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Managerial Economics: Consulting, Forecasts, and Competition

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Need help with these nightmare questions. The response to each question must be in one decent paragraph. Thanks and I appreciate your help in advance.

1. A manager makes the statement that output should be expanded so long as average revenue exceeds average cost. What does this mean, and does this strategy make sense? How would you explain it?
2. As an economic consultant to the dominant firm in a particular market, you have discovered that, at the current price and output, demand for your client's product is price inelastic. What advice regarding pricing would you give and why?
3. Managers depend on economic forecasts in making decisions. Recognizing that a margin of error is as important as the forecast itself, disasters in the planning process could occur if management is over confident in predictions and projections for the future. Provide an industry example of this and explain how it could have been avoided.
4. Opportunity cost is associated with choosing a particular decision that is measured by the forgone benefits of the next-best alternative. What example would you pose to explain this? What is meant by a sunk cost?
5. Consider the concept of perfect competition. This is where the firm faces infinitely elastic demand. How is this best explained? Provide an example.
6. Monopolistic competition is described with the following formula: MR=MC and P=AC. Explain this by providing an industry example.
7. Sequential competition is described as where the manager must think ahead. What strategies do you recommend for anticipating the actions of competitors and why?
8. An externality is described as an impact or side effect that is caused by one economic agent and incurred by another agent or agents. How is this best explained? What industry example do you use to demonstrate this?

Samuelson, W.(2012). Managerial Economics.(7th ed). John Wiley & Sons, Inc.

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Good luck!

1. A manager makes the statement that output should be expanded so long as average revenue exceeds average cost. What does this mean, and does this strategy make sense? How would you explain it?

This strategy makes sense because what the manager is saying is that it is important to make margin (the difference between retail and cost). It is also a way to increase cost from output when the money received from one additional unit is more than the cost to produce more than one additional unit because you continue to make money on goods sold. When average costs begin to exceed average revenue, a firm loses money on each additional product it makes. A very simple way to explain it is a company should keep making product as long as it is making money on the product.

2. As an economic consultant to the dominant firm in a particular market, you have discovered that, at the current price and output, demand for your client's product is price inelastic. What advice regarding pricing would you give and why?

If the goods sold is priced inelastic that means the company should raise its prices. Price inelastic means that the demands for goods is stable relative to price. In other words, the demands for goods does not fluctuate in large movement because of the price. This means if the company increases its price there will not be a sufficient amount of customers that decide not to buy the product because of the price. Therefore, raising the price will simply result in roughly the same number of customers paying more money, which results in higher revenue.

3. Managers depend on economic forecasts in making decisions. Recognizing that a margin of error is as important as the forecast itself, disasters in the planning process could occur if management is over confident in predictions and projections for the future. Provide an industry example ...

Solution Summary

This detailed solution provides answers to what output exceeding costs means, advice for a client with inelastic pricing, an example of managers depending upon economic forecasts, explanation of sunk costs as well as perfect competition,explanation of MR=MC and P + AC, strategies for sequential competition, and explanation/example of externality. Includes APA formatted references.

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Managerial Economics for Remox Corporation

4. Remox Corporation is a British firm that sells high-fashion sportswear in the United States. Congress is currently considering the imposition of a protective tariff on imported textiles. Remox is considering the possibility of moving 50 percent of its production to the United States to avoid the tariff. This would be accomplished by opening a plant in the United States. The following table lists the profit outcomes under various scenarios:
Profit in 2008
No Tariff Tariff
Option A: Produce all output in Britain $1,200,000 $800,000
Option B:Produce 50% in the United States 875,000 $1,000,000

Remox hires a consulting firm to assess the probability that a tariff on imported textiles will in fact pass a congressional vote and not be vetoed by the president. The consultants forecast the following probabilities:
Probability
Tariff will pass 30%
Tariff will fail 70

a. Compute the executed profits for both options.

b. Based on the expected profit only, which option should Remox choose?

c. Compute the probabilities that would make Remox indifferent between options A and B using that rule.

d. Compute the standard deviations for options A and B facing Remox Corporation.

e. What decision would Remox make using the mean-variance rule?

f. What decision would Remox make using the coefficient of variation rule?

5. Mirk Labs is a British pharmaceutical company that currently enjoys a patent monopoly in Europe, Canada, and The United States on Zatab (pronounced zay-tab), and allergy medication. The global demand for Zatab is
Qd =15.0 - 0.2P

Where Qd is annual quantity demanded (in millions of units) of Zatab, and P is the wholesale price of Zatab per unit. A decade ago, Mirk Labs incurred $60 million in research and development costs for Zatab. Current production costs for Zatab are constant and equal to $5 per unit.

a. What wholesale price will Mirk Labs set? How much Zatab will it produce and sell annually? How much annual profits does the firm make on Zatab?
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c. Calculate the annual deadweight loss to society due to the drug firm's market power in Zatab. What exactly does this deadweight loss represent?
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