MANAGERIAL ECONOMICS

(MGCR 293)
Assignment 1 Solutions
Chapter 1- Problem - 5, 7, 8
Chapter Appendix A- Problem 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12.
Chapter 2- Problem 1, 2, 3, 4, 5
Chapter 3- Problem 5, 6, 8, 11.
Chapter 4- Problem 1, 6
Lecturer: Tariq Nizami

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 Chapter 1

#5
a)
20,000$ (80 days that 50 umbrellas are demanded at 5$ each)
-3,000$ (Umbrellas leasing costs)
-9,000$ (3 months rent for the store rental expense)
8,000$ (Accounting profit)

b)
20,000$ (80 days that 50 umbrellas are demanded at 5$ each)
-3,000$ (Umbrellas leasing costs)
-9,000$ (3 months rent for the store rental expense )
-4,000$ (personal labour- Implicit cost)
4,000$ (Economic profit)

#7
3.1-P/4 = 1.3+P/2 or 12.4-4Q=-2.6+2Q
P=$2.4 or Q=2.5

2.4$ per bushels is the equilibrium price.

2.5 billions of bushels is the equilibrium quantity of wheat sold.
Our Supply & Demand analysis identifies which prices and quantities might prevail if information
were costless. The actual price must equal the equilibrium price. If it is not the case it will be
temporary. For example if the price is too high the quantity supplied will exceed the quantity
demanded.

#8
a) Both. Supply shifted to the left at the same time demand shifted to the right.

Chapter Appendix A

#2
a) Trumbull’s chairman is wrong. Introducing the product will increase the firm’s profits. The decision
whether to introduce the product should only depend on the consequences of that decision. If the
revenues are going to increase by $5 million and costs are going to increase by $4 million, the project
should proceed. The overhead costs that will be incurred regardless of the decision on this particular
project should not be included in the decision calculus.

b) As in part a, the only costs and benefits that belong in the decision calculus are those which will
occur as a result of the decision. In this case, the past research and development expenditures are
immaterial; they are sunk costs and should be ignored.

#3
a)

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Between 5 and 6: $5,000/day
Between 9 and 10: -$3,000/day

b) At 7 units per day, average profit is $3000

c) Although average profit is maximized at an output of 7 units, the total profit is only $21,000 when
$23,000 per day can be earned if 9 units are produced instead. The profit is higher at 9 units per day
than 7 units per day.
#4
a) dY/dX = 10 + 10x
b) dY/dX = 8 + 8x3
c) dY/dX = (4+ x3)(3dX/dX)-3X*d(4+ x3)/dX
----------------------------------------
(4 + x3) 2
dY/dX=12 – 6x3 / (4 + x3) 2

d) dY/dX = (x-3)(4dx/dx)-4x*d(x-3)/ (x – 3) 2
=-12 / (x – 3) 2

#5
dTC/dQ = 4 + 16Q
a) 4 + 16(10) = $164 = MC
b) 4 + 16(12) = $196 = MC
c) 4 + 16(20) = $324 = MC

#6
a) dπ / dQ = 20 – 6Q => 20 – 6(8) = -$28
b) dπ / dQ = 20 – 6Q
c) 20 – 6Q = 0 => Q = 10 / 3 or 3.333…

#7
a) dY/dx = 9 + 6x => d2Y/2dx = 6
b) dY/dx = 12 + 12x2 => d2Y/2dx = 24x
c) dY/dx = 8 + 16x3 => d2Y/2dx = 48x2
d) dY/dx = -4 / x2 => d2Y/2dx = 8x / x4 or = 8/ x3
#8
a)dπ / dQ = -6 + 11Q – 6Q2 + Q3 => d2π / d2Q = 11 – 12Q + 3Q2
dπ / dQ = 0 when Q = 1 but d2π / d2Q is positive when Q = 1 so the π is not maximized when Q = 1 but
minimized.

b)dπ / dQ = 0 when Q = 2 and dπ / dQ is negative when Q = 2 so the π function is maximized when

Q = 2. At Q=2 the first derivative is again zero but the second derivative is negative.

c)At Q = 2, profits equal -12, but at Q = 10, profits equal 980. The maximum and minimum suggested
above were only local, not global, extreme points. Profits rise without bound with output, and so I
would doubt the consultant’s profit/output relationship.

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#9
a) dY/dx = 2
b) dY/dx = 12x3
c) dY/dx = 0.8z0.2 x-0.2 = 0.8(z/x) 0.2
d) dY/dx = -3z / (4 + x) 2

#10
a)
dπ/dQ1 = 40 -10Q1 - 3Q2 = 0(Multiply by 3) 120 -30Q1 - 9Q2 = 0
dπ/dQ2 = 30 -3Q1 - 8Q2 = 0 (Multiply by -10) -300 +30Q1+ 80Q2 = 0
-180 + 0Q1 + 71 Q2 = 0
Q2 = 180 / 71 =2.54
Substituting the value of Q2 we get
40 – 10 Q1 – 3(180/71) = 0
Q1 = 230/71=3.24

b) The tax is a lump sum and therefore a fixed cost. In determining what level of output to produce,
this tax will only matter if it is so ;large as to make it unprofitable to continue producing. Profits before
tax are about $50,000, and so the $5,000 tax does not affect Q1 and Q2. $5,000 is a constant added to
the function it will not change the result of the first derivative.

#11
a)
dC/dx1 = 4X1 + X2 – 3 = 0…(1)
dC/dx2 = X1 + 6X2 – 4 = 0…(2)

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Multiplying Equation (2) by -4, we get Multiplying Equation (1) by -6, we get

4X1 + X2 – 3 -24X1 - 6X2 + 18

- 4X1 - 24X2 + 16 X1 + 6X2 - 4
0X1 + 23X2 + 13 = 0 => X2 = 13/23 23X1 + 0X2 - 14 = 0 => X1 = 14/23
You can also find the value of X1 in equation (1)
above
b) As in the problem 8, the tax is a lump sum, and therefore in determining what level of inputs to
consume, this tax will only matter if it is so large as to make it unprofitable to continue producing. We
are not given enough information to know whether it is still worth producing after the tax. Answer will
not change as the constant added to the equation will not change the results of the derivates.

#12
a)
The constraint is x1 + x2 = 10 or
x1 = 10 – x2

Substitute x1 in the equation by (10 - x2) =>

C = 7(10 - x2)2 + 9 x22 + 1.5(10 - x2) x2
C = 700 – 140x2 + 7x22 + 9 x22 - 15x2 + 1.5x22
=> C = 700 – 155x2 + 17.5x22
dC/dx2 = -155 + 35x2 = 0
x2 = 155/35
Second derivate is positive so it is a minimum.

Substitute the value of x2 in the constraint equation by 155/35, we get =>

x1 = 10 – 155/35 => x1 = 195/35

b)Given the contract to supply 10 rugs per day, the cost minimization goal is equivalent to a profit
maximization goal. So long as the Marginal Revenue(MR) of the 11th rug is less than Marginal
Cost(MC) then cost minimization ( subject to output’s equaling 10), is equivalent to profit
maximization.
c) By producing different proportions of whole rugs on different days, she may be able to produce
precise fractional amounts on average over a long period of time.
Chapter 2

#1 P = 2000 – 50Q
a) If Q = 20 then P = 2,000 – 50(20) = $1,000
b) If P = 500 then 500 = 2,000 - 50Q => 50Q = 2000-500 or Q = 30
c) η = P/Q * dQ/dP or P/P-a
η = 500/500 - 2000 = -500/1500 =-0.33. Demand is inelastic (η >-1) when Price is $500.
d) η = P/Q * dQ/dP => or P/P-a so at Price = $1000, η = 1000/1000 - 2000 = -1000/1000 = -1.
Demand is unitary elastic(η= -1) when Price is $1000.

#2. P = 3000 – 40Q. Total revenue is P times Q so multiplying both sides by Q, we get

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PQ = 3000Q – 40Q^2. By taking the first derivative we get the Marginal Revenue(MR)
a)=> MR = 3,000 – 80Q
b)Demand is unitary elastic (η = -1) when MR=0.
From above putting MR = 3000 – 80Q = 0
we get Q = 37.5.
Substituting this in P = 3000-40(37.5)= $1500. Therefore at all Prices above $1500, demand for the
product is price elastic.
c) We know from Ch. 2 that the dependent variable in this case Total Revenue is maximized where its
marginal value or Marginal Revenue shifts from positive to negative or becomes zero. So put MR = 0
and find the value of Q. So
MR=3000-80Q=0 we get -80Q=-3000 or Q=37.5.
At this output the price is going to be P=3000-40(37.5)=$1500

#3 Q=500-3P+2Pr+0.1I
dQ/dP=-3,
Q=500-3(10)+2(20)+0.1(6000)=1110
a) Price Elasticity of demand, η = P/Q * dQ/dP => η = -3 * (10 / 1110) = -3/111
b) Income Elasticity of demand, η = I/Q * dQ/dI => η = 0.1 * (6000 / 1110) = 60/111
c) Cross Elasticity of demand, η = Pr/Q * dQ/dPr => η = 2 * (20 / 1110) = 4/111
d) Our calculations assumed that the population is constant.
#4
a) This fact is relevant because we know that the price elasticity of demand tells us whether a decrease
or increase in price will lead to a decrease or increase in the Total revenue of the company. That is, it
depends on whether the demand is elastic or inelastic.

b) Assuming that the marketing manager is correct that the demand elasticity is -0.5, then a price
reduction will cause the number of units sold to increase by a smaller percentage than price has fallen,
and both the president and executive vice president will have egg on their faces when Total Revenue
declines after the price is reduced. When the price elasticity of demand is > -1, the demand is inelastic.
Thus, a decrease in the product price will decrease the Total Revenue.

#5 P=5-Q
a) We can answer it by calculating Price Elasticity of Demand, η=P/Q*dQ/dP
we can write the above formula as Q=5-P, dQ/dP= -1.
At P=$1 Q=5-1=4.
η = -1 * 1/4 = -0.25.
It means that the price is inelastic.( η>-1). In order to increase their total revenue they should increase
the price of their product.
b) No η is -0.25 which is in the inelastic portion of the demand curve.

Chapter 3
#5

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#6

#8
a) 40 * $100 = $4,000. since the intercept for good X is 40, if Jane only buys X, she can afford 40 units
of it at a price of $100 per unit.
b) X = 40 –(Py/Px)Y
c) Slope of the budget line is –Py/Px.= -40/80= -0.5
d) Price of good Y(Py) is 4,000 / 80 = $50
e) The MRS is equal to the slope of the budget line in equilibrium. –Py/Px= -50 / 100 = -0.5

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#11
a) 3,000 / 20 = 150
b) 3,000 / 10 = 300
c) Yes, -0.5
d) $3 billion. The State of New York should spend all its money on mass transit (unless there are
diminishing returns to investing in it) to maximize transportation capability.

Chapter 4

#1 Q=300S+200U-0.2S^2-0.3U^2
a)
MPs = dq / ds = 300 – 0.4s
MPu = dq / ds = 200 – 0.6u
MPs / Ps = MPu / Pu => (300 – 0.4s / 10) = (200 – 0.6u / 5) => s = -250 + 3 u

If u = 100, s must equal 50, not 400. In conclusion the recommendation is not right.

b)
10s + 5u = $5,000
s = -250 + 3u
u = (5,000 – 10s) / 5 => u = 1000 – 2s
s = -250 + 3 (1,000 – 2s) => s = 14,750 / 7 = 392.86
u = (10 * 392.86 – 5,000) / 5 = 214.28

392.86 hours of skilled labour and 214.28 hours of unskilled labour.

c)MRPu=MEu where MRPu=MR(MPu)

P =MR= $10, Pu =MEu= 5, MPu = 200 – 0.6u(from above equation)
10 * 200 – 0.6 u = 5 => u = 332.5
To maximize profit, 332.5 hours of unskilled labour must be hired.

#6
a) b)
Amount of grain Amount of milk Average product Marginal product
1200 5917 5917/1200 = 4,93
1800 7250 7250/1800 = 4,03 7250-5917/600=2,22
2400 8379 8379/2400 = 3,49 8379-7250/600=1,88
3000 9371 9371/3000 - 3,12 9371-8379/600=1,65

c) Yes, we can see that succeeding 600-pound increments of grain increase milk production by
successively smaller amounts. The more the grain used, more it’s marginal product decreases.