AGW 614/3

Managerial Economics
Graduate School of Business
University Science Malaysia
Tutorial 1
(5 Questions- 15 marks for each question. Please submit on March 18,
2013)
1. Suppose the quantity demanded of good (Qd) depends only on the price of the good
(P), monthly income (M), and the price of a related good R (PR):
Qd =180-10P - 0.2M +10PR
a. Construct the (direct) demand curve for the good when M = $1,000 and PR = $5. Interpret
the intercept and slope parameters for the demand equation
b. Let income decrease to $950. Construct the new demand curve. Is this a normal good?
c. Let the price of good R increase to $6 (income remaining at $950). How do you describe
good R, is this a substitute or complement good?
d. For the demand curve in part c, find the equilibrium price and quantity when
supply is Qs= -10+10P
e. Find the consumer surplus, producer surplus and social surplus for d. Why do you think
social surplus is important to a firm?

2. Joys Frozen Yogurt shops have enjoyed rapid growth in Northeastern states in recent
years. From the analysis of Joys various outlets, it was found that the demand curve per
week follows this pattern:Q=200-300P +120 I + 65T -250 Ac +400 Aj where Q= number of cups served per week;
P=average price paid for each cup; I =per capital income in the given market
(Thousands); T= average outdoor temperature; Ac Competitions monthly advertising
expenditures (thousands); Aj = Joys own monthly advertising expenditures (thousand).
One of the outlets has the following conditions: P=1.50; I=10; T=60; Ac=15; Aj=10
a. Estimate the number of cups served per week by this outlet. Also determine the outlets
demand curve.
b. What would be the effect of a $5,000 increase in the competitors advertising
expenditure?
c. What would Joys advertising expenditure have to be to counteract this effect in order to
maintain similar quantity of number of cups served as in a?

3.

Q=100P-0.3 represents a demand curve. Derive a demand schedule and a demand curve.
What types of products might exhibit this type of non-linear demand curve? Explain from
cost, price and competition perspective.

4. The government imposes minimum wage. Derive a demand curve and supply curve to
reflect this policy. What are the three possible problems when implementing minimum
wage policy?
5. John Elsenki has been briefed by his various department staffs on the
following scenarios on the following issues. John knows that he has to
answer to various parties about the value of the company, if he has to
make decision following information given by his staffs.
Production department has pressured John to accept a proposal to
install new equipment to reduce air pollution. The department also
suggested new machine is necessary to lower manufacturing costs.
On the other hand, the manager in
business analysis unit has
proposed to John to increase prices for the firms products, and
predicted that quantity demanded in the short run will be unaffected,
but in the longer run, unit sales are expected to decline. The manager
proposal is based on the argument that there will be an expected
increase in inflation. It is uncertain the center bank of the country will
lower interest rates dramatically to curb the expected inflation.
As Johns personal advisor, advise John on the above effects on the firms value.
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