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Managerial Economics Problem Set

1. Suppose you are the general manager of a concrete mixing and delivery facility located in Texas. Your firm buys the raw materials for concrete (i.e., sand, gravel, and cement), mixes the concrete according to customer specifications, and delivers the concrete to the job sites. In the early years, your firm only sold concrete for residential home construction and this part of the business has grown over time, but the company has expanded to provide concrete for industrial and road construction projects in the past few years. Your cost accountant has observed that the real (inflation adjusted) average cost of production has declined as your business has grown. What are the possible reasons for this decline in average cost? What implications does this feature of your cost structure have for the way you manage the business?

2. Today, most of the national news outlets reported a study published by Consumer Reports magazine, which warned consumers about potentially high arsenic levels in bagged rice sold at grocery stores. Arsenic is a poison if consumed in concentrated levels, and arsenic may be deposited in rice grains as the rice plants grow because arsenic is naturally present in most soils. The reports indicated that brown rice products tend to have much higher arsenic content than white rice products due to differences in the ways the brown and white rice products are processed for consumption. Please analyze the potential impact of this proposed change on the US market for white and brown rice. In particular, please discuss the likely shifts in the supply and demand curves for these two products as well as the potential impact on equilibrium quantities and prices.

3. One of the many legislative proposals that resulted from the recession was a call to place upper limits on the fees and interest rates that credit card companies can impose on their customers. What impact would a new law that sets a regulated maximum on credit card interest rates have on the market for consumer credit in the US?

4. Some products are subject to network effects - the product becomes more valuable for its users as the number of other users increases. For example, the social media sites are subject to network effects - the Facebook experience is more valuable for each user if there are millions of other users rather than just a few people. In the presence of network effects, buyers are generally willing to pay more for the product as the number of other users increases. In contrast, RIM's Blackberry phones used to dominate the cell phone market in the US, but their customer base and market share have fallen in the past few years as buyers shift to iPhones and other products. Do you think smartphones are subject to network effects? Why? If so, what happens to an individual person's demand curve for BlackBerry phones as the number of other Blackberry users declines?

Solution Preview

>What are the possible reasons for this decline in average cost?

Increasing returns to scale and learning curve effects.

>What implications does this feature of your cost structure have for the way you manage the business?

We should continue to expand as long as average cost continues to decrease.

2. Consumers' tastes will shift away from brown rice. The demand curve ...

Solution Summary

This solution gives concise answers to 4 common managerial economics questions. The topics covered are:
1. Average cost
2. Supply and demand
3. Interest rates
4. Network effects