Final Exam

Keiser University

Dr. David Tucker

Managerial Economics

05/01/2020
1. Long-run real interest rates are expected to increase. An accountant and an MBA

student (who just finished his course of Managerial Economics) where interviewed

regarding the effect on the firm they both work at. Keeping all else constant, their

answer would likely differ. How do you guess the interviewed will answer? Does the

difference in response matters? If yes, why? If not, why not?

In fact, the accountant´s answer and the MBA student´s answer will likely differ.

Both the economist and the accountant have a different way of looking at long-

run real interest rates, which is related to the inflation rate. From the accountant's point of

view, he would focus on the financial statements and try to adjust the data that was

affected due to the increase in interest rates. Also, he will respond that the demand for

loans will decrease since most entrepreneurs do not want to go to loans with higher

interest rates in the long term.

On the other hand, the MBA student would focus on the Principle of the real

interest rate.

  Real interest rate = Nominal Interest Rate - Expected Inflation

This would mean that changes in long-run real interest rates would change

permanently, which would affect interest rates. Therefore, the student would consider the

change in the firm's output and the firm's pricing power that influenced the real interest

rate.

In addition, this increase would cause an increase in mortgage interest payments.

Also, it would take into account that this would generate an effect on consumer spending,
they would no longer be so high, they would drop. For instance, luxurious expenses like

buying a boat or a car would be thought twice.

2. Many cities have experienced a substantial decrease in the amount of

garbage being collected after they changed from levying a flat tax on each household

to a system where the homeowner is changed a fee for each bag or can picked up.

Would this have been the result of a change in demand or a change in the quantity

demanded? Would you recommend the flat fee or the fee per bag? Why?

The law of demand establishes that, if the price of things goes up, and other

factors remain constant, some products that are in demand will decrease. This reduction

in the amount of waste collected is therefore a change in the quantity demanded since at

the beginning there was a fixed rate, but now the rates have not increased, but the amount

has varied according to the number of garbage bags collected from each household.

By charging a fee per bag, household members will try to reduce waste to

minimize costs. As consumers, we always try to find services with prices that are

accessible, therefore, the rate per bag is the best option. If before each house had 3 or 4

bags per week, now it will have less, because it will be charged by quantity, not by a

fixed rate; and this would help to keep the number of garbage bags collected from each

household to a minimum.
3. Define three types of elasticity of demand. Indicate how you would use information

from recent research paid by your company that the own price elasticity of your

product is -1.2 and not -0.8 as previously thought.

1. Price Elasticity of Demand: it is the responsiveness of quantity demanded to

change in price. That is, the percentage change in quantity demanded in

comparison to the percentage change in price of a product.

2. Cross Elasticity of Demand: it is used to measure the responsiveness in the

quantity demanded of one good to a change in price of another good.

Cross elasticity of demand = % Change in Quantity Demanded of Good X/

% Change in Price of Good Y.

Thus, cross elasticity is used to determine whether two goods are

substitutes or complements. For instance, if the cross-price elasticity of two goods

is positive, they are substitute. If they are negative, they are complements.

3. Income Elasticity of Demand: it refers to the sensitivity of the quantity

demanded for a certain good to a change in real income of consumers who buy

this good, keeping all other things constant. It is calculated by dividing the

percentage change in quantity demanded by the percentage change in income.

 Previously, the elasticity was -0.8, this meant that the demand was inelastic. And,

when you have inelastic demand, a rise (fall) in price means an increase (decrease) in

total revenue. But, after conducting an investigation that establishes that the demand is no

longer -0.8 but -1.2. Therefore, this is elastic and an increase (fall) in price will lead to a

decrease (increase) in total revenue. That is, if total revenues want to be increased, the

price must be reduced.

In addition, this information reveals that the product is not a necessity, therefore,

consumers will try to avoid it if the price of it increases.

4. A magazine, in an article dealing with management, wrote, “When he took over the

furniture factory three years ago … [the manager] realized almost immediately that

it was throwing away at least $100,000 a year worth of wood scrap. Within a few

weeks, he set up a task force of managers and workers to deal with the problem.

And within a few months, they reduced the amount of scrap to $7,000 worth [per

year].” Was this necessarily an economically efficient move? Explain your answer.

The economically efficient implies that the organization utilizes the least assets to

produce the most enough goods and services. The lowest cost of production can be

considered as economically efficient.

The furniture production line was wasting 100,000 U.S dollars each year because

they discard some wood scrap which can be used to made furniture. So, the manager

recruits some people to check the wood scrap and keep the good wood scrap for produce.

And within a few months, they reduced the amount of scrap to $7,000 worth.
 Since the cost of making furniture has decreased from $100,000 to $7000, at that

point the move is economically efficient. The industrial facility is delivering a similar

yield at a lower cost. And to minimize wastes, effective activities must be set up

subsequently bringing about technically effectiveness.

5. If all the assumptions of perfect competition hold, why would firms in such an

industry have little incentive to carry out technological change or much research

and development? What conditions would encourage research and development in

any of the competitive industries?

When a company decides to make a technological change or a research and

development undertaking, it usually has significant costs. In addition, when companies in

a perfectly competitive market make some kind of technological change and present an

innovative product, it is a matter of weeks for other companies to do something similar,

which will restore homogeneity in the market.

In these cases, the companies that often copy the ideas result in a benefit, since

they do not have to bear the investment and development costs that have been invested in

the change of technology, they simply copy the idea without much research.

In such circumstances, there is a minimal motivating force for firms in a perfectly

competitive market to endeavor a technological change or complete a lot of innovative

products. Solid patent rights, intellectual property rights, and copyright laws can go far in

empowering firms in competitive industries to attempt innovative work endeavors, make

innovative items, and exclusively get the rewards.

 Besides, if companies invest in technological innovation, research, and

development, their organization item costs may increase. What's more, if individuals do

not care for the new technological advancement, research, and development, they won´t

buy the items. And if fewer clients purchase the business items, at that point the

organization will gain less profits.