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Tutorial Sheet -1

UHU-081
Engineering Economics

Q1. Demand and supply functions for a consumer product are;


QD = 5000-6P
QS = 4P
Determine equilibrium price and quantity.

Q2. Demand and supply functions are:


QD= 100000-4P
QS = 6P
Calculate equilibrium price and quantity.

Q3. Calculate price elasticity of demand when a rise in price from Rs. 10 to Rs.12, lower its
demand from 1000 units to 800 units in a local store.

Q4. The sales data of a book publishing company produces a demand function as: Q = 5000-50P
From this demand equation, find:
 Demand schedule and demand curve
 No. of books sold at 25
 Price for selling 2500 copies
 Price for zero sale
 Sales at zero price

Q5. Explain the effect on market price and quantity in the market for mobile handsets of
following.
 Consumer incomes rises
 Technical improvement decreases cost of production
 Price of landline calls falls
Q6. Use demand and supply curve to analyze what is happening in each of the following case.
 Price of coffee has risen because of a frost in Brazil reducing the coffee crop.
 Further fall in chip prices have led to a reduction in the price of laptop.
Tutorial Sheet -2
UHU-081
Engineering Economics
Q1. Calculate the elasticity of demand for the demand curve: P= 100-5Q at each of the following
price and quantity levels:
 P =90 and Q=2
 P = 50 and Q = 10
 P=5 and Q=19

Q2. Define the elasticity of demand and explain why this concept should be of interest to anyone
in business who has to make a choice about the price for selling product.

Q3. The Serpell Report (1983) on Railway Finances in England measured price elasticity of
demand for rail services on some routes to be fairly inelastic (-0.15); hence, suggested fares rise
of 40% for London Commuters. In this case, work out the revenue effect if fares are raised from
£10 to £14 and daily 1000 passengers are travelling on this route. Should the authorities accept
this suggestion?

Q4. Panavision, a TV manufacturing company, is planning to increase the price of its television
sets by 10% next year. The economic report of the country has forecasted rise in per capita
income by 5% during this period. Panavision economic advisor has estimated price elasticity for
the TV set at (-1.4) and income elasticity at 2.2. The Panavision currently sells 50,000 TV sets.
 Give the forecast for the sales in ne xt period
 Is it advisable to raise the price when each TV set is currently priced at Rs. 10000.
Q5. Do you think the price elasticity of demand for Ford sport-utility vehicles (SUVs) will
increase, decrease, or remain the same when each of the following events occurs? Explain your
answer.
a. Other car manufacturers, such as General Motors, decide to make and sell SUVs.
b. SUVs produced in foreign countries are banned from the American market.
c. Due to ad campaigns, Americans believe that SUVs are much safer than ordinary passenger
cars.
d. The time period over which you measure the elasticity lengthens. During that longer time, new
models such as four-wheel-drive cargo vans appear.
Q.6 Amazon.com, the online bookseller, wants to increase its total revenue. One strategy is to
offer a 10% discount on every book it sells. Amazon.com knows that its customers can be
divided into two distinct groups according to their likely responses to the discount. The
accompanying table shows how the two groups respond to the discount.
a. Using the midpoint method, calculate the price elasticities of demand for group A and group
B.
b. Explain how the discount will affect total revenue from each group.
c. Suppose Amazon.com knows which group each customer belongs to when he logs on and
can choose whether or not to offer the 10% discount. If Amazon.com wants to increase its
total revenue, should discounts be offered to group A or to group B, to neither group, or to
both groups?
Tutorial Sheet -3
UHU-081
Engineering Economics
Question-1. Fit a linear regression line to the following data and estimate the demand at a price
=Rs 30

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Price 15 15 12 26 18 12 8 38 26 19 29 22
(Rs.)

Sales 52 46 38 37 37 37 34 25 22 22 20 14
(‘000
units)

Question- 2 The sales department of a firm is planning to expand sales of Rs. 10 Lakhs. The
consultant to the sales department points out that in the past this firm’s sales proceeds and
advertisement a very high correlation of +.75. The past data revealed that firm’s average sales per
year has been Rs. 4 Lakhs with a variance of Rs.30000 and its average annual advertisement
expenditure of Rs. 1 Lakh with variance of Rs. 10000. How much advertising expenditure this
firm must, therefore, incur to achieve sales target.

Question-3 From the following data find out the trend equation for sales as per least square
method of Times Series Analysis. Also project the sales in units for next five years.

Year 2000 2001 2002 2003 2004 2005 2006

Total 1150 1020 3050 3000 950 3060 4030


Sales (in
units)

Question -4 Demand function or the product of shoe making company is given


Q=-.070P+0.45A. Where (P= Price per pair and A= Advertisement cost per unit). The Company
sells 50000 pairs of shoes per annum at Rs. 600 per pair. What will the annual sales if the
company spends Rs. 1 Lakh on advertisement.

Question-5 From the following information from the yaer 2000 to 2011. You are required to find
out the trend value of sales as per 3 years and 5 years moving av erage method. Also plot the
original and trend value on the graph paper.

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Sales 52 46 38 37 37 37 34 25 22 22 20 14
(‘000
units)
Tutorial-4
Engineering Economics

Q. 1 If, for a particular combination of labour and capital, the marginal productivity of capital
is 6 units of output and the marginal rate of technical substitution is 2 units of capital per unit of
labour, calculate the marginal productivity of labour.

Q.2 Let the price of capital be Rs. 60 and that of labour Rs.50. Write the Iso-cost equation for the
outlay of Rs.2000 and calculate the slope of the Iso-cost curve.
Q3. For each of the following functions determine whether return to scale are decreasing or
increasing or constant?
(a) Q=K/L
(b) Q=100+3K+2L
(c) Q=5kaLb where a=0.6, b=.4
(d) Q=5kaLb where a=0.8, b=.05
(e) Q=2k+3L+KL

Q.4 Given the following production function and input prices , estimate the optimum input
combinations of L & K, assuming that firm has only Rs. 6000 to spend. Additionally assume
profit maximization as the objective function of the firm:
Q= LK-80L
PL=60,PK=30
Where Q the level of output produced , L is labour units ; K is the units of capital used ,PL =wage
rate and PK the rate of interest

Q.5 Given Q=100K0.5L0.5


w=Rs. 50
R=Rs.40
Q=output produced
W=wage rate
r=rental price of capital
Show how to determine the amount of labour(L) and Capital (K) that firm should use in order to
minimize the cost of producing 1118 units of output. what is the minimum cost

TUTORIAL -5
Engineering Economics

1. The ABC Manufacturing Company’s short-run average cost function in the year 2000 is
AC = 3 +4Q. Where AC is the firm’s average cost (in Rs. per unit of the product), and Q
is the output rate.
(a) Obtain the firm's short-run total cost function.
(b) Does the firm have any fixed costs? Explain.
(c) If the price of the firm’s product is Rs. 3 per unit, is the firm making profits or
losses? Explain.
(d) Derive the firm's marginal cost function.
2. Pradeep Company’s total variable function is as follows:

TVC = 50Q – 10Q2 + Q3

Where Q is the number of units of output produced.


a) What is the output level where marginal cost is a minimum?
b) What is the output level where average variable cost is a minimum?
c) What is the value of average variable cost and marginal cost at the output specified in
the answer to part (b)?

3. Using the output-cost data of a chemical firm, the following total cost function was
estimated using quadratic function:
TC = 1016 – 3.36Q + 0.021Q2

a) Determine average and marginal cost functions.


b) Determine the output rate that will minimize average cost and the per unit cost at that
rate of output.
c) The firm proposed a new plant to produce nitrogen. The current market price of this
fertilizer is Rs 5.50 per unit of output and is expected to remain at that level for the
foreseeable future. Should the plant be built?

4. Suppose that a firm’s the marginal cost function is MC(x) = 50x + 600.
a. Find the total cost function if total fixed cost is $4,000.
b. What is the firm’s total cost of producing 5 units of output?
c. What is the firm’s total cost of producing from 2 to 5 units of output?

5. A firm’s long-run total cost (LRTC) equation is given by the expression

a. What is the firm’s long-run average cost equation?


b. What is the firm’s minimum efficient scale (ME S) of production?

Tutorial -6
Engineering Economics

1 Suppose Modern Merchandise, Inc., makes and markets do-it yourself hardware,
housewares, and industrial products. The company’s new Aperture Miniblind is winning
customers by virtue of its high quality and quick order turnaround time. The product
also benefits because its price point bridges the gap between ready-made vinyl blinds
and their high priced custom counterpart. In addition, the company’s expanding product
line is sure to benefit from cross-selling across different lines. Given the success of the
Aperture Miniblind product, Modern Merchandise plans to open a new production
facility near Beaufort, South Carolina. Based on information provided by its chief
financial officer, the company estimates fixed costs for this product of $50,000 per year
and average variable costs of

AVC = $0.5 + $0.0025Q

(a) Where AVC is average variable cost ($) and Q is output.


(b) Estimate total cost and average total cost for the projected first-year volume of
20,000 units.
(c) An increase in worker productivity because of greater experience or learning during
the course of the year resulted in a substantial cost saving for the company. Estimate
the effect of learning on average total cost if actual second year total cost was
$848000 at an actual volume of 20000 units.

2. Assume Kanata Corporation is a leading manufacturer of telecommunications


equipment basedin Ontario, Canada. Its main product is micro-processor controlled
telephone switching equipment, called automatic private branch exchanges (PABXs),
capable of handling 8 to 3000 telephone extensions. Severe price-cutting throughout the
PABXs industry continues to put pressure on sales and margins. To better compete
against increasingly aggressive rivals, the company is contemplating the constructions of
a new production facility capable of producing 1.5 million units per year. Kanata’s in –
house engineering estimate of the total cost function for the new facility is:

TC = $3000 +$1000Q +0.003Q 2

(a) Estimate MES in this industry.


(b) In light of current PABX demand of 30 million units per year, how would you evaluate
the future potential for competition in the industry?

3. Textbook publishers evaluate market size, the degree of competition, expected revenues, and
costs for each prospective new title. With these data in mind, they estimate the probability that
a given book will reach or exceed the break-even point. If the publisher estimates that a book
will not exceed the breakeven point based upon standard assumptions, they may consider
cutting production costs by reducing the number of illustrations, doing only light copy editing,
using a lower grade of paper, or negotiating with the author to reduce the royalty rate. To
illustrate the process, consider the following data:

Cost Category Dollar Amount


Fixed Costs
Copyediting and other editorial costs 15,750
Illustrations 32,750
Typesetting 51,500
-----------
Total Fixed costs 100,000

Variable Costs
Printing, binding and paper 22.5
Bookstore discounts 25.00
Sales staff commissions 8.25
Author royalties 10.00
General & administrative 26.25
Total variable costs per copy …………..
92.00

List Price per copy 100

Fixed costs of $100,000 can be estimated quite accurately. Variable costs are linear and set by
contract. List prices are variable, but competition keeps prices within a narrow range. Variable
costs for the proposed book are $92, and the expected wholesale price is $100. This means that
each copy sold provides the publisher with an $8 profit contribution.
4. Estimate the volume necessary to reach a breakeven level of output.
5. How many textbooks would have to be sold to generate a profit contribution of $20,000.
6. Calculate the economic profit contribution or loss resulting from the acceptance of a
book club offer to buy 3,000 copies directly from the publisher at a price of $77 per
copy. Should the offer be accepted?
Tutorial Sheet-7
Markets

1. There are two players, Ramco and Tamco, in a market. The reaction functions of Ramco
and
Tamco are
QR= 50 – 0.5QT
QT = 60 – QR
Where, QR is quantity produced by Ramco and QT is quantity produced by Tamco. If the
market is transformed into a perfectly competitive market, the output for the industry
would be

2. The bottle industry in a country is experiencing perfect competition. The lowest point on
the long run average cost curve of each of the identical bottle producers is Rs.4, and this
minimum point occurs at an output of 1000 bottles per month. The market demand curve
for bottles is QD = 140000 – 10000P where P is the price of a bottle (in Rupees per
bottle) and QD is the quantity of bottles demanded per month, the market supply curve
for bottles is QS = 80000 – 5000P where QS is the quantity of bottles supplied per month.
What is the equilibrium price of a bottle?
3. The demand equation confronting a profit-maximizing monopolist is
Q = 25 - 0.5P
(a) Calculate the monopolist’s total-revenue-maximizing price and output level. At this
output level, calculate the price-elasticity of demand. What is the value of the Lerner
index?
(b) Suppose that the monopolist’s total cost equation is TC = 100 + 20Q. Calculate the
monopolist’s profit-maximizing price and output level. At this output level, calculate
the price-elasticity of demand. What is the value of the Lerner index?
4. Suppose that the supply and demand equations for a perfectly competitive market are:
QD = 1625 - 50P
QS = 25 + 30P
(a) Calculate the market-equilibrium price and quantity.
(b) Suppose that there are 25 firms in the industry. How much does each firm in the
industry produce?
(c) Suppose that the total cost equation of each firm in the industry is TC = 5 + 10Q +
0.2Q2. Is each firm producing at its profit maximizing level of output? If not, when
how should each firm alter its production?
(d) Is each firm in the industry in long-run competitive equilibrium?

Tutorial Sheet-8
Markets
1 There are two players, Ramco and Tamco, in a market. The reaction functions of Ramco
and
Tamco are
QR= 50 – 0.5QT
QT = 60 – QR
Where, QR is quantity produced by Ramco and QT is quantity produced by Tamco. If
the market is transformed into a perfectly competitive market, the output for the industry
would be
2. Mr. Khan took over his father’s business of table manufacturing. Earlier, he used to work
in a bank for a salary of Rs.3,000 per month. Mr. Khan saw good growth in the business
and in the process of expansion he even occupied premises which used to fetch him a rent
Rs.5,000 per month. He also employed five men at a salary of Rs.1,000 per month each.
He proposed to spend an amount of Rs.2,000 per month towards promotional
expenditure. Raw material costs incurred for manufacturing a table works out to be 25Q 2
and the price of a table is Rs.2,000.
(a) If Mr. Khan is producing 50 tables per month, his accounting and economic profits
(b) If table making business is in a monopolistically competitive market, how many
tables should Mr. Khan produce to maximize his profits?
3. The bottle industry in a country is experiencing perfect competition. The lowest point on
the long run average cost curve of each of the identical bottle producers is Rs.4, and this
minimum point occurs at an output of 1000 bottles per month. The market demand curve
for bottles is QD = 140000 – 10000P where P is the price of a bottle (in Rupees per
bottle) and QD is the quantity of bottles demanded per month, the market supply curve
for bottles is QS = 80000 – 5000P where QS is the quantity of bottles supplied per month.
What is the equilibrium price of a bottle?

 The demand equation confronting a profit-maximizing monopolist is


o Q = 25 - 0.5P
 Calculate the monopolist’s total-revenue-maximizing price and output level. At this
output level, calculate the price-elasticity of demand.What is the value of the Lerner
index?
 Suppose that the monopolist’s total cost equation is TC = 100 + 20Q. Calculate the
monopolist’s profit-maximizing price and output level. At this output level, calculate the
price-elasticity of demand.What is the value of the Lerner index?

4. Suppose that the supply and demand equations for a perfectly competitive market are:
QD = 1625 - 50P
QS = 25 + 30P
 Calculate the market-equilibrium price and quantity.
 Suppose that there are 25 firms in the industry. How much does each firm in the
industry produce?
 Suppose that the total cost equation of each firm in the industry is TC = 5 + 10Q +
0.2Q2. Is each firm producing at its profit maximizing level
 of output? If not, when how should each firm alter its production?
 Is each firm in the industry in long-run competitive equilibrium
Tutorial Sheet-9
Engineering Economics
Q.1 Zenith Bros. is a pioneer in manufacturing of luxury soaps. The demand function faced by
Zenith Bros. is estimated to be P = 16 000 – 8Q. The long run average cost function of the firm is
LAC = 16000 – 14Q + 0.004Q2 Assuming that Zenith Bros., operate under a monopolistically
competitive market. What is the excess capacity of firm in long run.

Q.2 In a Duopoly the Industry demand function is


P = 100 – 0.5Q
Cost functions of the two firms are
C1 = 5Q1

C2 = 0.5Q2
What is the Cournot’s equilibrium output for the industry?

Q.3 The demand for spring water is given by P = 1000 – Q . What is price in a Cournot’s
Duopoly, assuming the cost of production to be zero?

Q.4 The demand for spring water is given by P = 1000 – Q Assume that the cost of production to
be zero. What is the equilibrium price for the industry if there are four firms in the industry?

Q.5 Suppose two firms in a duopoly market with a demand function P = 100 – 0.5Q and cost
functions C1 = 5Q1 and C2 = 0.5Q 22 collude and form a cartel with the aim of joint profit
maximization. What is the profit made by the firms?
Q.6 The demand function for a monopolist company is Q = 53 – P and the Total Cost function
for the company is TC = 5Q. If the prime objective of the company is to maximize sales revenue,
what is the output to be produced by the firm?

Q.7 Two companies, Sweta Ltd., and Moti Ltd., are duopolists producing identical products. The
market demand for the products is given by the following demand function:
P = 600 – QS – QM,
where QS and QM are the quantities sold by the respective firms and P is the selling price. Total
Cost functions for the two companies are:
TCS = 25,000 + 100QS
TCM = 20,000 + 125QM
Assuming that the firms act independently as in the Cournot model, what is the long run
equilibrium output for the industry?

Q.8 Market demand for a good under the oligopoly market is estimated to be Qd = 100 – P. Firm
X is a dominant firm in the industry and the supply function of all other firms is Qso = P – 20. If
the dominant firm has a constant marginal cost of Rs.20, what will be the market price of the
good?

TUTORIAL SHEET-10
UHU-081(ENGINEERING ECONOMICS)

Question -1 Bob Sponge has been retained as a management consultant by Square Pants, Inc.,
a local speciality retailer, to analyze two proposed capital investment projects, projects Xand Y.
Project X is a sophisticated working capital and inventory control system based upon a powerful
personal computer, called a system server, and PC software specifically designed for inventory
processing and control in the retailing business. Project Y is a similarly sophisticated working
capital and inventory control system based upon a powerful personal computer and general-
purpose PC software. Each project has a cost of $10,000, and the cost of capital for both
projects is 12%. The projects= expected net cash flows are as follows:

A. Calculate each project=s nominal payback period, net present value (NPV), internal rate of
return (IRR), and profitability index (PI).
B. Should both projects be accepted if they are interdependent?
C. Which project should be accepted if they are mutually exclusive?
D. How might a change in the cost of capital produce a conflict between the NPV and IRR
rankings of these two projects? At what values of k would this conflict exist? (Hint: Plot the
NPV profiles for each project to find the crossover discount rate k.)
E. Why does a conflict exist between NPV and IRR rankings?

Question -2 Suppose that your college roommate has approached you with an opportunity to
lend $25,000 to her fledgling home healthcare business. The business, called Home Health Care,
Inc., plans to offer home infusion therapy and monitored in-the-home healthcare services to
surgery patients in the Birmingham, Alabama, area. Funds would be used to lease a delivery
vehicle, purchase supplies, and provide working capital. Terms of the proposal are that you
would receive $5,000 at the end of each year in interest with the full $25,000 to be repaid at the
end of a ten-year period.
A. Assuming a 10% required rate of return, calculate the present value of cash flows and the net
present value of the proposed investment.
B. Based on this same interest rate assumption, calculate the cumulative cash flow of the
proposed investment for each period in both nominal and presentvalue terms.
C. What is the payback period in both nominal and present-value terms?
D. What is the difference between the nominal and present-value payback period? Can the
present-value payback period ever be shorter than the nominal payback period?

Question-3
Following information are available of two projects X & Y
Initial Investment
X=Rs.25, 00,000
Y =Rs. 25, 00,000

Years Profit Before Tax & Dep. Profit Before Tax & Cost of Capital =12%
Dep. Rate of Dep. = 10 %
1 600,000 6,00,000 Tax rate =50%
2 7,00,000 750,000
3 7,00,000 600,000
4 10,00,000 9,50,000
5 12,00,000 11,00,000
6 900,000 9,50,000
7 800,000 750,000
8 7,00,000 7,00,000

(A) Calculate Payback period and ARR of both projects & suggest which project should be
accepted if these are independent.
(B) If these are not depend ent than assign ranking to both projects.
(C) Calculate Discounted Payback period, NPV & IRR of both projects & suggest which
project should be accepted if these are independent. Also assign ranking to both
projects , if these are taken as mutually exclusive
(D) Calculate Profitability index.
(E) Is there conflict between NPV & IRR?

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