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2nd Assignment Managerial Economics XJTU

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SECOND ASSIGNMENT

3116999164

Managerial Economics

Chapter 3

Q4. Suppose the own price elasticity of demand for good X is _2, its

income elasticity is 3, its advertising elasticity is 4, and the cross-price

elasticity of demand between it and good Y is _6. Determine how much

the consumption of this good will change if:

a. The price of good X increases by 5 percent.

b. The price of good Y increases by 10 percent.

c. Advertising decreases by 2 percent.

d. Income falls by 3 percent.

Answer

Qx d

a. own price= =2 , then we can replace the price variation in the

Px

formula

Qx d

own price= =2 and finally, we can compute the variation in Qx.

5

d

%Q x =10

Qx d

b. cross price= =6 , then we can replace the price variation in the

Py

formula

Qx d

cross price= =6 and finally, we can compute the variation in Qx.

10

%Q dx =60

Qx d

c. Advertising= =4 , then we can replace the price variation in the

Ax

formula

Qx d

Advertising= =4 and finally, we can compute the variation in Qx.

2

%Q dx =8

Qx d

d. Income = =3 , then we can replace the price variation in the formula

M

Qx d

Income = =3 and finally, we can compute the variation in Qx.

3

%Q dx =9

Q8. Suppose the true inverse demand relation for good X is

^

P=a+ bQ +e , and you estimated the parameters to be = 10, b=2.5 ,

a^ =1 , and b^ =0.5 . Find the approximate 95 percent confidence

interval for the true values of a and b.

Answer

a a^ 2 a^ =[ 10 2 ] =[ 8 , 12 ]

b b^ 2 b^ =[ 1 1 ]= [ 0 , 2 ]

Q12. You are the manager of a firm that sells a leading brand of alkaline

batteries. A file named Q12.xls with data on the demand for your

product is available online at www.mhhe.com/baye7e. Specifically, the

file contains data on the natural logarithm of your quantity sold, price,

and the average income of consumers in various regions around the

world. Use this information to perform a log-linear regression, and then

determine the likely impact of a 3 percent decline in global income on

the overall demand for your product.

Answer

Regression Statistics

Multiple R 0.97

R Square 0.94

Adjusted R

Square 0.94

Standard Error 0.00

Observations 49.00

ANOVA

df SS MS F Significance F

Residual 46.00 0.00 0.00

Total 48.00 0.01

P-

Coefficients Standard Error t Stat value Lower 95% Upper 95%

If the income decline a 3%, the demand of the product will decrease .009% (3% x

-0.03).

Q16. You are a manager in charge of monitoring cash flow at a company

that makes photography equipment. Traditional photography

equipment comprises 80 percent of your revenues, which grow about 2

percent annually. You recently received a preliminary report that

suggests consumers take three times more digital photographs than

photos with traditional film, and that the cross-price elasticity of

demand between digital and disposable cameras is -0.2. In 2009, your

company earned about $400 million from sales of digital cameras and

about $600 million from sales of disposable cameras. If the own price

elasticity of demand for disposable cameras is -2.5, how will a 1 percent

decrease in the price of disposable cameras affect your overall

revenues from both disposable and digital camera sales?

Answer

Qx d

own price= =2.5 , in the same way we did in the question 4, we just

Px

replace the new variation we have in the price, to get the variation in Qx.

Qx d

own price= =2.5

1

in 2.5%. Now we must see the effects in the digital camera demand.

Qx d

cross price= =0.2

Py

Qx d

own price= =0.2

1

Qx=0.2 .

The formula to obtain the revenue is Price x Quantity and we know how much the

quantities for both kind of cameras have changed. So with this two data, we can

calculate the effect in the revenue.

Digital Camera

P1 Q 1( 1.002)=$ 400.8 millions because the price for digital cameras

hasnt changed, so we just need to change the quantity. So the final result

is that the revenue has increased in 800,000.

Disposable Camera

price and a different quantity, which we dont know, but we can calculate

the difference from the elasticity. Finally, when we multiply our new price

(1% cheaper) and or new quantity (2.5% larger), we have the new revenue

of $811.8 millions, that means an effect and difference of 11.8 millions

from the initial situation.

Q20. According to CNN, two dairy farmers challenged the legality of the

funding of the Got Milk? campaigns. They argued that the Got Milk?

campaigns do little to support milk from cows that are not injected with

hormones and other sustainable agriculture products, and therefore

violate their (and other farmers) First Amendment rights. The 3rd U.S.

Circuit Court of Appeals agreed and concluded that dairy farmers

cannot be required to pay to fund the advertising campaigns. One of

the obvious backlashes to the National Dairy Promotion and Research

Board is reduced funding for advertising campaigns. To assess the likely

impact on milk consumption, suppose that the National Dairy Promotion

and Research Board collected data on the number of gallons of milk

households consumed weekly (in millions), weekly price per gallon, and

weekly expenditures on milk advertising (in hundreds of dollars). These

data, in forms to estimate both a linear model and log-linear model, are

available online at www.mhhe.com/baye7e in a file named Q20.xls. Use

these data to perform two regressions: a linear regression and a log-

linear regression. Compare and contrast the regression output of the

two models. Comment on which model does a better job fitting the

data. Suppose that the weekly price of milk is $3.10 per gallon and the

National Dairy Promotion and Research Boards weekly advertising

expenditures falls 25 percent after the courts ruling to $100 (in

hundreds). Use the best-fitting regression model to estimate the weekly

quantity of milk consumed after the courts ruling.

Chapter 5

C(Q) = 50 + 25Q + 30Q2 + 5Q3

a. The fixed cost of producing 10 units of output.

b. The variable cost of producing 10 units of output.

c. The total cost of producing 10 units of output.

d. The average fixed cost of producing 10 units of output.

e. The average variable cost of producing 10 units of output.

f. The average total cost of producing 10 units of output.

g. The marginal cost when Q = 10.

Answer

a. The fixed costs dont depends upon the quantity, for any value of Q in the

function, the fixed cost is equal to 50.

CV ( Q )=8,250

C ( Q )=8,300

FC 50

d. AFC = = =5.

Q 10

VC 8,250

e. AVC = = =825

Q 10

C 8,300

f. AC = = =830

Q 10

g. To get the marginal cost function, we must derivate the total cost function in

base of Q.

dC(Q)

=25+6 Q+15 Q2

dQ

Now we can replace Q=10 to get the marginal cost of producing 10 units.

MC=25+6 ( 10 ) +15(10)2=1,585

Q8. Explain the difference between fixed costs, sunk costs, and variable

costs. Provide an example that illustrates that these costs are, in

general, different.

Answer

The sunk costs, are the costs that have been paid and cannot be recovered. The

fixed costs, are the one a company must pay anyway even if they decide to not

produce, and in the other hand, the variable costs its value will depend on the

units that the company decide to produce. To give an example, if a car

manufacturer decide to launch a new model, the investigation made to know the

new requirements or technologies to apply are their sunk cost, in other words,

even if they decide to not launch the new model, they wont be able to recover

the cost. If they decide to produce it or not, anyway theyll have to pay costs as

electricity or rents in case the land is not owned by them. And finally, their

variable costs going to be measured per how many units they decide to produce.

Q12. You were recently hired to replace the manager of the Roller

Division at a major conveyor-manufacturing firm, despite the managers

strong external sales record. Roller manufacturing is relatively simple,

requiring only labor and a machine that cuts and crimps rollers. As you

begin reviewing the companys production information, you learn that

labor is paid $8 per hour and the last worker hired produced 100 rollers

per hour. The company rents roller cutters and crimping machines for

$16 per hour, and the marginal product of capital is 100 rollers per

hour. What do you think the previous manager could have done to keep

his job?

Answer

MPK MPL

=

r w

=

$ 16 per hour $ 8 per hour

$ 6.25 $ 12.5

He wasnt minimizing costs, because we can see that the marginal product of

capital is the same than the labor, but cost just the half. So, the company must

rent more roller cutters and crimping machines and hire less workers.

Q16. The World of Videos operates a retail store that rents movie

videos. For each of the last 10 years, World of Videos has consistently

earned profits exceeding $25,000 per year. The store is located on

prime real estate in a college town. World of Videos pays $2,000 per

month in rent for its building, but it uses only 50 percent of the square

footage rented for video rental purposes. The other portion of rented

space is essentially vacant. Noticing that World of Videos only occupies

a portion of the building, a real estate agent told the owner of World of

Videos that she could add $1,200 per month to her firms profits by

renting out the unused portion of the store. While the prospect of

adding an additional $1,200 to World of Videoss bottom line was

enticing, the owner was also contemplating using the additional space

to rent video games. What is the opportunity cost of using the unused

portion of the building for video game rentals?

Answer

As the rent is a sunk cost to this new service she wants to offer, because anyway

shell need to pay for the video rental business, the opportunity cost is just the

money she can lose because of not rent the space. That us $1,200 per month or

$14,400 per year

Q20. According to The Wall Street Journal, Mitsubishi Motors recently

announced a major restructuring plan in an attempt to reverse

declining global sales. Suppose that as part of the restructuring plan

Mitsubishi conducts an analysis of how labor and capital are used in its

production process. Prior to restructuring Mitsubishis marginal rate of

technical substitution is 0.15 (in absolute value). To hire workers,

suppose that Mitsubishi must pay the competitive hourly wage of

1,330. In the study of its production process and markets where

capital is procured, suppose that Mitsubishi determines that its

marginal productivity of capital is 0.5 small cars per hour at its new

targeted level of output and that capital is procured in a highly

competitive market. The same study indicates that the average selling

price of Mitsubishis smallest car is 950,000. Determine the rate at

which Mitsubishi can rent capital and the marginal productivity of labor

at its new targeted level of output. To minimize costs Mitsubishi should

hire capital and labor until the marginal rate of technical substitution

reaches what proportion?

Answer

PML

MRTS= =0.15

PMK

PML

MRTS= =0.15

0.5

PML=0.15 0.5=0.075

So the proportion to get the new level of output is 0.5 of PMK and 0.075 of PML.

And in order to minimize costs, the proportion must reach:

PMK P=r

0.5 950,000=475,000

1,330 PML

=

475,000 PMK

PML

0.028=

PMK

Now we can conclude that to minimize costs, the new proportion must be equal

to 0.028.

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