Course: Managerial Economics

Individual Assignment One and Two

Briefly explain the following questions:

1. Kebede is the owner of a small grocery store in a busy section of Addis Ababa, Ethiopia.
Kebede’s annual revenue is $200,000 and his total explicit cost (Kebede pays himself an
annual salary of $30,000) is $180,000 per year. A supermarket chain wants to hire Adam as
its general manager for $60,000 per year.
A. What is the opportunity cost to Kebede of owning and managing the grocery store?
B. What is Kebede’s accounting profit?
C. What is Kebede’s economic profit?

The opportunity cost of any decision includes the value of all relevant sacrifices, both explicit
and implicit. Do you agree? Explain.

 Answer;
 
Opportunity costs represent the benefits an individual, investor or business misses out on when
choosing one alternative over another.
 Yes, I agree with
that.But I don’t quite understand what you mean by “sacrifices”. They are all “options” or opport
unities that you can choose from. I can say that when choosing one option, I will have to
sacrifice other relevant options or values. But still it is your choice. You must have weighed the
risks and benefits of implementing your strategies to realize
short-term  and  long-term
 
goals
to make this decision. What I mean is that you must be far-sighted enough to predict what would
happen when you choose one option over the others. You should foresee that more benefits could
possibly be obtained in the long run, although you may lose something when foregoing one
opportunity in order to get the another goal in the short-term. Therefore, you should consider
each explicit
andimplicit factors, be familiar with the advantages and disadvantages of each alternative andana
lysis the risks and benefits of each choice before making your final decision. Yes, relevant
sacrifices could be explicit and/or implicit. For example, you choose to invest stock market over
updating the equipment to improve your business since you think that the
former choice can bring you more return at present. But you should understand that letting theeq
uipment falling behind would greatly hinder the productivity of your business. This is one of the
explicit sacrifices and there are also other obvious losses such as tedious and
cumbersomework, resentment from employees, losses of talented worker, etc.
2. The “law of demand” is not a law. Do you agree with this statement? Explain
Answer;

What is 'Law of Demand'

Definition: The law of demand states that other factors being constant (cetris peribus), price
and quantity demand of any good and service are inversely related to each other. When the
price of a product increases, the demand for the same product will fall.
Description: Law of demand explains consumer choice behavior when the price changes. In
the market, assuming other factors affecting demand being constant, when the price of a good
rises, it leads to a fall in the demand of that good. This is the natural consumer choice
behavior. This happens because a consumer hesitates to spend more for the good with the
fear of going out of cash.

The above diagram shows the demand curve which is downward sloping. Clearly when the
price of the commodity increases from price p3 to p2, then its quantity demand comes down
from Q3 to Q2 and then to Q3 and vice versa.
3. Many owners of small businesses do not pay themselves a salary. What effect will this
practice have on the calculation of the firm’s accounting profit? Economic profit? Explain.

 Answer;
It will affect the business account since the owner of the business might start spending
the cash belonging to the business for personal use, leading to a deficit in the
accounting profit and capital.
4. Firms that earn zero economic profit should close their doors and seek alternative investment
opportunities. Do you agree? Explain.
5. Suppose that the total market demand for a product comprises the demand of three
individuals with identical demand equations.
QD,1= QD,2=QD,3=50-25P

What is the market demand equation for this product?

6. The market demand and supply equations for a product are where Q is quantity and P is
price. What are the equilibrium price and quantity for this product
QD =25-3P
QS =10+2P

Where Q is quantity and P is price. What are the equilibrium price and quantity for this product?

7. The market supply and demand equations for a given product are given by the expressions
QD =200-50P
QS = - 40 + 30P
A. Determine the equilibrium price and quantity.
B. Suppose that there is an increase in demand to
QD =300-50P
Suppose further that there is an increase in supply to
QS =-20+30P
What are the new equilibrium price and quantity?
C. Suppose that the increase in supply had been
QS = 140 + 30P
Given the demand curve in part b, what are the equilibrium price and quantity?
D. Diagram your results.
8. Define and give an example of each of the following demand terms and concepts. Illustrate
diagrammatically a change in each.
 A. Quantity demanded
B. Demand
C. Substitute good
D. Complementary good
E. Income expectation (high and low)
9. Does the following statement violate the law of demand? The quantity demanded of
diamonds declines as the price of diamonds declines because the prestige associated with
owning diamonds also declines.
10. At a price of $25, the quantity demanded of good X is 500 units. Suppose that the price
elasticity of demand is -1.85. If the price of the good increases to $26, what will be the new
quantity demanded of this good?

11. Briefly explain the determinants of price elasticity of demand?

12. For each of the following production functions, determine whether returns to scale are
decreasing, constant, or increasing when capital and labor inputs are increased from K = L =
1 to K = L = 2. (Explain your answers)

13. Define each of the following (Support your answer with the necessary graph)
A. Stage I of production
B. Stage II of production
 C. Stage III of production
14. What it meant by
A. Short run in production
B. Long run in production
15. Suppose that output is a function of labor and capital. Assume that labor is the variable input
and capital is the fixed input. Explain the law of diminishing marginal product. How is the
law of diminishing marginal product reflected in the total product of labor curve?
16. Briefly explain the following concepts related to isoquant curve
A. What does a linear isoquant illustrate?
B. Isoquants cannot intersect. Do you agree? Explain.
17. Suppose that the total cost function of a firm is given as

A. Determine the output level that minimizes average total cost (ATC). At this output
level, what is TC? ATC? MC? Verify that at this output level MC = ATC, and that
ATC intersects MC from below.
B. Determine the output level that minimizes average variable cost (AVC). At this
output level, what is TC? AVC? MC?
C. Diagram your answers to parts a and b.
18. Explain the following concepts (support your answer with the necessary graph)
A. Expansion path
B. Economies of scale
19. Suppose that a perfectly competitive industry comprises 1,000 identical firms. Suppose,
further, that the market demand (QD) and supply (QS) functions are
QD =170,000,000-10,000,000P
QS =70,000,000+15,000,000P
A. Calculate the equilibrium market price and quantity?
B. Given your answer to part a, how much output will be produced by each firm in
the industry?
C. Suppose that one of the firms in the industry goes out of business. What will be the
effect on the equilibrium market price and quantity?
20. Firms in perfectly competitive industries may be described as price takers. What are the
implications of this observation for the price and output decisions of profit-maximizing
firms?
21. Briefly explain the difference and similarity between the four types of market structure
(perfectly competitive, monopolistically competitive, oligopoly and monopoly)
22. Briefly explain the six basic steps of decision making?
23. Briefly explain the following concepts:
A. Managerial economics
B. Opportunity cost
 C. Explicit and implicit cost
D. Economic and Accounting cost
24. Explain approaches used to measure national income?
A. Gross Domestic Product (GDP)
B. Gross National Product (GNP)
C. Discuss approach used to measure GNP/GDP

Note: Choose 20 from the above listed questions for both assignments.