Managerial Economics

Managerial Economics
1. Matching Definitions
Please match each terms with the definition given below:

accounting profit microeconomics
business practices and tactics moral hazard
economic profit opportunity cost
equity capital owner-supplied resources
explicit costs price-setting firm
globalization of markets price-taking firm
implicit costs principal-agent problem
industrial organization risk premium
marginal analysis strategic decisions
market total economic cost
market power transaction costs
market structure value of a firm
market-supplied resources

1. ___________________ Source of most of the advances over the past 30 years in
strategic decision making.
2. ___________________ Resources owned by others and hired, rented, or leased
in resource markets.
3. ___________________ Resources owned and used by a firm.
4. ___________________ Sum of opportunity costs of market-supplied resources
plus opportunity costs of owner-supplied resources.
5. ___________________ Monetary opportunity costs of using market-supplied
resources.
6. ___________________ Nonmonetary opportunity costs of using owner-supplied
resources.
7. ___________________ Money provided to businesses by the owners.
8. ___________________ Amount that total revenue exceeds total economic cost.
9. ___________________ Decisions that attempt to alter the conditions of
competition in order to increase long-run profits.
10. ___________________ Price for which a firm can be sold, or equivalently, the
present value of the expected future profits of the firm.
11. ___________________ Amount added to the riskless discount rate to account for
uncertainty associated with the expected future profits.
12. ___________________ Conflict arising when the objectives of the agent differ
from those of the principal, and the principal has
difficulty enforcing and monitoring the agent.
13. ___________________ Exists when either party to an agreement has an
incentive not to abide to the agreement and one party
cannot cost-effectively monitor the agreement or cannot
effectively enforce the agreement.
14. ___________________ A firm that cannot set the price of the product it sells,
since market forces determine the price.
15. ___________________ A firm that has the ability to raise the price of its product
without losing all of its sales.
16. ___________________ Routine business decisions based on marginal analysis.
17. ___________________ Any arrangement through which buyers and sellers
interact to exchange products, services, resources for
production, or in general, anything of value.
18. ___________________ Additional costs over and above the price paid that arise
in the process of making transactions.
19. ___________________ Swiss army knife for explaining most business practices
and tactics.
20. ___________________ Economic integration of markets located in nations
around the world.
21. ___________________ What a firm’s owners give up to use resources to
produce goods or services.
22. ___________________ Difference between total revenue and explicit costs.
23. ___________________ Set of characteristics that determines the economic
environment in which a firm does business.
24. ___________________ Key to the kingdom of microeconomics.
25. ___________________ Ability to raise price without losing all sales.

2. For each of the following managers, decide whether the manager is likely to be a
price-setter (possesses market power) or a price-taker (does not possess market
power).

a. The loan officer at a bank decides what interest rate to charge on car loans
made to Chicago-area buyers of new cars.
b. The manager of FastCo Inc., a manufacturer of standardized fasteners, such
as screws and machine bolts.
c. The CEO of Bombardier, a manufacturer of a popular brand of jet skis.
d. The owner-manager of a McDonald’s hamburger restaurant, which is the first
hamburger restaurant to open in a new suburban neighborhood.

3. For each of the firms below, identify the market structure that best matches the
competitive characteristics found in that firm’s market.

a. Microsoft Corporation, in the market for business-application software, such
as word processing, spreadsheet, and database.
b. Becker Brothers Farms, a 1,000-acre wheat farm near Beaver City, Nebraska.
c. Robo Wash, the only coin-operated car wash in Monroe, Louisiana.
d. The Jumping Bean, a family-owned Mexican food restaurant in San Antonio,
Texas.
e. Après Ski, one of only two restaurants licensed to operate at the base of the
main ski lift in Park City, Utah.
4. Suppose the quantity demanded of good (Qd) depends only on the price of the good
(P), monthly income (M), and the price of a related good R (PR):
Qd ?180 -10P -?0.2M ?10PR

a. On the axes below, construct the (direct) demand curve for the good when M = $1,000 and PR = $5. The equation for demand is Qd = ________________________.

b. Interpret the intercept and slope parameters for the demand equation in part a.

c. Let income decrease to $950. Construct the new demand curve. This good is _________________ (normal, inferior). Explain using your graph.

d. For the demand curve in part c, find the inverse demand function:
P = _____________________.

e. Let the price of good R increase to $6 (income remaining at $950). Construct the new demand curve. Good R is a _______________________ (substitute, complement) good. Explain using your graph.

f. For the demand curve in part e, the demand price for 20 units is $________. At a price of $4, the maximum amount consumers are willing and able to purchase is __________ units.

g. For the demand curve in part e, find the equilibrium price and quantity when
supply is 10 10 . s Q ??-???P
PE = ____________ and QE = ____________
Construct the supply curve and verify your answer.

h. For the equilibrium in part g, the consumer surplus is $____________. Producer
surplus is $____________. Social surplus is $____________. The net
gain to society created by the market for this good is $____________.

 

7. “An increase in the demand for electricity will cause a shortage of electricity.”
Evaluate this statement with a concise narrative and graphical analysis.

8. Determine the effect on equilibrium price and quantity if the following changes occur
in a particular market:

Equilibrium Price Equilibrium quantity
a. _________ _________ Consumers’ income decreases and the good is inferior.
b. _________ _________ The price of a substitute good (in consumption) decreases.
c. _________ _________ The price of a substitute good in production decreases.
d. _________ _________ The price of a complement good (in consumption) decreases.
e. _________ _________ The price of inputs used to produce the good decrease.

 

 

 
Chapter 3:

1. a. Fill in the missing numbers below.

b. Define “optimal level of activity.” In part a, what is the optimal level of activity? Why?
c. In part a, marginal benefit does not equal marginal cost for any quantity. Does this mean there is no optimal level of activity? Why or why not?
d. At the optimal level of activity, could you increase the level of activity and get an increase in total benefit? If so, why should the manager not increase the activity further?

Chapter 4:

5. A manager wishes to determine the relation between a firm’s sales and its level of advertising in the newspaper. The manager believes sales (S) and advertising expenditures (A) are related in a nonlinear way:

S ??a ??bA ??cA2 ??dA3

Explain how to transform this nonlinear model into a linear regression model.
Chapter 5:
Matching Definitions

budget line marginal utility
complete property of preferences market demand
consumption bundle substitution effect
Giffen good total effect
income effect transitive property of preferences
indifference curves utility
marginal rate of substitution utility function

1. ___________________ The satisfaction or benefit that consumers receive from consuming goods or services.

2. ___________________ A particular combination of specific quantities of goods or services.

3. ___________________ Consumers can rank all conceivable bundles of goods or services.

4. ___________________ If A is preferred to B, and B is preferred to C, then A is always preferred to C.

5. ___________________ Equation showing a consumer’s perception of the total utility forthcoming from consuming each bundle of goods and services.

6. ___________________ A set of consumption bundles each and every one of which provides a consumer with exactly the same level of total utility.

7. ___________________ The number of units of Y that must be given up for total utility to remain the same when one more unit of X is consumed.

8. ___________________ The addition to total utility attributable to consuming one more unit of a good, holding the consumption of all other goods constant.

9. ___________________ Line showing all bundles of goods that can be purchased at given prices if the entire income is spent.

10. ___________________ The change in the consumption of a good that would result if the consumer remained on the original indifference curve after the price of the good changes.

11. ___________________ The change in consumption of a good resulting strictly from the change in purchasing power after the price of a good changes.

12. ___________________ The sum of the substitution and income effects.

13. ___________________ A good for which quantity demanded varies directly with price, causing an upward sloping demand curve.

14. ___________________ A list of prices and the corresponding quantity consumers are willing and able to purchase at each price.

 
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