Managerial Economics

Indian School of Business

HOMEWORK

Please write the names of ALL group members, their ID numbers, group name and section clearly
on your answer script.
You must adhere to the honor code while doing this assignment. This is a CODE 2N-b
assignment.

Show all intermediate steps (for full and partial grades).

Problem 1
A computer products retailer purchases laser printers from a manufacturer at a price of Rs.
25,000 per printer. During the year, the retailer will try to sell the printers at a price greater than
Rs. 25,000, but may not be able to sell all the printers. At the end of the year, the manufacturer
will buy back any unsold inventory at 40 percent of the original price. No one other than the
manufacturer would be willing to buy these unsold printers at the end of the year.

a. At the beginning of the year, before the retailer has purchased any printers, what
is the opportunity cost of a laser printer?
b. After the retailer has purchased the laser printers, what is the opportunity cost
associated with selling a laser printer to a customer? (Assume that if this customer
does not buy the printer, it will be unsold at the end of the year.)
c. On December 1, the retailer still has a large inventory of unsold printers. The
retailer has set a retail price of Rs. 30,000 per printer. The manager of the store
proposes that they should cut the price by half and sell the printers at Rs.
15,000 each. The owner of the store disagrees, pointing out that at Rs. 15,000
each, they would lose Rs. 10,000 on each printer sold. Is the owner’s argument
correct?
Problem 2
Consider the market for biryani in Hyderabad. In this market, the supply curve is given by Qs =
10PB − 5PR and the demand curve is given by QD = 100 − 15PB + 10PK, where B denotes biryani,
R denotes rice, and K denotes kebabs. Assume that PR is fixed at 1 and PK = 5. Calculate the
equilibrium price and quantity in the biryani market. What is the consumer surplus generated by
the biryani market at these prices?

a. Suppose that a poor harvest season raises the price of rice to PR = 2. The price of
kebabs remains the same as in part a. Find the new equilibrium price and quantity
of biryani. Draw a graph to illustrate your answer.
b. Suppose PR = 1 but the price of kebabs drops to PK = 3. Find the new equilibrium
price and quantity of biryani.
c. Suppose PR = 1, PK = 5, and the local government mandates that since a lot of
tourists like to eat biryani when they visit Hyderabad, in the interest of promoting
tourism, the price of biryani cannot exceed 5. How much is the shortage of biryani
as a result?
Problem 3
It is lunch time and there are 2 kinds of customers at the Goel dining hall: students from the
afternoon sections, and students from the morning sections. Their respective demand curves for
lunch per week are given by QA = 800 – 2P and QM = 920 – 4P. The dining hall’s marginal cost
of each lunch served is 30.
a. Assume that the dining hall can price discriminate. What is the profit maximizing
price that the dining hall can charge from each type of student?
b. Why do you think the elasticity of demand is different for the two types of
students?

Problem 4
Suppose that the market for calcium is perfectly competitive. Consider the following information
about its price:
• Between 2000 and 2005, the market price was stable at about Rs. 200 per kilo.
• In the first 3 months of 2006, the market price doubled, reaching a high of Rs. 400
per kilo, where it remained for the rest of 2006.
• Throughout 2007 and 2008, the market price of calcium declined, eventually
reaching Rs. 200 per kilo by the end of 2008.
• Between 2008 and 2013, the market price was stable at that level

Assuming that the technology for producing calcium did not undergo any changes between 2000
and 2013, and the input prices faced by calcium producers remained constant, what explains the
pattern of prices that prevailed between 2000 and 2013? Is it likely that there were more
producers of calcium in 2013 than there were in 2000?

Problem 5
An old lady is looking for help crossing the street.1 Only one person is needed to help her; more
are okay but no better that one. Sunny and Simran are the two people in the vicinity who can
help; each has to choose simultaneously whether to do so. Each of the two will get utility worth 3
from the old lady’s success (no matter who helps her). But each one who goes to help will bear a
cost of 1, this being the utility value of the person’s time taken up in helping. Set this up as a
game. Write the payoff table and find all pure-strategy Nash equilibria.

Problem 6
Having muscled out the other bhelpuri vendors on Chowpatty Beach in Bombay, the proprietors
of Royal Bhelpuri and Modern Bhelpuri have to decide where to locate their stalls. Customers
are situated uniformly along the beach and will purchase from the vendor closest to them.

a. If the beach is 1 km long, what are the Nash equilibrium locations for Royal and
Modern?
b. If a new entrant, Tasty Bhelpuri, enters the market, what are the equilibrium locations?