Question No.

01

A city government is considering renting space in an allday parking garage for its 100
employees. The government estimates these employees' demand function for
parking spaces is 150 50P (P ≥ $1), where P is the per-day price of parking, and
the city will pass on the cost.

(a) If the city needs not charge each of its employees the same price for a parking
space, what is the maximum amount the city could pay for the 100 spaces, and
what would be the average cost per space?

(b) Assume the employees’ union insists that – per their contract – each employee
must be charged the same price for parking, and the city’s response is to intend
charging the price that maximizes its parking fee revenue. What price per space
would the city charge under this circumstance, and how much less total dollar
benefit would the employees receive?

Question No. 02

A graduating MBA student has job offers from two brokerage firms. Firm #1 pays a
straight salary of $70,000 (but no commission bonuses). Firm #2 pays a salary of
$6,000 plus a commission bonus, with a fixed bonus schedule based on annual
sales; the potential commission bonus for firm #2's job is as follows: $150,000 with a
probability of 11%, $50,000 with a probability of 83%, $20,000 with a probability of
5%, and zero with a probability of 1%.

(a) What is the expected monetary value of Firm #2's job?

(b) The student claims to be indifferent between the two job offers. If this is true, is
the student
risk averse, risk loving, or risk neutral, and why?

Question No. 03

PakMonoG’s inverse demand function is P = 100 – 2Q and cost function is TC = 10 +

2Q,
where Q is quantity in units and P price in PKR.
a) Determine the profit-maximizing price, quantity and profit (or loss) of PakMonoG.

b) Given your calculations in (a), illustrate the demand, marginal revenue and marginal cost
curves of the firm in a graph.
 c) If we were to compare PakMonoG with a perfect competitive firm in the market, are
there differences in characteristics of the two structures?

d) What are welfare implications? Is total societal welfare of the firm higher or lower than
that of a competitive firm? Support your answer using the graph in (b) above.

Question No. 04

Demand for Magnum Ice Cream is given by an equation as Q = 70 – 10P + 4 Px + 50 I

where, Q = Quantity of Magnum demanded, P = Price of Magnum Ice Cream, Px = Price of
Walls Ice Cream, I = Per Capita Income
a. Assume P = Rs 100, Px = Rs 120 and I = Rs 25 (Rs in thousands).
Calculate
(i) Price Elasticity of Demand
(ii) Cross Price Elasticity of Demand
(iii) Income Elasticity of Demand
b. How the elasticity does estimates help in managerial decision making?

Question No. 05

William Howe must decide whether to start a business renting beach umbrellas at an
ocean resort during June, July and August of next summer. He believes he can rent
each umbrella to vacationers at $5 a day, and he intends to lease 50 umbrellas for the
three- month period for$3,000. To operate this business, he does not have to hire
anyone (but himself), and he has no expenses other than the leasing costs and a fee of
$3,000 per month to rent the business location. Howe is a college student, and if he did
not operate this business, he could earn $4,000 for the Three- month period doing
construction work.

 (a) If there are 80 days during the summer when beach umbrellas are demanded and
Howe rents All 50 of his umbrellas on each of these days, what will be his accounting
profit for the Summer?

(b) What will be his economic profit for the summer?