Arsi University

Managerial Economics for MBA

Problem Set
Q1. The following data relate to the sales of a product over an eight-month
Period:

a. Investigate whether sales are affected more by the level of price or by the change in price of
the product.
b. Interpret the regression coefficient of the explanatory variable.
c. Draw an appropriate graph of the data and relationship.
d. Forecast sales in September if price is £65.

Q2. KAD has estimated the following demand relationship for its product over the last four
years, using monthly observations:

Where Q=sales in units, P=price in £, Y is income in £, 000, and the numbers in brackets are t-
statistics.
a. Interpret the above model.
b. Make a sales forecast if price is £9, income last month was £25,000 and sales last month were
2,981 units.
c. Make a sales forecast for the following month if there is no change in price or income.
d. If price is increased by 5 per cent in general terms, estimate the effect on sales, stating any
assumptions.

Q3. Suppose that a consumer’s utility function is U = Q1 2 Q2 2, If P1 = 5, P2 = 10, and the

consumer’s money income is M = 1,000, what are the optimal values of Q1 and Q2?

Q4. Consider the cost function C(Q) = 600 + 100Q + 5Q2 for Amazon to produce the new e-
book reader. Using the cost function given a determine the profit-maximizing output and price
for the new e-book reader, and discuss its long-run implications, under two alternative scenarios:

a. Amazon’s new e-book reader is a perfect substitute with several e-book readers that have
similar cost functions and that currently sell at price $150 each.

b. Amazon’s new e-book reader has no substitutes and so is a monopolist, and its demand is
expected to be Q = 32 – (1/5) P.

Q5. Indicate whether each of the following statements describe a perfectively competitive firm or
monopolist.

a. A firm is producing at the output where MR equal to MC and charges price based on
market.
b. In the long run, a firm is producing at the profit maximizing level of output, where the
price is $13 and the average total cost is $10.

Q6. Suppose inverse market demand function for duopoly telecommunication equipment
producer is P=100-2Q and cost function that each firm faces is C1=4q1 and C2=4q2

a. What are reaction functions of the Cournot duopolists?

b. Calculate each firm’s output and market price at cournot equilibrium

c. Calculate each firm’s output if firm I become dominant firm ( Stackelberg Model)

d. Discus on condition that leads to price discrimination in the firm