Managerial Economics

ASSIGNMNET I

Question 1

consider a firm that is planning an advertising campaign for a new product. Goals set for the
campaign include exposure to at least 100,000 individuals, no fewer than 80,000 of whom have
an annual income of at least $50,000 and no fewer than 40,000 of whom are single. For
simplicity, assume that the firm has only radio and television media available for this campaign.
One television advertisement costs $10,000 and is expected to reach an average audience of
20,000 persons. Ten thousand of these individuals will have an income of $50,000 or more, and
4,000 will be single. A radio advertisement costs $6,000 and reaches a total audience of 10,000,
all of whom have at least $50,000 in income. Eight thousand of those exposed to a radio
advertisement are single.

Advertising media relations

Radio Television
Cost per adv $6,000 $10,000
Total audience per adv 10,000 20,000
Audience per Adv with income ≥$50,000 10,000 10,000
Unmarried audience per adv 8,000 4,000

a.Using simplex method, solve for firms cost minimization level of no.of advert. Via both
radio and television
b.What is the optimal level of advertisement cost?
c.solve using dual problem maz c = 100,000va+80,000vi+40,000vs

Answer for question no.1

A) Solve for firms cost minimization level by using simplex method

The Objective function

The firms objective function is to minimize advertising cost. The total cost is the sum of
payments for each types of advertising medias.

Min C=$6,000x1+$10,000x2

The decision variables

The problem contains two decision variables

X1= radio media available for the advertising campaign

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 X2=Tv media available for the advertising campaign

Constraints

- Minimum audience exposure requirement which is 100,000 people total available

- Audience Income requirement ,whose income is above $50,000 are 80,000 people
- Audience marital status, available requirements for unmarried audience is 40,000 people
- Variables of x1,x2 ≥0

Model formulation –we standardize the model as follows

Min C = $6,000x1 + $10,000x2+0s1+0s2+0s3+MA1+MA2+MA3

St 10,000x1+20,000x2-s1+A1 ≥ 100,000
10,000x1+10,000x2-s2+A2 ≥ 80,000
8,000x1+4,000x2 –s3+A3 ≥ 40,000
X1,x2,s1,s2,s3,A1,A2,A3 ≥ 0

For simplicity Assume numbers in the table’s are expressed in thousand(,000)

Initial Table
Cij Cj 6 10 0 0 0 M M M Soln. Ratio
BV x1 x2 s1 s2 s3 A1 A2 A3
M A1 10 20 -1 0 0 1 0 0 100 5
M A2 10 10 0 -1 0 0 1 0 80 8
M A3 8 4 0 0 -1 0 0 1 40 10
ZJ 28M 34M -M -M -M M M M
Cj-
Zj 6,-28M 10-34M M M M 0 0 0
X2 = entering variable
A1 = leaving variable

Second Table

Cij Cj 6 10 0 0 0 M M Soln. Ratio

A
BV x1 x2 s1 s2 s3 2 A3

10 X2 1/2 1 -1/20 0 0 0 0 5 10

M A2 5 0 1/2 -1 0 1 0 30 6

M A3 6 0 1/5 0 -1 0 1 20 10/3
ZJ 5+11M 10 - -M -M M M
1/2+7/10

2
 M
Cj-
Zj 1-11M 0 ½-7/10M M M 0 0

Table Three

Cij Cj 6 10 0 0 0 M Soln. Ratio

BV x1 x2 s1 s2 s3 A2

10 X2 0 1 -1/15 0 1/12 0 10/3 40

M A2 0 0 1/3 -1 5/6 1 40/3 16

6 X1 1 0 1/30 0 -1/6 0 10/3 -20

-
ZJ 6 10 -7/15+1/3M -M 1/6+5/6M M

Cj-Zj 0 0 7/15-1/3M M 1/6-5/6M 0

Table four

Cij Cj 6 10 0 0 0 Soln. Ratio

BV x1 x2 s1 s2 s3

10 X2 0 1 -1/10 1/10 0 2

0 S3 0 0 2/5 -6/5 1 16

6 X1 1 0 1/10 -1/5 0 6

ZJ 6 10 -8/5 -1/5 0 56

Cj-Zj 0 0 -8/5 1/5 0

Therefore the firm should use - six Radio advertisements (x1) = 6

- two Tv advertisements (x2) = 2

To minimize total advertisement cost the min level of advertisement for the campaign x1=6 and
x2=2

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 B) Optimal level of advertisement cost
Substitute value of x1 amd x2 in the obj.function results:

Min C = $6,000(6)+ $10,000(2)

=$36,000+$20,000

=$56,000

C) Duality Solution
Standardize by subtracting slack variables
MAX C= $100,000Y1+80,000Y2+40,000Y3+0s1+0s2
Stc. 10,000y1+10,000y2+8,000y3 -s1= 6,000
20,000y1+10,000y2+4,000y3-s2 = 10,000
Y1,y2,y3,s1,s2 ≥ 0

Initial Table

Cij Cj 100 80 40 0 0 Soln. Ratio

BV Y1 y2 Y3 S1 S2

0 S1 10 10 8 1 0 6 3/5

0 s2 20 10 4 0 1 10 1/2

ZJ 0 0 0 0 0
Cj-
Zj 100 80 40 0 0
Y1 = entering variable
S2= leaving variable

second Table

Cij Cj 100 80 40 0 0 Soln. Ratio

BV Y1 y2 Y3 S1 S2

0 S1 -10 5 6 1 -1/2 1 1/5

100 Y1 1 1/2 1/5 0 1/20 1/2 1

ZJ 100 50 20 0 5
Cj-
Zj 0 30 20 0 -5
Y2 = entering variable

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 S1= leaving variable

third Table

Cij Cj 100 80 40 0 0 Soln. Ratio

BV Y1 y2 Y3 S1 S2

80 Y2 -2 1 6/5 1/5 -1/10 1/5

100 Y1 2 -9/2 -10/25 -1/10 0 8/20

ZJ 40 -250 56 6 -8
Cj-
Zj 60 -170 -16 -6 8
y2=1/5 or 0.20cents

y1=8/20 or 0.40 cents y3=0

therefore the optimal solution is

$100,000Y1+80,000Y2+40,000Y3

=$100,000(.40)+80,000(.20)+40,000(0)

=$40,000+$16,000+$0= $56,000

Question no.2

Minimization case
Consider the following linear programming model for a farmer purchasing fertilizer
Minimize z = $6x1+$3x2
St. 2x1+4x2 ≥16 lb of nitrogen
4x1+3x2 ≥24 lb of phosphate
Where x1= bags of super gro-fertilizer
X2= bags of crop-quick fertilizer
Z= farmers total cost ($) of purchasing fertilizer
This model is transformed into standard form by subtracting surplus variables from the two ≥
constraints as follows .

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 Minimize z =6x1+3x2+os1+0s2
St. 2x1+4x2-s1=16
4x1+3x2-s2=24
X1,x2,s1,s2 ≥ 0
Use artifcial variables : are assigned a large cost in the objective function to eliminate them from
the final solution.
a. Find the optimal number of super-gro fertilizer (x1) and crop quick fertilizer (x2) and farmers
total cost.

solution

Minimize total cost of fertilizer

Min z =$6x1+$3x2

Stc. 2x1+4x2 ≥ 16 lb where x1=bags of super gro fertilizer

4x1+3x2≥ 24 lb x2=bags of crop-quick fertilizer

X1,x2 ≥ 0

Standardize the model by subtracting slack variables from the constraints

Min z =$6x1+$3x2+0s1+os2+MA1+MA2

Stc. 2x1+4x2 –s1+A1= 16 st1. When x1=8 x2=0, when x1=0 x2=4

4x1+3x2-s2+A2= 24 When x1=6 x2=0, when x1=0 x2=8

X1,x2 ,s1,s2,S1,S2,A1,A2≥ 0

initial table

Cij Cj 6 3 0 0 M M Soln. Ratio

A
BV x1 x2 s1 s2 1 A2
M A1 2 4 -1 0 1 0 16 4
M A2 4 3 0 -1 0 1 24 8
ZJ 6M 7M -M -M M M
Cj-
Zj 6-6M 3-7M M M 0 0
X2=Entering , A1 =leaving

Cij Cj 6 3 0 0 M Soln. Ratio

BV x1 x2 s1 s2 A2

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 3 X2 1/2 1 -1/4 0 0 4 8
M A2 5/2 0 3/4 -1 1 12 24/5
ZJ 3/2+5/2m 3 -3/4+3/4m -M M
Cj-
Zj 9/2-5/2M 0 ¾-3/4M M 0
X1=Entering , A2 =leaving

Cij Cj 6 3 0 0 Soln. Ratio

BV x1 x2 s1 s2
3 X2 0 1 -2/5 1/5 8/5 -4
6 X1 1 0 3/10 -2/5 24/5 16
ZJ 6 3 3/5 -9/5 168/5
Cj-
Zj 0 0 -3/5 9/5

Table -4

Cij Cj 6 3 0 0 Soln. Ratio

BV x1 x2 s1 s2
3 X2 4/3 1 0 -1/3 8
0 s1 10/3 0 1 -4/3 16
ZJ 4 3 0 -1 24
Cj-
Zj 2 0 0 1
Therefore

X1=0 S1=16

X2=8 S2=0

minZ=$24 total cost of purchasing fertilizer

Assignment II
1. Demand curves ISHO garment is contemplating a T-shirt advertising promotion monthly sales
data from T-shirt shops marketing indicate that
Q=1500-200P where Q is T-shirt sales quantity and p is price.
a. How many T-shirt could ISHO-garment sell at $4.50 each?
b. What price would ISHO-garment have to charge to sell 900 T-shirts?
c. At what price would T-shirt sales equal zero?
d. How many T-shirt could be given away?
e. calculate the price elasticity of demand at a price of $5?
Solution
a. Quantity of T-shirt at the price $4.50 is :
Q=1500-200*4.50
Q =1500-900

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 Q =600 T-shirts
b. Price for selling 900 T-shirt is :
900=1500-200p
200p=1500-900
200p=600
P=600/200
P=$3
C. T-shirts sales equal at the price:
1500-200p=0
200p=1500
P=1500/200
P=$7.50
d. How many T-shirts could be given away ?
P= free or zero price , so
Q=1500-200p
Q=1500-200*0
Q=1500
e. Q=1500-200P
=1500-200(5)
=1500-1000
=500
Therefore when Q=500 P=5 , ▲Q/▲p =-200
Ep=▲Q/▲P x P/Q
=-200x 5/500
=-1000/500
=-2

2. Optimal pricing :
In an effort to reduce excess end-of-the-model-year inventory, Harrison Ford offered a 2.5%
discount off the average list price of Focus SE sedans sold during the month of August.
Customer response was enthusiastic, with unit sales rising by 10% over the previous month’s
level .
a. Calculate the price elasticity of demand for Harrisons Ford Focus SE sedans.
SOLN
|EP|= %▲P/ %▲Q
|EP|=10%/-2.5%
|EP|=.10/-0.025
|EP|=-4
b. Calculate the profit maximizing price per unit if Harrison Ford has an average wholesale cost
of $10,000 and incurs marginal selling costs of $875 per unit .

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SOLN.
Since Profit maximizes at MR-MC=0, ep=-4 we have got then,
MR=P(1+1/EP)
$875=P(1+1/ep)
$875=p(1+1/-4)
$875=p(-3/-4)
P=$875/0.75
P=$1,166.67

ARSI UNIVERSITY
Department of Management
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 MBA 2015 Weekend Program

Group Assignment I,II : Optimization and Demand curve

Course : Managerial Economics
Prepared by : Name Id no.
1.Addis Zelalem Gs/Ex/0135/15
2.Fekadu Hindebu Gs/Ex/0123/15
3.Hashim Umer Gs/Ex/0126/15
4.Fikru Lemma Gs/Ex/0124/15
4.Hana Kelemwork Gs/Ex/0148/15

Submitted To: Dr.Reta Birku

April 09,2023
Adama

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Assignment III

1. Determine whether the following production functions exhibit constant, increasing,

or decreasing returns to scale.

A. Q = 0.5X + 2Y + 40Z

B. Q = 3L + 10K + 500

C. Q = 4A + 6B + 8AB

D. 𝑄 = 7𝐿 2 + 5𝐿𝐾 + 2𝐾 2

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E. 𝑄 = 10𝐿 0.5𝐾 0.3

2.Suppose the production Function of Adama metal sheet company is estimated as follows: Q=boLb1Kb2Eb3

Where

Q = output

L = labor input in worker hours

K = capital input in machine hours

E = energy input in

Each of the parameters of this model was estimated by regression analysis

using monthly data over a recent 3-year period. Coefficient estimation

results were as follows:

ˆb0 = 0.9; ˆb1 = 0.4; ˆb2 = 0.4; ˆb3 = 0.2

The standard error estimates for each coefficient are

ˆb0 = 0.6; ˆb1 = 0.1; ˆb2 = 0.2; ˆb3 = 0.1

a.      Estimate the effect on output of a 1% decline in worker hours (holding K and E constant).

b.     Estimate the effect on output of a 5% reduction in machine hours availability accompanied by a 5%

decline in energy input (holding L constant).

c.      Estimate the returns to scale for this production syste

Solution:

1A. To determine Initially let

X = 50, Y = 75 , Z = 100

𝑄 = 0.5𝑋 + 2𝑌 + 40𝑍, 𝑄 = 0.5(50) + 2(75) + 40(100) = 4,175

Increasing all inputs by an arbitrary percentage 2%

𝑄 = 0.5(51) + 2(76.5) + 40(102) = 4,258.5

(𝑄2/𝑄1)= 4175/4258.5 = 1.02), the output elasticity is 1 and the

production system exhibits.Increasing returns to scale

B. let L = 50

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K = 100

𝑄 = 3𝐿 + 10𝐾 + 500

𝑄 = 3(50) + 10(100) + 500 = 1,650

Increasing both inputs by an arbitrary percentage 3% 𝑄 = 3(51.5) + 10(103) +500 = 1,684.5

(𝑄2/𝑄1)= 1,684.5/1,650 = 1.021), the output elasticity is less than 1 and the

production system exhibits Diminishing returns to scale.

C. let A = B = 100

𝑄 = 4𝐴 + 6𝐵 + 8𝐴𝐵

𝑄 = 4(100) + 6(100) + 8(100)(100) =81,000 Increasing both inputs by an arbitrary percentage 1%

𝑄 = 4(101) +6(101) + 8(101) (101) = 82,618

(𝑄2/𝑄1)=82,618/81,000= 1.02), the output elasticity is greater than 1 and

the production system exhibits Increasing returns to scale

D. Q = 7L² + 5LK + 2K²

its power production function. Returns to scale are calculated by assuming the

exponents of the power function or, alternatively, by summing the log-linear

model coefficient estimates.

lnQ=ln5+2lnL+ln2+2lnK = a+b = 2+2= 4 Increasing returns to scale

E. 𝑄 = 10𝐿0.5 K0.3

Summing the coefficients =0.5+0.3 = 0.8

Which is ≤ 1 it indicates Decreasing returns to scale

Q2, Solution

A. For Adama steel manufacturing company functions, calculations of the elasticity of output with

respectto individual inputs can be made by simply referring to the exponents of the

production relation. Here a 1% decline in L, holding all else equal, will lead to a 0.4% decline in output.

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Notice that: ∆𝑄 𝑄 ∆𝐿 𝐿 = ∆𝑄 ∆𝐿 × 𝐿 𝑄 (𝑏0𝑏1𝐿 𝑏1−1 𝐾𝑏2𝐸 3)×𝐿 𝑄 = 𝑏0𝑏1𝐿 𝑏1−1+1 𝐾𝑏2𝐸 3 𝑏0𝐿 𝑏1
𝐾𝑏2𝐸3 = 𝒃𝟏

∆𝐿

∆𝑄

∆𝐿

(𝑏0𝑏1𝐿

𝑏1−1

𝐾𝑏2𝐸

3)×𝐿

𝑏0𝑏1𝐿

𝑏1−1+1

𝐾𝑏2𝐸

𝑏0𝐿

𝑏1

𝐾𝑏2𝐸3

= 𝒃𝟏

Because (∆Q/Q)/(∆L/L) is the percent change in Q due to a 1% change in L,

∆𝑄

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𝑄

∆𝐿

= 𝑏1 =

∆𝑄

= 𝑏1 ×

∆𝐿

= 0.4 × (−0.01)

∆𝑄

= −𝟎. 𝟎𝟎𝟒 𝑶𝒓 − 𝟎.𝟒%

B. From part A it is obvious that:

∆𝑄

= 𝑏2 (

∆𝐾

) + 𝑏3 (

∆𝐸

) So, coefficient estimation results of b2=0.4 and b3=0.2 were

given and 5% reduction in machine hours and 5% decline in energy input holding

labor (L) constant.

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= 0.4(−0.05) + 0.2(−0.05)

∆𝑄

= −𝟎.𝟎𝟑 𝐨𝐫 − 𝟑%

C. In the case of Cobb-Douglas production functions, returns to scale are determined

by simply summing exponents because:

𝑄 = 𝑏0𝐿

𝑏1𝐾

𝑏2𝐸

𝑏3ℎ𝑄 = 𝑏(𝐾𝐿)

𝑏1𝑏1

(𝐾𝐾)

𝑏2

(𝐾𝐸)

𝑏3

𝑏1+𝑏2+𝑏3 𝑏0𝐿

𝑏1𝐾

𝑏2𝐸

𝑏1+𝑏2+𝑏3 𝑄

Here 𝒃𝟏 + 𝒃𝟐 + 𝒃𝟑 = 𝟎.𝟒 + 𝟎. 𝟒 + 𝟎. 𝟐 = 𝟏

It indicates constant returns to scale. This means that a 1% increase in all inputs will

lead to a 1% increase in output, and average costs will remain constant as output

increases

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