Managerial Economics Problem Set 1

Practice Problem Set 1: Managerial Economics

MARKETS
Associated with each problem set, I will indicate a set of techniques that I expect you to
master. Expect to see questions related to these techniques on the midterm and final
exams for the course.
Problem Set #1 will give you practice with the following techniques:
1. Given a demand (supply) function, obtain the inverse demand (supply)
function.
2. Given a demand function, determine whether a related good is a substitute or
complement for a given good, and whether the good is a normal or inferior
good.
3. Given linear supply and demand curves, solve for the corresponding
equilibrium market price and quantity.
4. Given linear supply and demand curves, be able to compute consumer and
producer surplus at a given price. Be able to interpret this as a measure of total
welfare.
5. Be able to illustrate graphically the notions of market equilibrium, equilibrium
price and quantity, consumer and producer surplus, and the effects of shifts in
the supply and demand curves or government interventions in the market.
6. Be able to solve for the new equilibrium price and quantity when an excise tax
is imposed in the market. You should be able to compute any reduction in
surplus associated with the tax (and be able to illustrate this graphically).
Practice Questions
Practice Question #1
Verify that the equilibrium market price for beer is $7 and the equilibrium quantity is
112,000 6-packs/month under the linear supply and demand functions discussed in
our class meeting (recall that we are measuring beer in 1,000s of 6-packs/month). As
a reminder, these supply and demand functions are:
d
QBeer
= 224 16 PBeer
s
QBeer
= 28 + 20 PBeer

[HINT: For equilibrium, the quantity demanded must equal the quantity supplied.
Set them equal, and solve for the price of beer that makes it happen. Then plug this

Managerial Economics Problem Set 1

equilibrium price back into either the supply or demand function to find the
equilibrium quantity.]
Suppose that an excise tax of $1/6-pack is imposed, which is paid by the producer
(brewers). Compute the new equilibrium price and quantity. Also compute the
government tax revenue as well as the new consumer and producer surplus amounts.
What is the deadweight loss of the tax on beer? Illustrate the qualitative effects of the
tax graphically.

Additional practice questions from the Baye & Prince Textbook (Chapter 2):

Question 4, pg. 70
Question 7, pg. 70
Question 14, pg. 72
Question 23, pg. 75