Assignment 1 (Managerial Economics)

XLRI

1. Refer the table below answer the following questions

Molly Pete
Avatar Design 6 8
Tattoo Design 3 2

(a) What is the opportunity cost of designing one tattoo for Molly?
(b) What is the opportunity cost of designing one tattoo for Pete?
(c) Who has comparative advantage in Avatar design and who has comparative ad-
vantage in Tattoo design?
(d) What should they do for maximizing output?
(e) What is the opportunity cost of designing three tattoo for Pete?
(f) What is the opportunity cost of designing four tattoos for Molly?

2. Assume that the demand and supply of hamburgers can be represented in Figure 1.

(a) What is the equilibrium price and quantity?

(b) Calculate consumer surplus, producer surplus and social surplus.
(c) Suppose the quantity supplied is restricted by government regulation to 200 units
per month. Calculate the new price, the consumer surplus, producer surplus and
social surplus.

3. When demand is estimated to be p = 500 − 0.5x, calculate the loss in consumer surplus
when a tax drives price from 10 to 5.

4. Maximum price schemes are often called price controls and are typically developed to
protect consumers. Here the main concern is that prices are too high. We can show
that price controls set to protect consumers by pegging prices below market equilibrium

1
 p

3.5
Supply
H B
2.5
G C
2
F
1.5 D
Demand
0.5

200 300 q

Figure 1

3.5
Supply

A B
∗
p
C E
pmax

Demand

qmax q∗ q

Figure 2

levels impose deadweight loss on society in terms of lost social surplus. Consider Figure
2, where a maximum price pmax is set below the market equilibrium price p∗ .
Here the quantity sold is determined by supply. Sellers under this policy definitely lose
compared to a free market. Their surplus declines from (C + E + F) to F, so sellers
lose C + E.

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 Consumer surplus changes from A + B to A + C, a net change of C - B, which can
be positive or negative. The difference C - B appears positive in the figure, but this
need not be so. Consumers gain from the lower price on the items sold, but now fewer
items are sold, and this is costly.

Again, social surplus here unambiguously declines under this policy. The change in
social surplus is the change in consumer surplus plus the change in producer surplus,
or (C - B) - (C + E), which is - (B + E), which is negative, indicating a loss. This
fall in social surplus indicates that gains (if any) to consumers are more than offset by
losses to producers, so deadweight losses arise again, equal to the area (B + E).

A widely practised form of price control in many economies has been rent control.
Because governments seek to provide access to rental accommodation for low-income
families who cannot afford high city rentals, they have in the

Multiple Choice Question

1. An economic model is
a. a mechanical machine that replicates the functioning of the economy.
b. a fully detailed, realistic description of the economy.
c. a simplified representation of some aspect of the economy.
d. a computer program that predicts the future of the economy.

2. The circular-flow diagram illustrates that, in markets for the factors of production,
a. households are sellers, and firms are buyers.
b. households are buyers, and firms are sellers.
c. households and firms are both buyers.
d. households and firms are both sellers.

3. A point inside the production possibilities frontier is

a. efficient but not feasible.
b. feasible but not efficient.
c. both efficient and feasible.
d. neither efficient nor feasible.

4. All of the following topics fall within the study of microeconomics EXCEPT
a. the impact of cigarette taxes on the smoking behavior of teenagers.
b. the role of Microsoft’s market power in the pricing of software.
c. the effectiveness of antipoverty programs in reducing homelessness.
d. the influence of the government budget deficit on economic growth.

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 5. Which of the following is a positive, rather than a normative, statement?
a. Law X will reduce national income.
b. Law X is a good piece of legislation.
c. Congress ought to pass law X.
d. The president should veto law X.

6. In an hour, Mateo can wash 2 cars or mow 1 lawn, and Sophia can wash 3 cars or mow
1 lawn. Who has the absolute advantage in car washing, and who has the absolute
advantage in lawn mowing?
a. Mateo in washing, Sophia in mowing
b. Sophia in washing, Mateo in mowing
c. Mateo in washing, neither in mowing
d. Sophia in washing, neither in mowing

7. Between Mateo and Sophia, who has the comparative advantage in car washing, and
who has the comparative advantage in lawn mowing?
a. Mateo in washing, Sophia in mowing
b. Sophia in washing, Mateo in mowing
c. Mateo in washing, neither in mowing
d. Sophia in washing, neither in mowing

8. When Mateo and Sophia produce efficiently and make a mutually beneficial trade based
on comparative advantage,
a. Mateo mows more and Sophia washes more.
b. Mateo washes more and Sophia mows more.
c. Mateo and Sophia both wash more.
d. Mateo and Sophia both mow more

9. The best definition of a market is

a. a store that offers a variety of goods and services.
b. a place where buyers meet and an auctioneer calls out prices.
c. a group of buyers and sellers of a good or service.
d. a venue where the sole supplier of a good offers its product.

10. A change in which of the following will NOT shift the demand curve for hamburgers?
a. the price of hot dogs
b. the price of hamburgers
c. the price of hamburger buns
d. the income of hamburger consumers

11. Which of the following will shift the demand curve for pizza to the right?

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 a. an increase in the price of hamburgers, a substitute for pizza
b. an increase in the price of root beer, a complement to pizza
c. the departure of college students, as they leave for summer vacation
d. a decrease in the price of pizza

12. If pasta is an inferior good, then the demand curve shifts to the . . . . . . . . . when
. . . . . . . . . rises.
a. right; the price of pasta
b. right; consumers’ income
c. left; the price of pasta
d. left; consumers’ income

Answer

1. c.

2. a.

3. b.

4. d.

5. a.

6. d.

7. b.

8. a.

9. c.

10. b.

11. a.

12. d.

Notice: Practice as many questions as you can from the textbook.