HUTECH AND OUM

ASSIGNMENT BMME5103 OCTOBER AND NOVEMBER SEMESTER 2011 MANAGERIAL ECONOMICS BMME5103 ASSIGNMENT (50%) Question 1 a. State whether you expect demand for the following products to be relatively price elastic or price inelastic. In each case, outline the factors likely to be important in determining the product's price elasticity. i) cigarettes (3 marks) ii) a well-known brand of soap b. (3 marks) Determine the likely cross-price elasticity of demand between the following products. Explain your answers. i) rice and noodles (3 marks) ii) electricity and electric stoves (3 marks) c. Suppose that you have just received the following statement from one of your classmates: Demand curves are always negatively-sloped. Is this statement correct? Support your answer with a sound argument. (3 marks) [TOTAL: 15 MARKS] Question 2 Suppose the demand and supply curves for good W are as follows: QD = 100 - 2P QS = -20 + 4P where P is price per kg measured in dollars and Q is quantity measured in 00kgs (3 marks) b. Determine the equilibrium price and quantity. (2 marks) c. Calculate the value of the consumer and producer surpluses at the equilibrium price. (3 marks) 1

a. Sketch the demand and supply curves.

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ASSIGNMENT BMME5103 d. Explain why governments may introduce a price floor. (3 marks) e. Suppose a price floor of $30 were to be introduced. Calculate the consumer and producer surplus after its introduction. (2 marks) f. Who has benefited from the introduction of the price floor? (2 marks) [TOTAL: 15 MARKS] Question 3 Given the following data for a firm: Q 0 1 2 3 4 5 6 7 8 9 10 a. TFC ($) 200 200 200 200 200 200 200 200 200 200 200 TVC ($) 0 50 90 120 160 220 300 400 520 670 900

For each of the levels of output shown above, calculate the following: i) total cost (TC) (2 marks) ii) average fixed cost (AFC) (2 marks) iii) average variable cost (AVC) (2 marks) iv) average total cost (ATC) (2 marks) v) marginal cost (MC) (2 marks)

b.

Why is MC the same when computed from either TVC or from TC? (2 marks)

c.

Sketch a graph showing AVC, ATC and MC.

(2 marks) 2

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ASSIGNMENT BMME5103 d. Explain how we can determine the value of AFC from this graph, without sketching the AFC curve. (2 marks) Explain why the MC curve cuts AVC and ATC at their minimum points. (2 marks) If TFC were $300 rather than $200, explain how this would affect the AFC, AVC, ATC, and MC curves. (2 marks) [TOTAL: 20 MARKS] Question 4 A monopoly has the following demand and cost data as shown below: Assume fixed costs of $300. P ($) 500 450 400 350 300 250 200 150 100 a. Q (units) 0 1 2 3 4 5 6 7 8 TVC ($) 230 440 690 990 1410 1960 2710 3710

e.

f.

For the output and cost figures given above, calculate the average variable cost (AVC), average total cost (ATC) and marginal cost (MC). (3 marks) For the price and quantity figures given above, calculate total revenue (TR) and marginal revenue (MR). (2 marks) Based on the figures above, determine the short run profit maximising (loss minimising) output and total profit or loss for this monopoly. (3 marks)

b.

c.

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d. ASSIGNMENT BMME5103 Suppose the government were to impose a price ceiling at the allocative efficient price. What is this price and what is the level of output? (3 marks) e. Would the monopolist remain in business in the long run if the price ceiling remained in place? Explain your answer. (2 marks) Define productive efficiency. At which output level would this firm achieve productive efficiency? (2 marks) [TOTAL: 15 MARKS] Question 5 Suppose Chill and Freeze are the only two firms in the air conditioning market. Each firm is considering two possible pricing strategies either P = $700 or P = $1500 for their goods. The following payoff matrix gives the profit outcomes (in $m). Freeze P = $700 Chill P = $700 P = $1500 35 29 30 35 P = $1500 41 39 27 38

f.

a.

What price will each of the firms choose if they make their decisions independently, following a maximin strategy? Explain how you determine your answer. (3 marks) What is meant by the term collusion? In general, what is the incentive for firms in an oligopoly market to collude? Explain. (3 marks) Based on the payoffs for Chill and Freeze (shown above) and your solution in (a), could these firms benefit by colluding? Explain. (2 marks) Discuss factors that deter firms operating in an oligopoly market structure from colluding, and explain how they act as a deterrent. (2 marks) [TOTAL: 10 MARKS]

b.

c.

d.

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ASSIGNMENT BMME5103 Question 6 A perfectly competitive firm has the cost data as shown in the table below: Q (units per day) 0 1 2 3 4 5 6 7 8 9 10 a. Total Cost (TC) 9 0 110 126 139 150 163 178 196 219 249 289

For the output and cost figures given above, calculate the average total cost (ATC), average variable cost (AVC) and marginal cost (MC). (3 marks) For each of the following prices determine this firms profit-maximising (or loss-minimising) output per day, in the short run, and calculate the daily profit or loss. i) ii) iii) $13.20 (2 marks) $16.50 (2 marks) $39.00 (2 marks)

b.

c.

Draw this firms short run supply curve, indicating the relevant numerical values for price and output. (3 marks) Suppose this firms costs are the same as those of other firms in the perfectly competitive market. Indicate, together with a brief explanation, the numerical value of the critical price level below which this firm will leave the market in the long run, and above which new firms will enter that market in the long run. (3 marks) [TOTAL: 15 MARKS]

d.

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ASSIGNMENT BMME5103 Question 7 Suppose that you have two department stores: F1 and F2. Each of the two stores has to choose a location for its one store in Hochiminh City. Each store will choose one of four location strategies:

F2
Uptown Center City East Side West Side Uptown 30, 40 115, 40 125, 45 105, 50 Center City 50, 95 100, 100 95, 65 75, 75 East Side 55, 95 130, 85 60, 40 95, 95 West Side 55, 120 120, 95 115, 120 35, 55 (3 marks) b. c. Does this game have any Nash equilibrium? If any, identify them. (3 mark) Use the Maximin Strategy to find out the equilibrium outcome. Is there any incentive for both stores to collude? If any, show benefits that each store can get from this collusion. (4 mark) [TOTAL: 10 MARKS]

F1
a.

Does any store have dominant strategies? If any, identify them.