Kuliah 1 The Fundamentals of Managerial Economics

Chapter 1 Michael Baye 1. 2. 3. 4. What is the manager? What is economics? Define managerial economics Overview the basic principles that comprise effective management 5. What is the profit? 6. What is the eksplicit cost 7. What is the implicit cost 8. What is the opportunity cost 9. What is difference between economic profit and accounting profit 10. What is the goal of firms in global economy? 11. Recognize the time value of money 12. What is the present value 13. What is the meaning of profit maximization Problems: 1. The cost of attending a private college for one year is $ 6,000 for tuition, $ 2,000 for the room, $1,500 for meals and $500 for books and supplies. The student could also have earned $15,000 by getting a job instead of going to college and 10% interest on expenses he or she incurs at the beginning of the year. Calculate the explicit, implicit and the total economic costs of attending college. 2. A woman managing a duplicating (photocopy) establishment for $25,000 per year decides to open her own duplicating place. Her revenue during the first year of operation is $120,000 and her expenses are as follows: Salaries to hired help $45,000 Supplies 15,000
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Rent 10,000 Utilities 1,000 Interest on bank loan 10,000 Calculate (a) the explicit costs (b) implicit costs (c) the business/accounting profit (d) economic profit (e) the normal return on investment in this business 3. According to Milton Friedman, Business has only one social responsibility - to make profits ( as long as its stays within the FIGURE 1-1 The Nature of Managerial Economics legal and morals rules of the game established by society). Few trends could so thoroughly undermine the very foundations of Management Decision officials our society as the acceptance by corporate Problems of a social responsibility other than to make as much money for their stockholders as possible. Explain why you agree or disagree with such a statement Exercise from Baye page 28 # 8
Economic Theory : Microeconomics, macroeconomics

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Decision sciences : Mathematical economics, econometrics

MANAGERIAL ECONOMICS : Application of economic theory and decision science tools to solve managerial decision problems

OPTIMAL SOLUTION TO MANAGERIAL DECISION PROBLEMS

2 Managerial economics refers to the application of economic theory and decision science tools to find the optiomal solution to managerial decision problems.

Kuliah 2

Market Forces : Demand and Supply

Chapter 2, Michael Baye 1. Define demand. Define supply 2. List non price factors that influence demand and supply 3. In defining demand and supply, why do you think economists focus on price while holding constant other factors that might have an impact on the behavior of buyers and sellers? 4. The law of demand and the law of supply 5. Movement along the demand and the supply 6. Shift the demand curve and supply curve 7. What is the market equilibrium and restriction of market equilibrium? 8. Define consumer surplus 9. Define producer surplus 10. Government controlled prices What is the price ceilings? What is the price floors?

Kuliah 3

Quantitative Demand Analysis

Baye chp 3

1. Explain what an elasticity of demand represents and how it is measured 2. Identify what factors determine whether demand is elastic or inelastic 3. Factors affecting the own price elasticity of demand 4. Relation of elasticity and total revenue 5. Perfectly elastic demand 6. Perfectly inelastic of demand 7. Explain the meaning of cross price elasticity of demand 8. Explain the meaning of income elasticity of demand 9. Explain the meaning elasticity of supply 10. Understand the distinction between arc elasticity and point elasticity Short Problems for elasticity. 1. (a) Would you expect the price elasticity of demand to be higher for
Chevrolet automobiles or for automobiles in general ? Why ? (b) Would you expect the price elasticity of demand for electricity for resindential use to be higher or lower than for industrial use ? Why ? (c) Would you expect the price elasticity of demand for electricity to be higher or lower in the short run as compared with the long run ? Why ?

2. Agricultural commodities are known to have a price inelastic demand

and to be necessities. How can this information allow us to explain why the income of farmers falls (a) after a good harvest ? (b) In relation to the incomes in other sectors of the economy ?

3. . Suppose that the cross-price elasticity of demand between McIntosh and

Golden Delicious apples is 0,8, between apples and apple juice is 0,5, between apples and cheese is 0,4, and between apples and beer is 0,1. What can you say about the relationship between each set of commodities ?

4. .A researcher estimated that the price elasticity of demand for automobiles

in the United States is 1.2, while the income elasticity of demand is 3.0. Next year, U.S. automakers intend to increase the average price of automobiles by 5 percent, and they expect consumers; disposable 6

income to rise by 3 percent. (a) If sales domestically produced automobiles are 8 million this year, how many automobiles do you expect U.S. automakers to sell next year ? (b). By how much should domestic automakers increase the price of automobiles if they wish to increase sales by 5 percent next year ?

5. .The management of the Mini Mill Steel Company estimated the following
elasticities for a special type of steel : Ep = - 2, EI= 1, and Exy = 1,5, where X refers to steel and Y to aluminum. Next year, the firm would like to increase the price of the steel it sells by 6 percent. The management forecasted that income will rise by 4 percent next year and that the price of aluminum will fall by 2 percent. (a) If the sales this year are 1,200 tons of the steel, how many tons can the firm expect to sell next year ? (b) By what percentage must the firm change the price of steel to keep its sales at 1,200 tons next year ?

6. Suppose the own price elasticity of demand for good X is - 2, its income
elasticity is 3, its advertising elasticity is 4, and its cross price elasticity of demand between it and good Y is 6. Determine how much the consumption of this good will change if: a. The price of good X increases by 5% b. The price of good Y increases by 10% c. Advertising decreases by 2 % d. Income falls by 3% 7. The ACME Corporation determines that at current prices, the demand for its computer chips has a price elasticity of - 2 in the short run. The price elasticity of its disc drivers is 1. a). If ACME decides to raise the price of both products by 10%, what will happen to its sales? To its sales revenue? b) Can you tell from the above information which product will generate more revenue? If yes, which one? 8. Integrating Problem The research depertment of the Corn Flakes Corporation (CFC) estimated the following regression for the demand of the cornflakes it sells : Qx = 1.0 2.0 Px + 1.5I + 0.8Py 3.0 Pm + 1.0A Where Qx = sales of CFC cornflakes, in millions of 1- ounce boxes per year Px = the price of CFC cornflakes, in dollars per 10 ounce box I = personal disposable income, in trillions of dollars per year Py = price of competitive brand of cornflakes, in dollars per 10 ounce box Pm = price of milk, in dollars per quart

A = advertising expenditures of CFC cornflakes, in hundreds of thousands of dollars per year This year, Px = $2, I=$4, Py = $2,50, Pm= $1, and A =$2. (a) Calculate the sales of CFC cornflakes this year; (b) calculate the elasticity of sales with respect to each variable in the demand function; (c) estimate the level of sales next year if CFC reduces Px by 10 percent, increase advertising by 20 percent, I rises by 5 percent, Py is reduced by 10 percent, and Pm remains unchanged. (d) By how much should CFC change its advertising if it wants its sales to be 30 percent higher than this year ?

Kuliah 4

The Theory of Individual Behavior

Chp 4 M. Baye

Questions
1. What is the difference between ordinal utility and cardinal utility? 2. Explain four basic properties of consumers preference ordering for a consumers indifference curves 3. Suppose that a set of indifference curves was not negatively sloped. What could you say about the desirability of the two goods? 4. Explain why two indifference curves cannot intersect. 5. Explain why MRS between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction 6. Explain the derivation of a demand curve using indifference analysis(PCC) 7. Distinguish between the income and substitution effects when price change (increase and decrease) 8. Distinguish between the inferior and normal goods when income change(Engel curve) 9. Explain the difference between each of the following term:

a. Price consumption curve and demand curve b. An individual demand curve and a market demand curve c. An Engel curve and demand curve d. An income effect and substitution effect Kuliah 5

The Production Process and Costs

Chp 5 M. Baye 1. What is the production function 2. Distinguish between short run, long run and very long run production function 3. Explain 3 stages of production function 4. What is increasing, decreasing and negative marginal return 5. Define isoquant and isocost and compare with indifference curve and budget line 6. Explain cost minimizing rule 7. What is fixed cost and variable cost 8. Why is sunk cost irrelevance by decision maker? When is it economies of scale/diseconomies of scale and constant return to s

Chp 5 M. Baye 9. What is the production function 10. Distinguish between short run, long run and very long run production function 11. Explain 3 stages of production function 12. What is increasing, decreasing and negative marginal return 13. Define isoquant and isocost and compare with indifference curve and budget line 14. Explain cost minimizing rule 15. What is fixed cost and variable cost 16. Why is sunk cost irrelevance by decision maker? 17. When is it economies of scale/diseconomies of scale and constant return to scale exist? Chapter 6 M Baye 1. What is the transaction cost 2. Explain types of specialized investments 3. How is the firm optimal procurement of inputs 4. What is the vertical integration? 5. Describe the principle-agent problem. How is the solution? Kuliah 7 dan 8 Questions Chapter 1 3 Besanko 1. 2. 3. 4. Where do economies of scale come from? What is the definition of economies of scale? What is the definition of economies of scope? Mention three special sources of economies of scale and scope that have to do with area other than production? 5. What is the sources of dieseconomies of scale 6. What is the concept of the learning curve
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7. What is the product life cycle? 8. Question from chp 2, page 101 Besanko Question # 1, 2, 3 and 8 9. Explain vertical chain of production for furniture? 10. Explain benefit and cost using the market, make or buy decision? 11. Explain reason to buy? 12. Explain reason to make? 13. Why does asymmetric information lead to inefficient action?

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Kuliah 9 dan 10 Questions Chapter 8 and 9 1. What is the principal agent problem, and how is solution for that problem? 2. What is the key conditions for perfect competition market?

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3. Why does asymmetric information lead to inefficient action

4. Explain how a firm determines profit maximizing output under perfect competition (graph) 5. Explain how the short run industry supply curve can be derived under perfect competition (graph) 6. Describe the role of entry and exit of firms in achieving long run market equilibrium 7. Under what condition should a firm continue to produce in the short run if it incurs losses at the best level of output? What is shut down point? 8. Define sources of monopoly power 9. Explain how a firm determines profit maximizing output under monopoly (graph) 10. Compare supply curve under monopoly and perfect competition 11. Define deadweight loss 12. Define consumer surplus 13. Define producer surplus 14. Regardless of the economic environment, every firm will maximize profits by operating at the minimum point of its average total cost curve. Is this statement true or false? Explain.

15. Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q. Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q2. At the profit-maximizing combination of output and price, deadweight loss is 16. Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q. Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q2. At the profit-maximizing combination of output and price, consumer surplus is ..

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17. Beta Industries manufactures floppy disks that consumers perceive as identical to those produced by numerous other manufacturers. Recently, Beta hired an econometrician to estimate its cost function for producing boxes of one dozen floppy disks. The estimated cost function is . a. What are the firm's fixed costs? b. What is the firm's marginal cost? Now suppose other firms in the market sell the product at a price of $10 c. How much should this firm charge for the product? d. What is the optimal level of output to maximize profits? e. How much profit will be earned? f. In the long run, should this firm continue to operate or shut down? Why? 18. You are the manager of a firm that has an exclusive license to produce your product. The inverse market demand curve is cost function is . Determine the output you should produce, the price you should charge, and your profits. . Your

19. . You are a monopolist with the following cost and demand conditions: and . a. Determine the profit-maximizing output and price b. Graph this solution c. Show your profits and the deadweight loss to society in your graph d. Determine the actual amount of deadweight loss

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