Rift Valley University – Chiro campus

Instruction:

 Attempt all questions.

 Clear and neat answers deserve credit.
 Be careful not to copy and paste from your sources unless you use direct
quotations and always paraphrase.

Submission date: November30/2023 (Weight: 50%)

1. Managerial economics is an application of the principles of economics in managerial

decision making. The economic way of thinking about business decision making
provides all managers with a powerful set of tools and insights for furthering the goals
of their organization. Describe the effects of each of the following managerial
decisions or economic influences on the value of the firm:
A. Discuss the managerial uses of production function.
B. The firm is required to install new equipment to reduce air pollution
C. Through heavy expenditures on advertising, the firm’s marketing department
increasessales substantially.
D. The production department purchases new equipment that lowers manufacturing
costs
E. The National Bank of Ethiopia takes actions that lower interest rates dramatically.
2. Consider the following specification

P = ETB7,500 − ETB3. 75Q

TC=ETB 1,012,500 + ETB1,500Q + ETB1. 25Q2

Based on the information given above

A. Determine the optimal level of output

B. Determine the optimal level of profit
3. Fill in the missing data for price (P), total revenue (TR), marginal revenue (MR), total
cost (TC), marginal cost (MC), profit (π), and marginal profit (Mπ) in the following table:

Q P TR MR TC MC π mπ
0 160 0 0 -
1 150 150 25 25
2 140 130 55 30
3 130 35
4 130
5 110 175
6 100 50 55
7 90 30 290 60
8 80 355
9 75
10 60 525

4. Describe the following

A. What is Marginal cost? State its significance in cost analysis.
B. Define opportunity cost and give an example.
C. Explain the concepts: AFC, AVC, ATC and MC.
D. Explain briefly the various types of costs with suitable examples.
E. Discuss the short run cost output relationship with the graph.
F. Derive long run total cost curve.
G. What is the relationship between AC and MC?
H. Give reasons for the U shape of long run AC curve.
I. Distinguish between economies of scale and diseconomies of scale with a graph.
J. List out the factors that cause economies and diseconomies of scale.
5. Mention the characteristics of monopoly, oligopoly, and monopolistic competitive
and perfect competitive market structure and make comparison.
6. Why does the entire managerial economics revolve around what to produce, how to
produce, and for whom to produce? Give examples to support your answer.
7. Suppose the Cobb-Douglas production function Q = 20 L 0.5K0.5. Assume also that the
wage rate for labor and rental price of capital are birr 5 and birr 10, respectively. If the
firm allocates total outlay of 1000 birr
A. Calculate the optimal units of labor and capital that maximize production.
B. Is the production function homogeneous? If so, identify the nature of the returns to
scale.
C. Calculate the maximum output at the equilibrium point.
D. Compute the MRTSLK at the equilibrium point.

8. Consider the following total cost function:TC = 2/3Q3 – 10Q2 + 200Q + 50

A) Identify the FC and VC function?

B) Calculate AVC, AFC, ATC, and MC functions

C) Determine the level of output at which AVC reaches minimum point and the
minimum AVC at that level of output?
9. Given the following data, calculate the price elasticity of demand when
Price per unit 6 5 4 3 2 1
Quantity 750 1250 2000 3250 4650 6250

(a) Price increases from 3.00 ETB per unit to 4.00 ETB per unit and
(b) The price falls from 4.00 ETB per unitto 3.00 ETB per unit
10. Consider the following Total Revenue (TR) and Total Cost (TC) functions for a firm
operating in a perfect competition market:
TR = 6Q and TC = Q3 – 2Q2 + 50Q + 25
A) Determine the profit maximizing or loss minimizing equilibrium level of output.
B) Compute the level of profit or loss at the above equilibrium quantity and comment on
the decision of the firm.
C) Mathematically and graphically derive the supply function of the firm.