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# Dr. Palamuleni Managerial Economics Application 1 Chapter 1 …

Dr. Palamuleni

Managerial Economics

Application 1

Chapter 1 and Chapter 2  (30 points)

Instructions: Please feel free to type responses or submit handwritten responses to questions below. In either case, I would like you to submit as either a word document or a pdf file. I strongly suggest you submit a PDF file since I cannot open some versions of word files. If you handwrite your responses, please scan them as pdf. Be sure to email me if you have any questions

Chapter 1: Marginal Analysis

1. You are the manager of a firm that specializes in selling blue tooth headsets around the world. Your goal is to determine the number of headsets that the firm can produce in order to maximize profits. The total benefits (revenues) and costs to your firm of producing various quantities of headsets are given in the first three columns of the following table. Based on this scenario, complete the table, and answer the accompanying questions (8points)

Quantity   (H)

Total   Benefits

B(H)

Total   Costs

C(H)

Net   Benefits

NB(H)

Marginal   Benefits

MB(H)

Marginal   Cost

MC(H)

Marginal   Net Benefits

MNB(H)

0

0

0

1

200

10

190

200

10

190

2

380

30

350

279

24

255

3

540

60

480

411

48

363

4

680

100

580

542

82

460

5

800

150

650

660

126

534

6

900

210

690

762

180

582

7

980

280

700

845

244

601

8

1040

360

680

911

318

593

9

1080

450

630

956

402

554

10

1100

550

550

983

496

487

a. What level of headsets maximizes benefits? What level of headsets minimizes costs? What level of headsets maximizes net benefits?

b. What is the relation between marginal benefit and marginal cost at this level of H?

c. Using excel, graph the total cost and total benefit curves.

d. Using excel, on another graph, plot the points for the marginal cost, marginal benefit, and Marginal net benefit.  What are your observations? What level of H maximizes net benefits?

Chapter 2: Demand analysis (Assuming perfectly competitive market

2 . If the demand for a good increases at the same time as the supply of the good decreases. What will happen to equilibrium prince and quantity of the good?

3 . Russian state television has imposed a temporary ban on all TV commercials. Your firm specializes in exports to Russia. 90 percent of its sales consist of consumer goods shipped to Russia. Your supervisor wants to know the likely impact of the ban on your firm’s operations. What do you tell her?

Effects of government policies on markets

4. Suppose the market for grass seed can be expressed as:

Demand: Qd = 200 – 5P

Supply: Qs = 40 + 5P

If the government collects a \$5 specific tax from sellers (here you can change the supply equation to Qs = 40 + 5(P-t) or Qs = 15+ 5P

a) How much will the quantity demanded change from the amount demanded before the tax?

b) What price will consumers pay after the tax?

c) What price will sellers receive after the tax?

d) What is the consumer surplus before tax

e) What is the consumer surplus after tax

f) What is the tax revenue?

5.  Suppose the market for corn is given by the following equations for supply and demand:  Qs = 3p − 2

Qd = 10 − P

where Q is the quantity in millions of bushels per year and p is the price.

a. Calculate the equilibrium price and quantity.

b. If a price floor is imposed at \$5 per bushel, will there be a surplus or a shortage? What is the quantity of excess supply or demand that results?

c. How does this price flo0r affect the total surplus?

6. Based on your analysis of Questions 4 and 5, how does government interventions on markets affect market outcomes (sales, prices and consumer welfare (economics surplus)). Is there a role of government in the markets discussed in chapter 2? Can you think of a situation where government intervening improves market outcome.  Please briefly discuss in a paragraph or two.