ASSIGNMENTS IN ECON 65 A

Managerial Economics
(Due Date: November 5, 2022)

IV BS Accountancy Dr. Gilchor P. Cubillo

First Semester AY 2022-2023 Professor

INSTRUCTION: ANSWER ONLY TWO (2) ITEMS FROM EACH CHAPTER.

CHAPTER 1

1. As a marketing manager for one of the world’s largest automakers, you are
responsible for the advertising campaign for a new energy-efficient sports
utility vehicle. Your support team has prepared the following table, which
summarizes the (year-end) profitability, estimated number of vehicles sold,
and average estimated selling price for alternative levels of advertising. The
accounting department projects that the best alternative use for the funds used
in the advertising campaign is an investment returning 10 percent. In light of
the staggering cost of advertising (which accounts for the lower projected
profits in years 1 and 2 for the high and moderate advertising intensities), the
team leader recommends a low advertising intensity in order to maximize the
value of the firm. Do you agree? Explain. (10 points)

2. You’ve recently learned that the company where you work is being sold for
$275,000. The company’s income statement indicates current profits of
$10,000, which have yet to be paid out as dividends. Assuming the company
will remain a “going concern” indefinitely and that the interest rate will
remain constant at 10 percent, at what constant rate does the owner believe
that profits will grow? Does this seem reasonable? (10 points)

3. You are in the market for a new refrigerator for your company’s lounge, and
you have narrowed the search down to two models. The energy efficient
model sells for $500 and will save you $25 at the end of each of the next five
years in electricity costs. The standard model has features similar to the
energy efficient model but provides no future saving in electricity costs. It is
priced at only $400. Assuming your opportunity cost of funds is 5 percent,
which refrigerator should you purchase? (10 points)

CHAPTER 2

1. You are the manager of a firm that produces and markets a generic type of soft
drink in a competitive market. In addition to the large number of generic products
in your market, you also compete against major brands such as Coca-Cola and
Pepsi. Suppose that, due to the successful lobbying efforts of sugar producers in
the United States, Congress is going to levy a $0.50 per pound tariff on all
imported raw sugar—the primary input for your product. In addition, Coke and
Pepsi plan to launch an aggressive advertising campaign designed to persuade
consumers that their branded products are superior to generic soft drinks. How
will these events impact the equilibrium price and quantity of generic soft drinks? (10 points)

2. You are the manager of a mid-sized company that assembles personal computers.
You purchase most components—such as random access memory (RAM)—in
a competitive market. Based on your marketing research, consumers earning
over $75,000 purchase 1.3 times more RAM than consumers with lower
incomes. One morning, you pick up a copy of The Wall Street Journal and
read an article indicating that a new technological breakthrough will permit
manufacturers to produce RAM at a lower unit cost. Based on this informa-
tion, what can you expect to happen to the price you pay for random access
memory? Would your answer change if, in addition to this technological
breakthrough, the article indicated that consumer incomes are expected to
grow over the next two years as the economy pulls out of recession? Explain. (10 points)

3. You are the manager of a firm that produces and markets a generic type of soft
drink in a competitive market. In addition to the large number of generic products
in your market, you also compete against major brands such as Coca-Cola and
Pepsi. Suppose that, due to the successful lobbying efforts of sugar producers in
the United States, Congress is going to levy a $0.50 per pound tariff on all
imported raw sugar—the primary input for your product. In addition, Coke and
Pepsi plan to launch an aggressive advertising campaign designed to persuade
consumers that their branded products are superior to generic soft drinks. How
will these events impact the equilibrium price and quantity of generic soft drinks? (10 points)

CHAPTER 3

1. Revenue at a major cellular telephone manufacturer was $1.4 billion for the nine
months ending March 2, up 97 percent over revenues for the same period last
year. Management attributes the increase in revenues to a 137 percent increase in
shipments, despite a 17 percent drop in the average blended selling price of its
line of phones. Given this information, is it surprising that the company’s revenue
increased when it decreased the average selling price of its phones? Explain. (10 points)

2. You are a manager in charge of monitoring cash flow at a company that makes
photography equipment. Traditional photography equipment comprises 80 per
cent of your revenues, which grow about 2 percent annually. You recently
received a preliminary report that suggests consumers take three times more digi-
tal photographs than photos with traditional film, and that the cross-price elastic-
ity of demand between digital and disposable cameras is 0.2. In 2009, your
company earned about $400 million from sales of digital cameras and about
$600 million from sales of disposable cameras. If the own price elasticity of
demand for disposable cameras is 2.5, how will a 1 percent decrease in the
price of disposable cameras affect your overall revenues from both disposable
and digital camera sales? (10 points)

3. Recently, Pacific Cellular ran a pricing trial in order to estimate the elasticity of
demand for its services. The manager selected three states that were representative
of its entire service area and increased prices by 5 percent to customers in those
areas. One week later, the number of customers enrolled in Pacific’s cellular plans
declined 4 percent in those states, while enrollments in states where prices were
not increased remained flat. The manager used this information to estimate the
own-price elasticity of demand and, based on her findings, immediately increased
prices in all market areas by 5 percent in an attempt to boost the company’s 2021
annual revenues. One year later, the manager was perplexed because Pacific Cel-
lular’s 2021 annual revenues were 10 percent lower than those in 2020—the price
increase apparently led to a reduction in the company’s revenues. Did the manager
make an error? Explain. (10 points)

CHAPTER 4

1. A consumer must spend all of her income on two goods (X and Y). In each of
the following scenarios, indicate whether the equilibrium consumption of
goods X and Y will increase or decrease. Assume good X is an inferior good
and good Y is a normal good. (10 points)
a. Income doubles.
b. Income quadruples and all prices double.
c. Income and all prices quadruple.
d. Income is halved and all prices double.

2. A recent newspaper circular advertised the following special on tires: “Buy

three, get the fourth tire for free—limit one free tire per customer.” If a con
sumer has $500 to spend on tires and other goods and each tire usually sells
for $50, how does this deal impact the consumer’s opportunity set? (10 points)

3. Upscale hotels in Makati City recently cut their prices by 20 percent in

an effort to bolster dwindling occupancy rates among business travelers. A
survey performed by a major research organization indicated that businesses
are wary of current economic conditions and are now resorting to electronic
media, such as the Internet and the telephone, to transact business. Assume a
company’s budget permits it to spend $5,000 per month on either business
travel or electronic media to transact business. Graphically illustrate how a
20 percent decline in the price of business travel would impact this com
pany’s budget set if the price of business travel was initially $1,000 per trip
and the price of electronic media was $500 per hour. Suppose that, after the
price of business travel drops, the company issues a report indicating that its
marginal rate of substitution between electronic media and business travel
is 1. Is the company allocating resources efficiently? Explain. (10 points)

CHAPTER 5

1. You were recently hired to replace the manager of the Roller Division at a
major conveyor-manufacturing firm, despite the manager’s strong external
sales record. Roller manufacturing is relatively simple, requiring only labor
and a machine that cuts and crimps rollers. As you begin reviewing the
company’s production information, you learn that labor is paid $8 per hour
and the last worker hired produced 100 rollers per hour. The company rents
roller cutters and crimping machines for $16 per hour, and the marginal
product of capital is 100 rollers per hour. What do you think the previous
manager could have done to keep his job? (10 points)

2. You are a manager for Herman Miller—a major manufacturer of office furni-
ture. You recently hired an economist to work with engineering and operations
experts to estimate the production function for a particular line of office chairs.
The report from these experts indicates that the relevant production function is
where K represents capital equipment and L is labor. Your company has
already spent a total of $10,000 on the 4 units of capital equipment it owns.
Due to current economic conditions, the company does not have the flexibility
needed to acquire additional equipment. If workers at the firm are paid a com-
petitive wage of $100 and chairs can be sold for $200 each, what is your profit
maximizing level of output and labor usage? What is your maximum profit? (10 points)

3. You are the manager of a large but privately held online retailer that cur-
rently uses 17 unskilled workers and 6 semiskilled workers at its ware-
house to box and ship the products it sells online. Your company pays its
unskilled workers the minimum wage but pays the semiskilled workers
$7.75 per hour. Thanks to government legislation, the minimum wage will
increase from $6.55 per hour to $7.25 per hour on November 30, 2022. Discuss
the implications of this legislation on your company’s operations and in
particular the implications for your optimal mix of inputs and long-run
investment decisions. (10 points)