Managerial Economics Questions
Q1) Mont Bleu Auto Parts produces transmissions that it sells to car manufacturers. It has two factories at which parts are produced. The factories produce identical parts and all parts can be sold in a competitive market at a price of $100. Suppose production at the factory in North Carolina has marginal cost of MC = 60 + q/1,000 and production at the South Carolina factory has a marginal cost of MC = 50 + q/1,000 where in each case, q is production at that factory. How much should Mont Bleu produce at each factory?
Q2) For the following 10 questions, circle the correct answer. No work need be shown.
a) True or False: Demand shifts have a smaller price impact when supply is more elastic.
b) True or False: The effect of shifts in demand on the market price is larger in the short run than in the long run.
c) True or False: When marginal revenue is greater than marginal cost, a monopolist should raise prices.
d) True or False: It is sometimes possible for taxes or subsidies to increase social welfare.
e) True or False: Marginal revenue will always be less than price for a monopolist because total revenue declines as additional units are sold.
f) True or False: Monopolists charge prices that maximize total surplus.
g) In monopolistic competition, the product of an industry is:
a. Sold primarily by one large firm, which is a monopoly.
b. Differentiated somewhat between producers.
c. Sold at a lower price than if the industry were perfectly competitive.
d. Homogeneous.
h) The reason economists would support government subsidizing vaccinations for infectious diseases is:
a. A person buys only one vaccination of each kind.
b. Profits from vaccinations allow drug companies to reduce the price of HIV drugs in the developing world.
c. Vaccinations produce positive externalities.
d. Production of vaccines has increasing returns to scale.
i) Suppose that when 1,000 pizzas per week are produced and sold the marginal social benefit of another pizza is $13.00, and the marginal social cost of another pizza is $5. Then it must be true that
a. The pizza firms are maximizing profits.
b. The cost to the firm of producing another pizza is greater than $5.
c. From society's point of view, more pizzas should be produced.
d. The government could improve social welfare by putting a tax on pizzas of $8 per pizza.
j) The elasticity of demand for socks is -2 and the elasticity of supply is 4. A spike in the price of cotton has raised the cost of manufacturing socks by $0.30 a pair. How much will the price of socks rise?
$0 $0.05 $0.10 $0.15 $0.20 $0.25 $0.30
Q3) Fill in the blanks below.
a) Long run supply is more _________ than short run supply because it is easier for sellers to _________ up and down in the long run.
b) Taxes are borne more by suppliers when supply is more inelastic than demand. This is because a larger _________ change is required to get suppliers to choose the same reduction in _________.
c) _________ price discrimination can be achieved when there is a positive association between a customer's willingness to pay overall, and her willingness to pay for improvements in product quality.
d) If you are selling in multiple markets and have the same marginal cost of serving all markets, you want to set _________ in each market equal to each other.
e) In the season 4 finale of "The Office", Jim pays for fireworks at the goodbye party for their colleague Toby so that there are fireworks as he proposes to Pam. This purchase creates positive _________ for everyone in the office.
Generally speaking, too few people buy fireworks shows because actions featuring positive _________ (same word) are taken less than is socially optimal.
f) In season 1, episode 8, of "The Wire", Stringer Bell is teaching workers about the difference in how you treat customers buying drugs on the street corner versus in a copying/print shop. He says "You know what we got here? We got an elastic product. You know that that mean? That mean when people can go elsewhere and get their printing and copying done, they gonna do it. You acting like we got an inelastic product and we don't." In this quote, Stringer Bell is telling his workers that there are good _________ for printing and copying services, whereas buyers of drugs lack good _________ (same word).
Q4) Tracy is a marketing manager at Humbert & Humbert Literary Works. She has estimated that the likely demand for a new novel is well represented by the equation: qD = 10,000 - 400 × p + 10,000 × D + A/10. qD is the number of books sold. p is the price that Humbert & Humbert charges. D is a dummy variable taking a value of 1 if the author is famous and a value of 0 otherwise. A is the dollars spent marketing the book. Throughout the problem, assume that marginal cost is $10.
a) Suppose that Humbert & Humbert decide not to market a new title by a famous author. What price should Humbert & Humbert charge?
b) Suppose that Tracy's manager offers to give her a budget of $40,000 to market the book. She can either spend $0 or $40,000. If she markets the book, she can offer a different price than the one found in (a). Should she market the book? How much higher are profits if she markets the book? Note: If profits are lower, then use a negative sign to indicate this.
c) These questions ask you to calculate elasticities of demand for books sold by Humbert & Humbert. Fill in the blanks:
a. Assuming no advertising, the own-price elasticity of demand at a price of $25 is _________ if the author is famous and _________ if the author is unknown.
b. Assuming that advertising equals $40,000, the own-price elasticity of demand at a price of $20 is _________ if the author is famous and _________if the author is unknown.
Q5) Xerxes sells used DVDs of the movie "300" in Iran, where they are banned, and he is the monopoly seller. He sells both Blu-Ray DVDs and low definition DVDs. He has found that there are two types of customer for his products. "Cinephiles" are willing to pay $40 for a Blu-Ray copy, and $30 for a low-def copy. "Normal" people are willing to pay $25 for either a Blu-ray copy of a low-def copy. Suppose that 40% of customers are cinephiles and 60% are normal.
a) Suppose that Xerxes can buy Blu-Ray copies for $25 or low-def copies for $20. Should Xerxes sell Blu-Ray DVDs and, if so, at what price? Should he sell low-def DVDs and, if so, at what price? Indicate the optimal prices. Write "N/A" if he should not sell a particular type of DVD.
b) Now suppose that the willingness to pay of cinephiles for Blu-Ray is $40 and for low-def is $35, while the willingness to pay of normal people for Blu-Ray is $25 and for low-def is $20. Explain in two sentences of less (no need to solve) why it will never be optimal to try to indirectly price discriminate, by targeting low-def to normal folks and Blu-Ray to cinephiles.
Q6) Let the monthly demand for steel be D(p) = 20,000 × (80 - p) tons and the monthly supply of steel be S(p) = 100,000 × (p - 20) tons. Each ton of steel produced creates 30 pounds of NOx pollution.
a) Suppose that a cap and trade system is in place, and the cap on NOx pollution from steel production is 24,000,000 pounds per month. What is the price of a permit which allows the pollution of one pound of NOx?
b) Now suppose that the limit is X pounds per month, and assume that X< 30,000,000. Draw a graph below showing the equilibrium in the market for steel. Label the intercepts for demand and supply, as well as the price and quantity that would obtain in the absence of a cap on pollution. Also draw a vertical line indicating the maximum quantity of steel that can be produced, given the cap. The intercept of this line should be labeled, but note that the intercept depends on X. Label the price that obtains with the cap "p" and label the marginal cost of production at the cap "MC".
c) Suppose that X is 18,000,000. What is the price of a permit to produce one pound of NOx pollution? What would the permit price be if X = 9,000,000?
d) [Harder] We now will construct demand and supply curves for the permit market. Draw a graph where the horizontal axis is the quantity of permits. The vertical axis is the price of a permit. Draw the demand curve for permits, labeling the vertical and horizontal axis intercepts. Note that your three quantity/price pairs from (a) and (c) should lie on the demand curve. Next, draw the supply curve for permits and label the horizontal axis. Remember that the number of permits issued is X. Label the price of a permit that obtains when X permits are issued as "p".
Q7) The summer of 2015 featured a bitter fight over whether to reauthorize the Export-Import Bank of the United States, an organization for which I worked after my sophomore year in college. The specific form of subsidies provided by the bank are different than in this problem, but the main purpose of the bank is nonetheless to subsidize US exporters. Many economists see export subsidies as among the worst policies for helping domestic industry. Let's see why.
Han & Han Industries sells quality faucets in Belgium and The Netherlands. It produces faucets at its factory in the town of Wesep, in the Netherlands. Suppose demand for its faucets in Belgium is qB = 2,000(50 - pB) and demand in the Netherlands is qN = 2,000(50 - pN). Total cost is c(q) = 200,000 + 20q + q2/2,000 where q = qB + qN.
a) Suppose Han & Han can charge different prices in each country. How much should it charge in each country? What is consumer surplus in the Netherlands? What is Han & Han's profit?
b) [Harder] Suppose the government in the Netherlands wishes to help Han & Han export and offers an export subsidy of €9 per unit exported. [Note: this means that their revenue from each unit sold in Belgium is now €9 higher than in (a)] How much should Han & Han charge in each country? What is consumer surplus in the Netherlands? What is Han & Han's profit? What is government surplus?
c) [Harder] Now suppose that the government in the Netherlands offers a subsidy of €6 per unit produced, regardless of whether it is sold in the Netherlands or Belgium. How much should Han & Han charge in each country? What is consumer surplus in the Netherlands? What is Han & Han's profit? What is government surplus?