MBA Andrews Managerial Economics

May 2023 Take-Home Final Exam

1. According to a statistical study, the following relationship exists between an electric

power plant’s fuel costs (C) and its eight-hour output as a percentage of capacity (Q)
C = 16.68 + 0.125Q + 0.00439Q2
a. When Q increases from 50 to 51, what is the increase in the cost of fuel for this electric
plant?
b. Of what use might the result in part (a) be to the plant’s managers?
c. Derive the marginal (fuel) cost curve for this plant, and indicate how it might be used by
the plant’s managers.

2. The Deering Manufacturing Company’s short-run average cost function in 2012 was
AC = 3 + 4Q
where AC is the firm’s average cost (in dollars per pound of the product), and Q is its output
rate.
a. Obtain an equation for the firm’s short-run total cost function.
b. Does the firm have any fixed costs? Explain.
c. If the price of the Deering Manufacturing Company’s product (per pound) is $3, is the
firm making profit or loss? Explain.
d. Derive an equation for the firm’s marginal cost function.

3. The supply and demand curves for pears are

QS = 10, 000P
QD = 25, 000 − 15, 000P
where QS is the quantity (tons) supplied, QD is the quantity (tons) demanded, and P is the
price per pear (in hundreds of dollars per ton).
a. Plot the supply and demand curves.
b. What is the equilibrium price?
c. What is the equilibrium quantity?

4. The Madison Corporation, a monopolist, receives a report from a consulting firm con-
cluding that the demand function for its product is
Q = 78 − 1.1P + 2.3Y + 0.9A
where Q is the number of units sold, P is the price of its product (in dollars), Y is per capita
income (in thousands of dollars), and A is the firm’s advertising expenditure (in thousands
of dollars). The firm’s average variable cost function is
AV C = 42 − 8Q + 1.5Q2
where AV C is average variable cost (in dollars).
a. Can we determine the firm’s marginal cost curve?
b. Can we determine the firm’s marginal revenue curve?
c. If per capita income is $4,000 and advertising expenditure is $200,000, can we determine
the price and output where marginal revenue equals marginal cost? If so, what are they?

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 5. The can industry is composed of two firms. Suppose that the demand curve for cans is

P = 100 − Q
where P is the price (in cents) of a can and Q is the quantity demanded (in millions per
month) of cans. Suppose the total cost function of each firm is
T C = 2 + 15q
where T C is total cost (in tens of thousands of dollars) per month and q is the quantity
produced (in millions) per month by the firm.
a. What are the price and output if managers set price equal to marginal cost?
b. What are the profit-maximizing price and output if the managers collude and act like a
monopolist?
c. Do the managers make a higher combined profit if they collude than if they set price equal
to marginal cost? If so, how much higher is their combined profit?