North South University

School of Business and Economics

MBA Program, Fall 2020
Managerial Economics
BUS 525: Final Assignment
Date of Submission: January 18, 2021

1. You are an employer seeking to fill a vacant position on an assembly line. Are you more
concerned with the average product of labor or the marginal product of labor for the last
person hired? If you observe that your average product is just beginning to decline,
should you hire any more workers? What does this situation imply about the marginal
product of your last worker hired? What would be the elasticity of the labor [ E L =
MPL/APL]? State how the law of diminishing returns is reflected in the shape of the total
product curve and indicate the relationship between diminishing marginal return and the
stages of the production. You can use any suitable production data. [ Hint. You can use
text book data in Ch 6. P.206 ; Or p. 227.ex2]

2. At a recent board meeting, the president and the CEO got into a heated argument about
whether to shut-down the firm’s plant in Dhaka Division. The CEO thinks that the
organization’s business fits the competitive market definition relatively well. The plant
currently incurs losses of Taka 60 million and the Fixed cost is Taka 70 million. The
president of the firm argued that the plant should continue to operate, at least until a
buyer is found for the production facility. The president’s argument was based on the
fixed cost. The CEO exploded over this point, blaming the president for considering the
fixed costs in making shutdown decision. According to the CEO, “everyone knows fixed
costs do not matter!”. Should the plant be closed or continue to operate at a loss in the
short run? How would you explain to the incorrect party that he or she is wrong?

What would be your opinion if the following situation prevails: The firm is currently
earning-short-run profits but the industry is in increasing cost industry although it is
 experiencing a decline in its product demand. In the long run, what do you expect will
happen to: firm’s cost of production, the price it can charge and the profits it can make?

3. If the firm’s average cost curves are U-shaped, why does its average variable cost curve
achieve its minimum at a lower level of output than the average total cost curve? You are
given the following data on output and inputs for 10 production periods:

TIME OUTPUT CAPITAL (K) LABOR (L)

1 225 12 20
2 240 14 22
3 278 10 24
4 212 14 18
5 199 12 20
6 297 16 24
7 242 16 20
8 155 10 14
9 215 8 20
10 160 8 14

Estimate the parameters (A, α , β ) of Cobb-Douglas production function using

α β
the Least-squares (OLS) regression method. [ Assume Q= AK L ]. Use the
estimated parameters to determine: Returns to Scale, Equations for the marginal
product of labor and Capital. Calculate the marginal products of capital and labor
for the input combinations: K = 20, L = 30

4. (a) A micro-entrepreneur produces caps and hats for women. The output-cost data of the
business is reproduced below:

Output Total Cost

50 890
100 950
150 1010
200 1270
250 1480
300 1960
350 2350
 Using the above data estimate the total cost equation and determine the average and
marginal cost functions. Determine the output rate that will minimize average cost and
the per-unit cost at that rate of output. The current market price of caps and hats per unit
is Tk. 6.50 and is expected to remain at that level for the foreseeable future. Should the
firm continue its production?

(b) Assume that you are given a cost equation: TC = Q^2 + 3Q+ 36 . Do you think that
average cost curve is U-shaped.
Using the following cost data how would you estimate your short run supply curve. If
there are 100 firms in the industry, would be the industry supply? [ Hint. Think about the
relationship between MC and AVC and find the output supply of a single a firm]

OUTPUT FC VC TC ATC AVC MC

0 100
1 125
2 145
3 157
4 177
5 202
6 236
7 270
8 326
9 398
10 490

5. Explain the managerial implications of the following figure:

6. In your own language explain the managerial implications of production, cost of

production, and profit maximization and perfect competition. OR: How would you apply
your learning of chapters 6, 7 , & 8 in managerial decision making. [ maximum 2 pages]