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Joel Prez

Managerial Economics
Chapter 3

Q4. Suppose the own price elasticity of demand for good X is _2, its
income elasticity is 3, its advertising elasticity is 4, and the cross-price
elasticity of demand between it and good Y is _6. Determine how much
the consumption of this good will change if:
a. The price of good X increases by 5 percent.
b. The price of good Y increases by 10 percent.
c. Advertising decreases by 2 percent.
d. Income falls by 3 percent.
Qx d
a. own price= =2 , then we can replace the price variation in the
Qx d
own price= =2 and finally, we can compute the variation in Qx.

%Q x =10

Qx d
b. cross price= =6 , then we can replace the price variation in the
Qx d
cross price= =6 and finally, we can compute the variation in Qx.

%Q dx =60

Qx d
c. Advertising= =4 , then we can replace the price variation in the
Qx d
Advertising= =4 and finally, we can compute the variation in Qx.

%Q dx =8

Qx d
d. Income = =3 , then we can replace the price variation in the formula
Qx d
Income = =3 and finally, we can compute the variation in Qx.

%Q dx =9
Q8. Suppose the true inverse demand relation for good X is
P=a+ bQ +e , and you estimated the parameters to be = 10, b=2.5 ,
a^ =1 , and b^ =0.5 . Find the approximate 95 percent confidence
interval for the true values of a and b.
a a^ 2 a^ =[ 10 2 ] =[ 8 , 12 ]

b b^ 2 b^ =[ 1 1 ]= [ 0 , 2 ]

Q12. You are the manager of a firm that sells a leading brand of alkaline
batteries. A file named Q12.xls with data on the demand for your
product is available online at Specifically, the
file contains data on the natural logarithm of your quantity sold, price,
and the average income of consumers in various regions around the
world. Use this information to perform a log-linear regression, and then
determine the likely impact of a 3 percent decline in global income on
the overall demand for your product.
Regression Statistics
Multiple R 0.97
R Square 0.94
Adjusted R
Square 0.94
Standard Error 0.00
Observations 49.00

df SS MS F Significance F

Regression 2.00 0.01 0.00 370.38 0.00

Residual 46.00 0.00 0.00
Total 48.00 0.01

Coefficients Standard Error t Stat value Lower 95% Upper 95%

Intercept 1.29 0.41 3.12 0.00 0.46 2.12

Price - 0.07 0.00 - 26.62 0.00 - 0.08 - 0.07

Income - 0.03 0.09 - 0.33 0.74 - 0.22 0.16

If the income decline a 3%, the demand of the product will decrease .009% (3% x
Q16. You are a manager in charge of monitoring cash flow at a company
that makes photography equipment. Traditional photography
equipment comprises 80 percent of your revenues, which grow about 2
percent annually. You recently received a preliminary report that
suggests consumers take three times more digital photographs than
photos with traditional film, and that the cross-price elasticity of
demand between digital and disposable cameras is -0.2. In 2009, your
company earned about $400 million from sales of digital cameras and
about $600 million from sales of disposable cameras. If the own price
elasticity of demand for disposable cameras is -2.5, how will a 1 percent
decrease in the price of disposable cameras affect your overall
revenues from both disposable and digital camera sales?
Qx d
own price= =2.5 , in the same way we did in the question 4, we just
replace the new variation we have in the price, to get the variation in Qx.
Qx d
own price= =2.5

Qx=2.5 , so we know the consumption of disposable cameras has increased

in 2.5%. Now we must see the effects in the digital camera demand.
Qx d
cross price= =0.2

Qx d
own price= =0.2

Qx=0.2 .

The formula to obtain the revenue is Price x Quantity and we know how much the
quantities for both kind of cameras have changed. So with this two data, we can
calculate the effect in the revenue.
Digital Camera

P0 Q0=$ 400 millions .

P1 Q 1( 1.002)=$ 400.8 millions because the price for digital cameras
hasnt changed, so we just need to change the quantity. So the final result
is that the revenue has increased in 800,000.

Disposable Camera

P0 Q0=$ 800 millions .

P0 (0.99) Q0 (1.025)=$ 811.8 millions . In this case, we have a different

price and a different quantity, which we dont know, but we can calculate
the difference from the elasticity. Finally, when we multiply our new price
(1% cheaper) and or new quantity (2.5% larger), we have the new revenue
of $811.8 millions, that means an effect and difference of 11.8 millions
from the initial situation.

Q20. According to CNN, two dairy farmers challenged the legality of the
funding of the Got Milk? campaigns. They argued that the Got Milk?
campaigns do little to support milk from cows that are not injected with
hormones and other sustainable agriculture products, and therefore
violate their (and other farmers) First Amendment rights. The 3rd U.S.
Circuit Court of Appeals agreed and concluded that dairy farmers
cannot be required to pay to fund the advertising campaigns. One of
the obvious backlashes to the National Dairy Promotion and Research
Board is reduced funding for advertising campaigns. To assess the likely
impact on milk consumption, suppose that the National Dairy Promotion
and Research Board collected data on the number of gallons of milk
households consumed weekly (in millions), weekly price per gallon, and
weekly expenditures on milk advertising (in hundreds of dollars). These
data, in forms to estimate both a linear model and log-linear model, are
available online at in a file named Q20.xls. Use
these data to perform two regressions: a linear regression and a log-
linear regression. Compare and contrast the regression output of the
two models. Comment on which model does a better job fitting the
data. Suppose that the weekly price of milk is $3.10 per gallon and the
National Dairy Promotion and Research Boards weekly advertising
expenditures falls 25 percent after the courts ruling to $100 (in
hundreds). Use the best-fitting regression model to estimate the weekly
quantity of milk consumed after the courts ruling.
Chapter 5

Q4. An economist estimated that the cost function of a single-product firm is

C(Q) = 50 + 25Q + 30Q2 + 5Q3

Based on this information, determine:

a. The fixed cost of producing 10 units of output.
b. The variable cost of producing 10 units of output.
c. The total cost of producing 10 units of output.
d. The average fixed cost of producing 10 units of output.
e. The average variable cost of producing 10 units of output.
f. The average total cost of producing 10 units of output.
g. The marginal cost when Q = 10.
a. The fixed costs dont depends upon the quantity, for any value of Q in the
function, the fixed cost is equal to 50.

b. CV ( Q )=25 ( 10 ) +30 (10)2 +5 (10)3

CV ( Q )=8,250

c. C ( Q )=50+ 25 ( 10 ) +30 (10)2 +5 (10)3

C ( Q )=8,300

FC 50
d. AFC = = =5.
Q 10

VC 8,250
e. AVC = = =825
Q 10

C 8,300
f. AC = = =830
Q 10

g. To get the marginal cost function, we must derivate the total cost function in
base of Q.

=25+6 Q+15 Q2
Now we can replace Q=10 to get the marginal cost of producing 10 units.

MC=25+6 ( 10 ) +15(10)2=1,585

Q8. Explain the difference between fixed costs, sunk costs, and variable
costs. Provide an example that illustrates that these costs are, in
general, different.
The sunk costs, are the costs that have been paid and cannot be recovered. The
fixed costs, are the one a company must pay anyway even if they decide to not
produce, and in the other hand, the variable costs its value will depend on the
units that the company decide to produce. To give an example, if a car
manufacturer decide to launch a new model, the investigation made to know the
new requirements or technologies to apply are their sunk cost, in other words,
even if they decide to not launch the new model, they wont be able to recover
the cost. If they decide to produce it or not, anyway theyll have to pay costs as
electricity or rents in case the land is not owned by them. And finally, their
variable costs going to be measured per how many units they decide to produce.

Q12. You were recently hired to replace the manager of the Roller
Division at a major conveyor-manufacturing firm, despite the managers
strong external sales record. Roller manufacturing is relatively simple,
requiring only labor and a machine that cuts and crimps rollers. As you
begin reviewing the companys production information, you learn that
labor is paid $8 per hour and the last worker hired produced 100 rollers
per hour. The company rents roller cutters and crimping machines for
$16 per hour, and the marginal product of capital is 100 rollers per
hour. What do you think the previous manager could have done to keep
his job?
r w

100 rollers per hour 100 rollers per hour

$ 16 per hour $ 8 per hour

$ 6.25 $ 12.5

He wasnt minimizing costs, because we can see that the marginal product of
capital is the same than the labor, but cost just the half. So, the company must
rent more roller cutters and crimping machines and hire less workers.

Q16. The World of Videos operates a retail store that rents movie
videos. For each of the last 10 years, World of Videos has consistently
earned profits exceeding $25,000 per year. The store is located on
prime real estate in a college town. World of Videos pays $2,000 per
month in rent for its building, but it uses only 50 percent of the square
footage rented for video rental purposes. The other portion of rented
space is essentially vacant. Noticing that World of Videos only occupies
a portion of the building, a real estate agent told the owner of World of
Videos that she could add $1,200 per month to her firms profits by
renting out the unused portion of the store. While the prospect of
adding an additional $1,200 to World of Videoss bottom line was
enticing, the owner was also contemplating using the additional space
to rent video games. What is the opportunity cost of using the unused
portion of the building for video game rentals?
As the rent is a sunk cost to this new service she wants to offer, because anyway
shell need to pay for the video rental business, the opportunity cost is just the
money she can lose because of not rent the space. That us $1,200 per month or
$14,400 per year
Q20. According to The Wall Street Journal, Mitsubishi Motors recently
announced a major restructuring plan in an attempt to reverse
declining global sales. Suppose that as part of the restructuring plan
Mitsubishi conducts an analysis of how labor and capital are used in its
production process. Prior to restructuring Mitsubishis marginal rate of
technical substitution is 0.15 (in absolute value). To hire workers,
suppose that Mitsubishi must pay the competitive hourly wage of
1,330. In the study of its production process and markets where
capital is procured, suppose that Mitsubishi determines that its
marginal productivity of capital is 0.5 small cars per hour at its new
targeted level of output and that capital is procured in a highly
competitive market. The same study indicates that the average selling
price of Mitsubishis smallest car is 950,000. Determine the rate at
which Mitsubishi can rent capital and the marginal productivity of labor
at its new targeted level of output. To minimize costs Mitsubishi should
hire capital and labor until the marginal rate of technical substitution
reaches what proportion?
MRTS= =0.15

MRTS= =0.15

PML=0.15 0.5=0.075

So the proportion to get the new level of output is 0.5 of PMK and 0.075 of PML.
And in order to minimize costs, the proportion must reach:

0.5 950,000=475,000
1,330 PML
475,000 PMK


Now we can conclude that to minimize costs, the new proportion must be equal
to 0.028.