SCHOOL OF BUSINESS

Sample of Examination
MBA 525 R2: Managerial Economics

1. The total cost function is as follows: TC= 20+ 4Q

Calculate the following costs at quantity is Q=10.
a. Total fixed cost
b. Total variable cost
c. Average total cost
d. Average fixed cost

2. A risk-neutral manager is considering two projects. The first is to introduce a new product; the
second is to revamp the production facilities at the existing plant. There is a 20 percent chance a
rival will enter the market and an 80 percent chance it will not. If the rival enters, the firm will
earn $80,000 profit if it introduces the new product, whereas revamping the production
facilities will earn it $50,000 in profits. If the rival does not enter, the firm will earn $60,000
profit if it introduces the new product, and revamping the production facilities will earn profit of
$60,000. What should the manager do? Why?

3. Sellers of used cars know the cars’ quality, but buyers do not. Imagine that used Toyota Corollas
are worth $10,000 if they are of high quality and $5,000 if they are of low quality. Although
buyers may not know the quality of a specific car, they do know that 25 percent of the used
Corollas will be of high quality. In such a market, what cars will be sold on the used car market
and at what price?

4. Two firms produce identical products at zero cost, and they compete by setting prices. If each
firm charges a low price, the both firms earn profits of zero. If each firm charges a high price,
then each firm earns profits of $30. if one firm charges a high price and the other firm charges a
low price, the firm that charges the lowest price earns profits of $50 and the firm charging the
highest price earns profits of zero.
a. Write this game in normal form.
b. Suppose the game is infinitely repeated. Can the players sustain the "collusive outcome" as a
Nash equilibrium if the interest rate is 50 percent?

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5. A potential entrepreneur is trying to decide whether to open a new health spa. She presently
makes $35,000 per year as an aerobics instructor and will have to give up this job if she opens
the new health spa. If she chooses to open the spa, it will cost her $200,000 per year in rent and
other operating expenses.
a. What are her accounting costs?
b. What are her opportunity costs?
c. How much would she need to make in revenues to earn positive accounting profits? Positive
economic profits? 

6. You have been hired to replace the manager of a firm that used only two inputs, capital and labor,
to produce output. The firm can hire as much labor as it wants at a wage of $10 per hour and can
rent as much capital as it wants at a price of $80 per hour. After you look at the company books,
you learn that the company has been using capital and labor in amounts that imply a marginal
product of labor of 50 and a marginal product of capital of 100. What do you have to do to
improve the profitability of the firm as the newly hired manager? Explain.