Managerial Economics: Trail Midterm Exam

Managerial economics: trail Midterm Exam

Chapter 3 questions

12. Briefly list and elaborate on the factors that will be affecting the demand for the following

Products in the next several years. Do you think these factors will cause the demand to

Increase or decrease?

1. convenience foods (sold in food shops and supermarkets)
2. products purchased on the Internet
3. fax machines
4. film and cameras
5. videos rented from retail outlets
6. Pay-per-view television programming
7. airline travel within the United States; airline travel within Europe
8. gasoline

Solution

a. Busier life styles, two-income families, single-parent households will continue to cause demand For convenience foods to increase.

b. Demand is already increasing drastically for goods purchased on the Internet and is posed to

Explode in the next five years.

c. Will decline as usage of internal fax modems and e-mail attachments continue to rise.

d. May decrease as digital cameras become less expensive and in greater demand.

e. Pay-per-view and satellite TV programs will continue to erode video rental demand.

f. Pay-per-view should increase as broader band connections to the home make this form of Entertainment cheaper and easier to use.

g. Longer term trends point in an upward direction.

h. It is difficult to tell, but if demand for SUV’s and trucks continues to rise, there will also be a

Steady increase in demand (particularly in the U.S. and Western Europe). Also, if emerging

Another soln

Analyzing from all know factor view

In case increasing all factors

Factors effecting / Px / Py / Expected price / Income / population / Taste& preference
Convenience food / Decrease
demand / Subst.
increase / No effect / Normal goods increase demand / Increase demand / May be increase
Complementary decrease
Product purchased on the internet / Decrease demand / Subst.
increase / Increase demand / Increase demand / No effect or increase / increase
Complementary decrease
Fax machine
Needed for companies / Decrease
demand / Subst.
increase / No effect or increase / No effect / increase / increase
Complementary decrease
Film & camera / Decrease demand / Subst.
increase / decrease / decrease / No effect / increase
Complementary decrease
Video rented from retail / Decrease demand / Subst.
increase / decrease / decrease / No effect / increase
Complementary decrease
Pay per view TV programs / Decrease
demand / Subst.
increase / No effect or
increase / Increase demand / Increase / Increase demand
Complementary decrease
Air line travel / Decrease
demand / Subst.
increase / No effect / increase / increase / No effect
Complementary decrease
gasoline / No effect / Subst.
increase / No effect / Increase / increase / No effect
Complementary decrease

13) Briefly list and elaborate on the factors that will be affecting the supply of the following products in the next several years. Do you think these factors will cause the supply to increase or decrease?

a. crude oil

b. beef

C. computer memory chips

a fast food outlets in emerging markets

f. credit cards issued by financial institutions

g. laptop computers

h. PC servers

Solution

a.(1) Discovery of new sources of oil: supply increases. (2) Invention of new long-lasting battery

for electric car: supply decreases—particularly in the long run as companies shift their

resources from oil production to battery production. (3) Mergers or acquisitions (as have been

going on in the late 90s with BP and Amoco as well as Exxon and Mobil):—these mergers may

cause supply to increase or decrease depending on the intentions of the larger companies that

have even more power over supply.

b. (1) Cattle ranching declines as it becomes harder to earn a good return in the market for beef (in this case it is actually supply decreasing in response to demand falling in the long run).

(2) Increase in beef imports from countries such as Argentina (recently the U.S. government allowed the importation of Argentine beef into the country) —supply increases.

c. Increase in the building of new manufacturing facilities in Asian countries such as Taiwan—supply increases.

d. Mergers and acquisitions in the hotel industry (could increase or decrease number of rooms— would probably increase number of rooms as the larger companies try to expand their market share by building new hotels).

e. U.S. or European based multinationals such as McDonald’s and Burger King build new restaurants in an attempt to expand their global businesses—supply increases.

f. New co-branded cards are offered by financial institutions—supply increases.

g. More manufacturing, assembly and distribution capacity by key companies such as Dell, Compaq, IBM and Gateway 2000—supply increases.

h. More PC companies such as Dell and Compaq 2000 enter the server market or increase their resources in this product segment in an attempt to offset the shrinking profit margins in the PC business --supply increases.

Chapter 4 Questions

5- What would you expect to happen to spending on food at home and spending on food in restaurants during a decline in economic activity? How’ would income elasticity of demand help explain these changes?

The income elasticity for restaurant food is probably quite high. Thus, during declines in economic activity (and thus, possibly declines in incomes), spending on restaurant food would most likely decline more than spending at home. Actually, since the two are substitutes, spending on food at home may actually go up during economic declines.

11- Why do you think that whenever governments (federal and state) want to increase revenues, they usually proposed an increase in taxes on cigarettes and alcohol?

Since the demand curve for cigarettes and alcohol is generally thought to be rather inelastic, imposing a tax on these products would not be expected to decrease consumption a great deal. The tax revenue from such products would be considerably larger than from products whose demand curve was rather elastic and whose consumption would decrease greatly upon the imposition of an additional tax

. 13 -if a demand curve facing a firm is horizontal or nearly so. What does it say about this firm’s competition?

That the firm's actions have no affect on the market price of the good. That is the definition of a perfectly competitive market, that an individual firm does not have any effect on the market price of a good.

This firm is faced by considerable competition. Theoretically, if it raises its price by any small Amount, it would lose all of its business, because there are many other firms in the industry that are Offering this same product at the lower price.

Question chapter 5 Demand Estimation questions

3-Briefly explain the meaning of R2. A time series aria1ysis of demand tends to result in a higher R2 than one using cross-sectional data.

Why do you think this is the case?

R2 is a measure of the explanatory power of the regression model. It is also referred to as a measure of “the goodness of fit” (of the regression line through the scatter of data points). Specifically, it indicates the percentage of the variation in the dependent variable Y explained or accounted for by The variations in the independent variable(s) X.

Other factors held constant, time series data generally produce a higher R2 than cross-sectional data because both dependent and independent variables often move together over time simply because of some upward trend. A good example of this is a time-series analysis of aggregate consumption Regressed on aggregate disposable income. Regression analysis of this consumption function commonly produces R2 of .95 and above.

The identification problem refers to the difficulty of clearly identifying the demand equation because of the effects of both supply and demand that are often reflected in data used in the analysis. As explained in the chapter, if this problem exists, it could lead to a bias in the sensitivity of quantity demanded relative to price. Two-stage least squares or indirect least squares regression techniques can be employed to get around this problem (simultaneous analyses of the demand and supply equations in a sequential iteration).

Question chapter 4 Forecasting

a. Jury of executive opinion.

Opinions come from experts in the forecast area, but in a panel discussion the most persuasive person may not be the most knowledgeable one. This method is often used to forecast sales, costs, production, profits, etc.

1. Delphi method.

Forecasts are made by experts. The experts’ opinions are usually obtained over the telephone or by writing, and are carried out by a sequential series of questions and answers.

Since the experts generally do not meet, there will not be any undue influence exercised by the more articulate members of the panel. However, since this method is frequently used in far-out technological forecasting, it may actually not be possible to forecast events not yet conceived. Further, because of the nature of the forecasts, they are often rather unreliable and can suffer from ambiguity in the questions. This forecasting method is usually employed for predicting technological changes, shifts in consumer preferences, demographic changes and other alterations in market conditions far into the future.

1. Opinion polls.

These are surveys conducted with population samples that are not experts but whose activities may determine future events. Since only samples are surveyed, it is essential that the sample be representative and the questions are carefully stated. Opinion polls are usually expensive. Another problem is that respondents' answers may reflect what they think their opinions should be rather than what they are.

The data appear to show that a recovery got under way in the last months of 2001 and into 2002. Actually, the recovery started some time in 2001.

Chapter 3 problems

Following relations describe the supply and demand for posters.

QD= 65,000- 10,000 P Qs=-35,000 + 15,000 P

Where Q is the quantity, P is the price of a poster, in dollars.

a. Complete the following table.

PRICE / QS / QD / Surplus or shortage
$6.00 / 55000 / 5000 / 50000
5.00 / 40000 / 15000 / 25000
4.00 / 25000 / 25000 / 0000
3.00 / 10000 / 35000 / -25000
2.00 / 0000 / 45000 / - 45000
1.00 / 0000 / 55000 / -55000

b- What is the equilibrium price?

Equilibrium price accure when

Qs=Qd => 65,000- 10,000 P=-35,000+ 15,000 P

100,000=25000p => p=4 $

5) The ABC marketing consulting firm found that a particular brand of portable stereo has the following demand curve for a certain region:

Q=10,000-200P+ 0.03 Pop + 0.6 i+ 0.2A

Where Q is the quantity per month, P is price ($), Pop is population, I is disposable income per household (S), and A is advertising expenditure ($).

1. Determine the demand curve for the company in a market in which P 300, Pop 1,000,000, 1 = 30,000, and A = 15,000.

Q=10000- 200 *(300) + 0.03 (1000000) +0.6(30000) + 0.2(15000) = 1000

If p=zero then q=10000+30000+18000+3000= 61000

If q=0 then 200p=1000+30000+18000+3000 =>p=305

1. Calculate the quantity demanded at prices of $200, $175, $150, and $125.

price / Q=10000- 200 *(p) + 0.03 (1000000) +0.6(30000) + 0.2(15000)
125 / 36000
150 / 31000
175 / 26000
200 / 21000

c. Calculate the price necessary to sell 45,000 units.

10000- 200 *(p) + 0.03 (1000000) +0.6(30000) + 0.2(15000) =45000

61000-200p=45000 => p=80

9)Suppose a firm has the following demand equation

Q= 1,000 — 3,000 P + 10 A

Where Q quantity demanded,P= product price (in dollars), A= advertising expenditure (in dollars)

Assume for the following questions that P = $3 and A $2,000.

A.Suppose the firm dropped the price to $2.50. Would this be beneficial? Explain. Illustrate your answer with the use of a demand schedule and demand curve.

At p=3 Qx =1000-3000 x 3+10 (2000) = 1000-9000+20000=12000

At p=2.5 Qy =1000-3000 x 2.5+10 (2000) = 1000-7500+20000=13500

This appear to be not beneficial as total revenue will decrease by unit when we reduce price by 0.5

B.Suppose the firm raised the price to $4.00 while increasing its advertising expenditure by $100. Would this he beneficial? Explain. Illustrate your answer with the use of a demand schedule and a demand curve. (Hint: First construct the schedule and the curve assuming A = $2,000. Then construct the new schedule and curve assuming A = $2,100.)

Q at price 4 and A=2000

Q=1,000 — 3,000 (4) + 10 (2000)

Q=1000-(3000 x 4) +10 (2000) =1000-12000+20000=9000

Q at price 4 and A=2100

Q=1,000 — 3,000 (4) + 10 (2100)

Q=1000-(3000 x 4) +10 (2000) =1000-12000+21000=10000

Q at price zero & a=2000 =>q=1000+20000=21000

Q at piece zero &A=2100 =>Q=21000

P at Q=0 &A=2000  Q=1000-3000p+20000 3000P=21000 p=7

P at Q=0 &A=2100  p=7.3

increasing the advertising is beneficial which cause the curve to shift to the right but increasing the price decrease the demand quantity which reduce the average demand quantity to be increase only by 1000which is not the same benefit if we reduce the price

11- Following are three sample equations. Plot them on a graph in which Q is on the vertical axis and P is on the horizontal axis Then transform these equations so P is expressed in terms of Q and plot these transformed equations on a graph in which P is on the vertical axis and Q is on the horizontal axis.

A). Q=250— l0P

b. Q = 1,300 -140 P

c. Q = 45 - 0.5 p

Solution:

A)Q=250— l0P - 10p=250-Q - p= (250-Q)/10  p= 25-0.1Q  At Q=0 then p=25 At p=0 Q=250.

B)Q = 1,300 -140 P  P= (1300-Q)/140  P= 9.29-0.0071Q at Q=0 then p=9.29

at p=0 then q=1308

c) Q = 45 - 0.5 pP=2x(45-Q)=90-2QAt Q=0 then p=90At p=0 Q=45

Problems chapter 4

10. Would you expect cross-elasticity between the following pairs of products to be positive? Negative, or zero?

1. Television sets and VCRs  Negative ( because they are complementary goods )
2. Rye bread and whole wheat bread  positive( because they are substitute )
3. Construction of residential housing and furniture Negative ( because they are complimentary goods )
4. Breakfast cereal and men’sshirt  zero (because they are not related )

Explain the relationship between each pair of products.

13 A local supermarket lower the price of its Vanilla ice cream from $3.50 per half gallon to $3, Vanilla ice cream (unit) sales increase by 20 %. The store manager notice's that the (unit) sales of chocolate syrup increase by 10 percent.

1. What is the price elasticity coefficient of vanilla ice cream?

=20%

= (p2-p1)/p1  (3-3.5)/3.5= - 0.142 =0.142

PRICE ELSTICITY OF DEMAND (PED)=0.2/0.142=1.4 which is PED >1 so it’s elastic

b. Why have the sales of chocolate syrup increased, and how would you measure the effect

Because chocolate is complementary to the ice cream sodecrease price of one increase demand of the other.

CROSS PRICE ELASTICITY OF DEMAND (CPED):

CPED=/ 10%/-14% -0.7 (-ve because ) GOOD x COMPLEMENT GOOD y

c. Overall, do you think that the new price policy was beneficial for the supermarket?

The new pricing policy is beneficial for the supermarket because 14% change in price increase demand by 20% so the commodity is elastic

15. The demand curve of product X is given as Q= 2000- 20P

a. How many units will be sold at $10?

Q= 2000- 20P  q=2000-200=1800 unit will be sold at price 10$

1. At what price would 2,000 units be sold, 0 units, 15oo units?

Px= (2000-Q)/20  Px= 100-0.05Q

At q=2000  Px= 0

At q=0 Px= 100

At q=1500 Px=25

1. Write equations for total revenue and marginal revenue (in terms of Q)

.  Px= 100-0.05Q so TR= (100-0.05Q) × Q  TR=100Q-0.05Q2

Marginal revenue is the slope of total revenue so by differentiating the TR equation

MR=100-0.1Q

D. What will be the total revenue at a price of $70? What will be the marginal revenue?

Q= 2000- 20P =2000-1400=600

TR=100Q-0.05Q2 =100(600)-0.05(600)2=60000-18000=42000

Or you can use

TR=P x Q =70 *600=42000

MR=100-0.1Q=100-60=40

E. What is the point elasticity at price 70?

PED = ( dQ / dP) x P/ Q = ?

If we differentiate the equation of Q in the term of P we get Q= 2000- 20P dQ\dP= -20

PED= -20 x (70/600) =2.333

F. If the price were to decrease to 60 what would total revenue, marginal revenue, and point elasticity is now?

Q= 2000- 20P 2000-20(60) =800

PED=20 x (60/800) =1.5

TR=P x Q=60 x 800=48000

MR=100-0.1 (800)=20

G. At what price would elasticity be unitary?

Marginal revenue = zero if the elasticity is unitary

MR=100-0.1 (Q) =0 0.1Q=-100  Q=1000 and from equation

Px= 100-0.05Q  p=100-0.05 (1000) =100-50=50

At PED=1