MANAGERIAL ECONOMICS: 8103

MBA-EXE Ist year, Semester I, 2019-2020

ASSIGNMENT 1: Deadline for Submission 31 August 2019
Topics covered: Demand Theory, Production Theory, and Costs
(I): Demand
Q. 1. (a) Suppose that the total market demand for Coca-cola comprises the demand of three
individuals with identical demand equations.
Q1 = Q2 = Q3 = 50 – 25P
What is the market demand equation for this product? Illustrate the market demand curve for
Coca-cola graphically.
(b) The market demand and supply equations for Coca-cola are given as:
QD = 25 – 3P and QS = –10 + 2P
What are the equilibrium price and quantity for this product?
Q. 2. An economist of ABC Corporation provided the firm’s marketing manager with this
estimate of the demand function for the firm’s product:
Qx =12,000 – 3Px + 4Py – 1M + 2Ax
where Qx represents the amount consumed of good X, Px is the price of good X, is the price of
good Y, M is income, and Ax represents the amount of advertising spent on good X. Suppose
good X sells for $200 per unit, good Y sells for $15 per unit, the company utilizes 2,000 units of
advertising, and consumer income is $10,000.
How much of good X do consumers purchase? Are goods X and Y substitutes or complements?
Is good X a normal or an inferior good?
Q. 3. (a) What is price elasticity of demand? How is point-elasticity of demand different from the
arc-elasticity of demand? Illustrate your answer using hypothetical price and quantity demanded
data of good X along a demand curve.
(b) Define income elasticity and cross-elasticity of demand using examples.
(c) The daily demand for Bata shoes is estimated to be:
Qb = 100 – 3Pb + 4Pc – .01M + 2Ab
Where Pb is the price of Bata shoes, Pc is the price of Cooper shoes (C), M is average income, Ab
represents the amount of advertising spent on Bata shoes. Suppose Bata shoes sells at $25 a pair,
good C sells at $35, the company utilizes 50 units of advertising, and average consumer income
is $20,000.
Calculate and interpret the own-price, cross-price, and income elasticity of demand.

Q. 4. Consider the demand equation Q = 25 – 3P, where Q represents quantity demanded and P
the selling price.
(a) Calculate the arc-price elasticity of demand when P1 = $4 and P2 = $3.
(b) Calculate the point-price elasticity of demand at these prices. Is the demand for this good
elastic or inelastic at these prices?

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(c) What, if anything, can you say about the relationship between the price elasticity of demand
and total revenue at these prices?
(d) What is the price elasticity of demand at the price that maximizes total revenue?
(e) Determine the price elasticity of demand for each of the following demand equations when P
= 4:
(i) QD = 98 – P2/2
(ii) QD = 14P-5

(II): Production

Q. 5. (a) Using graphical and numerical illustration, show the relationship between TP L, APL
and MPL. Also, state the law of diminishing returns and show that the rational producer will
produce in the relevant stage of the TPL curve and why?
(b) Given the production function Q = 100K0.6 L0.4, determine the marginal product of capital
and the marginal product of labor when K = 25 and L = 100.
(c) A&A firm produces output that can be sold at a price of $10. The firm’s production function
is given by the equation: Q = F(K, L) = K1/2 L1/2. If capital is fixed at 1 unit in the short-run, how
much labor should the firm employ to maximize profits if the wage rate is $2?

Q. 6. (a) What is output elasticity of labour and capital? Calculate output elasticity of capital
when output increases from 0 to 5 units and total product rises from 0 to 8 units.
(b) Describe the conditions for the optimal use of the two factor inputs in production - labour and
capital.

Q. 7. (a) What do you mean by returns to scale? Describe the various returns to scale graphically.
(b) Using the following production functions determine the various returns to scale of
production, when both labour and capital increases from 1 to 2 units.
(i) Q = 25K0.5 L0.5
(ii) Q = 100 + 3K + 2L
(iii) Q = 0.5Kα Lβ

(III): Costs

Q. 8. (a) A book publishing house’s total cost function is determined of the form:
TC = 12 + 60Q – 15Q2 + Q3
This firm produces Q = 10. Calculate TFC, TVC, AFC, AVC, AC, and MC.
(b) Now suppose, the total cost changed to TC = 1,000 + 10Q2.
(i) Determine the output level that minimizes average total cost (ATC). At this output level,
what is TC, ATC, and MC? Verify that at this output level MC = ATC and that ATC intersects
MC from below.
(ii) Determine the output level that minimizes average variable cost (AVC). At this output level,
what is TC, AVC, and MC?
(iii) Also graphically illustrate your answers to parts (i) and (ii).
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