units of advertising, and consumer income is $20,000. i) Calculate the own price elasticity of demand at these values of prices, income, and advertising. ii) Is demand elastic, inelastic, or unitary elastic? iii) How will your answers to parts i) and ii) change if the price of Y increases to $50?

7. (10 points) The demand for company X's product is given by Qx = 12 - 3Px + 4Py. Suppose good X sells for $3.00 per unit and good Y sells for $1.50 per unit. i) Calculate the cross-price elasticity of demand between goods X and Y at the given prices. ii) Are goods X and Y substitutes or complements? Why? iii) What is the own price elasticity of demand at these prices? iv) How would your answers to parts i) and ii) change if the price of X dropped to $2.50 per unit?

8. (10 points) Suppose that the firms production function is i) What is the average product of labor, holding capital fixed at ? ii) Find APL, APK, MPL, MPK, MRTS. iii) Does this production function have increasing, constant, or decreasing returns to scale? 9. (10 points) If input prices are = 3, and = 2, and Q = 10KL.

i) What is the least cost input combination required to produce 60 units of output? ii) How would input usage change if output is increased to 240 units? iii) How would input usage change if increased to 5 and output is increased to 240 units?

10. (10 points) Suppose a companys demand function is: Where E is the number of engineers, T is the number of technicians. The monthly wage of an engineer is $4,000, and the monthly wage of technician is $1,000. i) If the total cost of hiring people is $28,000 per month, how many engineers and technicians will be employed, and how many units of output will be produced? ii) Suppose that the wages of technicians and engineer are $2,000 and $4,000, respectively, and that total spending on production increases to $52,000. How many engineers and technicians will be employed, and how many units of output will be produced?