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Managerial Economics

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MANAGERIAL ECONOMICS

1. Construct a Supply/Demand (S/D) graph, identify the initial equilibrium, then identify the new equilibrium when Supply decreases and Demand increases.

2. In the graph for question number 1, what would happen to the initial equilibrium when consumer incomes increase, assuming the good in question is an inferior good? Explain your answer using an S/D graph

3. Given the following equation: Q=20 - 2p + 35I - 13S, where Q is quantity, P is price, I is income, and S is the price of a related good, what is the own price elasticity of demand when Q=20 and P=5? What is the cross price elasticity assuming S=15 and Q=20? Is the good a substitute or a complement?

4. Draw one graph showing a Demand curve, and the corresponding Marginal Revenue curve; also, show the price elasticity ranges along the Demand Curve.

5. Write a short essay explaining why a profit-maximizing manager should never set price in the Inelastic portion of the demand curve.

6. Assume the following equation where quantity is a function of price: Q = a + b P. Identify the Y-intercept and the slope that this equation would generate for a normal Demand Curve. (By normal I mean the way a Demand Curve is drawn in the undergraduate classes where Price is on the vertical axis and Quantity is on the horizontal axis, or where price is a function of quantity.)

7. Briefly identify four determinants of own-price elasticity.

8. Explain why a firm that uses all fixed cost and zero variable cost will always price in the unit elastic range of the demand curve.

1. Construct a Supply/Demand (S/D) graph, identify the initial equilibrium, then identify the new equilibrium when Supply decreases and Demand increases.

2. In the graph for question number 1, what would happen to the initial equilibrium when consumer incomes increase, assuming the good in question is an inferior good? Explain your answer using an S/D graph

3. Given the following equation: Q=20 - 2p + 35I - 13S, where Q is quantity, P is price, I is income, and S is the price of a related good, what is the own price elasticity of demand when Q=20 and P=5? Is it elastic or inelastic? What is the cross price elasticity assuming S=15 and Q=20? Is the good a substitute or a complement?

4. Draw one graph showing a Demand curve, and the corresponding Marginal Revenue curve; also, show the price elasticity ranges along the Demand Curve.

5. Write a short essay explaining why a profit-maximizing manager should never price in the Inelastic portion of the demand curve.

6. Assume the following equation where quantity is a function of price: Q = a + b P. Identify the Y-intercept and the slope that this equation would generate for a normal Demand Curve. (By normal I mean the way a Demand Curve is drawn in the undergraduate classes where Price is on the vertical axis and Quantity is on the horizontal axis, or where price is a function of quantity.)

7. Briefly identify four determinants of own-price elasticity.

8. Explain, using words and graphs, why a firm that uses all fixed cost and zero variable cost will always price in the unit elastic range of the demand curve. In your answer, identify the profit maximization rule.

Solution Summary

Managerial economics is examined.

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MANAGERIAL ECONOMICS

1. Construct a Supply/Demand (S/D) graph, identify the initial equilibrium, then identify the new equilibrium when Supply decreases and Demand increases.

A reduction in supply is shown as a left shift in the supply curve, and a demand increase is shown as a right shift in demand curve. The graph can be shown as follows:

2. In the graph for question number 1, what would happen to the initial equilibrium when consumer incomes increase, assuming the good in question is an inferior good? Explain your answer using an S/D graph

In case consumer income increases and the good in question is an inferior good then the demand for that good will fall and the price will fall. This is shown by the following graph:

3. Given the following equation: Q=20 - 2p + 35I - 13S, where Q is quantity, P is price, I is income, and S is the price of a related good, what is the own price elasticity of demand when Q=20 and P=5? What is the cross price elasticity assuming S=15 and Q=20? Is the good a substitute or a complement?

The demand equation is given as

Q = 20 - 2P + 35I - 13S

which can be rewritten as

P = 10 - (Q/2) + (35I/2) - ...

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