QUESTION 1

What is the difference between economic profit and accounting profit? What are the
sources of these differences? Please explain. 

Accounting profit is the profit recorded in the accounting book. Accounting profits are total

revenue minus all accounting costs. The accountants must focus on measuring explicit incurred

costs, as allowed by GAAP and use historical cost. And for economic profit, economists are

concerned with implicit costs.

Economic costs include not only the historical costs and explicit costs recorded by the

accountants, but also the replacement costs and implicit costs (normal profits) that must be

earned on the owners’ resources. Economic costs are total accounting cost plus implicit costs.

And Economic profits are total revenue minus all the economic costs.

QUESTION 2

What other business disciplines are related to managerial economics? 

Managerial economics is a subject using economic analysis to make business decision

involving the best use of an organization’s scarce resources. (Keat & Young, 2009) In order to be

well supported for managerial economics, it uses some concepts of managerial accounting,

strategy, management science, finance, and marketing. We will go through the relation of other

business disciplines to managerial economics as below.

Managerial economics use some concepts of managerial accounting included relevant cost,

break-even analysis, incremental cost analysis and opportunity cost. Next, it is closely related to

strategy concepts which included typed of competition and structure conduct performance

analysis.
 Besides, managerial economics use some concepts of management science included linear

programming, regression analysis and forecasting. Finance included capital budgeting, break-

even analysis, opportunity cost and economic value added.

QUESTION 3
For each of the following changes, show the effect on the supply curve, and state what will
happen to market equilibrium price and quantity in the short run. 

a. The government requires pollution control filters that raise costs on goods.

b. Wages of workers in this industry fall.

c. There is an improvement in technology.
d. The price of the good falls.
e. Producers expect that the price of the good will fall in the future.

a. The government requires pollution control filters that raise costs on goods

Supply curve will shift to left to S2 due to rise in cost for suppliers. Thus, in market equilibrium

price will increase and quantity will decrease.

b. Wages of workers in the industry fall

• Wages fall implies cost of production for producer falls, which will increase the supply.

• Supply curve thus shifts to right. In market equilibrium, price will decline and quantity

will rise.

c. There is improvement in technology

Improvement in technology will raise supply at the same price. It will lead to shift in supply

curve to the right. In market equilibrium, it will lead to decline in prices and increase in quantity.

d. Price of the good falls

• Fall in the price of the good will cause movement along supply curve rather than a shift
 • Decline in price will lead to downward movement on supply curve. It will create excess

demand in the economy.

e. Producers expect that the price of the good will fall in the future.

Future expectation of price decline will decrease supply at the same price. It will lead to the

leftward shift in the supply line. In market equilibrium, it will lead to an increase in price and

decrease in quantity.

QUESTION 4
Suppose that macroeconomic forecasters predict that the economy will be expanding in the
near future. How might managers use this information? 

A forecast of the economic expansion in the near future can help the managers realize the

possible opportunities and threats coming from the markets via their SWOT analysis.

An economic expansion promises an increase in the GDP value, the GDP per capita or the

consumer income per person. People spend more on goods and services. Consumer income

increases will shift the market demand curve for the company’s products to the right. Two

consequences happen: increase in the quantity sold in the market and increase in the market

price. Managers can make decisions on whether to increase the quantity of products or not. The

managers also make decisions on whether to invest more capital in new business projects or not.

Another characteristic of an economic expansion is the reduced number of unemployed people.

Higher employment will lead to the higher number of buyers, which causes the demand to

increase. Reduced unemployment in the society also means the firm has to compete with the

others to attract and keep talents. Management policies on recruitment and selection have to be

adjusted to be adapted to changes in the labor market.

 However, an economic expansion in near future can attract the entry of more new firms into

the market. Fierce competition is in-evitable and the managers should make decisions on

possible measures to remain competitiveness, create more competencies.

Another possible consequence of economic expansion is the increased inflation rate as

demand for goods and services increases. The managers have to provide their solutions to deal

with the possible increase in the input prices such as the increased material prices.

In addition, the managers must answer correctly the question “What are additional economic

conditions in our particular market?” Including government regulations, international

dimensions, future conditions and macroeconomic factors.

In case economy is expanded leading to the potential increase in demand. As a result, a lot of

opportunities for supply. The income of consumers will increase. This will definitely lead to the

increase in the demand for goods. As a result, companies should make some necessary changes

in production. Specifically, the supply of both superior and normal goods will most likely

increase because the consumers have more money and can afford to buy luxurious things. If the

income elasticity is larger than 1, the companies should pay more attention to the superior goods

(Keat & Young, 2009). For example, in automobile industry, when the economy has a signal of

expanding, there will be more people who want to buy new cars. Consequently, managers can

use this information to increase inventory. In some cases, some well-informed companies may

use this information for future contracts, of which the purpose is price hedging because of the

shortage of material supply.

QUESTION 5
If a stock is expected to pay an annual dividend of $20 forever, what is the approximate
present value of the stock, given that the discount rate is 5%? 

P = present price of the stock

D = dividends received per year

k = discount rate

n = life of firm in years

P = D1/(1+k) + D2/(1+k)2 + D3/(1+k)3 + … + Dn/(1+k)n

If the firm is assumed to have an infinitely long life, the price of a unit of stock which earns a

dividend D per year as in this question is given by the equation:

P = D/k  P = $20/0.05 = $400

QUESTION 6
If a stock is expected to pay an annual dividend of $20 this year, what is the approximate
present value of the stock, given that the discount rate is 8% and dividends are expected to
grow at a rate of 2% per year? 

Given an infinitely lived firm whose dividends grow at a constant rate (g) each year, the equation

for the stock price becomes:

P = D1/(k-g)

where D1 is the dividend to be paid during the coming year

Multiplying P by the number of shares outstanding gives total value of firm’s common equity

(‘market capitalization’).

D1 = $20

k= 8%

g= 2%

P = $20/(8%-2%) = $333.33
QUESTION 7
Annual demand and supply for the Entronics company is given by: 
QD = 5,000 + 0.5 I + 0.2 A - 100P, and QS = -5000 + 100P 
Where Q is the quantity per year, P is price, I is income per household, and A is advertising
expenditure:

a. If A = $10,000 and I = $25,000, the demand curve is as below:

QD = 5,000 + 0.5X25,000 + 0.2X10,000 – 100P =

QD = 19,500 – 100P

b. Given the demand curve in part a - QD = 19,500 – 100P, what is equilibrium

price and quantity is as below:

With QD = 19,500 – 100P in part a and QS= -5,000 + 100P the equilibrium price and quantity as

in the below table:

200P = 24,500

P = $122.5  QD =Qs = 7250

c. If the consumer incomes increase to I= $30,000, the impact on equilibrium

price and quantity will be as below:

New QD = 5,000 + 0.5 I + 0.2A - 100P = 5,000 + 0.5X30,000 + 0.2X10,000 – 100P

New QD = 22,000 – 100P

 P= $135, and the new quantity QD =Qs = 8,500.

QUESTION 8
Industry supply and demand are given by QD = 1000 - 2P and QS = 3P.

a. With Industry supply and demand are given by QD = 1000 - 2P and QS = 3P. The

equilibrium price and quantity are as below:

The equilibrium price and quantity are the meet point of QD and QS. When QD = QS, please see

below:

QD = QS  P = $200; With the equilibrium price = $200, the quantity = 600.

b. At a price of $100, will there be a shortage or a surplus, and how large will it be?

At a price P=$100, QD = 1000 - 2P  QD = 8000 and QS = 3P  QS = 300.

With the shortage quantity = QD - QS = 8,000 – 300 = 7,700

c. At a price of $300, will there be a shortage or a surplus, and how large will it be?

At a price P=$300, QD = 1000 - 2P  QD = 400 and QS = 3P  QS = 900. with an exceed

different quantity supplied is 500 in total.