Managerial Economics Exam 2 Math Examples

1. Jim has decided to open an online store that sells home & garden products. After searching around, he
chooses the software company XX to provide the software for his website since their product required the
least amount of specialized investments for him to use it. They agreed upon price of $27,000. To use XX’s
software, Jim makes $9,000 in sunk capital investments and spends 50 hours learning how to use XX’s
software, which is very different from other software packages. Both Jim and XX view Jim’s time as worth
$50 per hour and XX is fully aware of the investments Jim must make to use their product. After Jim’s
investments were made, XX came to Jim and asked for more money. How much do you think they asked
for?

Asking = Sunk Investments + Price

XX will ask Jim for $38,500 (may ask $38,499 to be sure it is strictly better than any alternative)

m
er as
2. Suppose an industry is composed of six firms. Four firms have sales of $10 each, and two firms have sales

co
of $5 each. What is the four-firm concentration ratio for this industry?

eH w
Total industry sales (Sr) = $50

o.
Sales of four largest firms = $40
rs e
ou urc
S 1+ S 2+S 3+S 4
C4 =
Sr
$ 10+ $ 10+ $ 10+ $ 10 $ 40
C4 = 0.80
o

= =
$ 50 $ 50
aC s
vi y re

Four largest firms in industry account for 80% of total industry output

3. Suppose an industry consists of three firms. Two firms have sales of $10 each, and one firm has sales of
ed d

$30. What is the Herfindahl-Hirschman Index for this industry?

Total industry sales (Sr) = $50

n 2
Si
HHI = 10,000 ∑ ( Sr )
is

i=1
Th

2 2 2
30 10 10
HHI = 10,000 [
( )( ) ( )
50
+
50
+
50
¿=4,400
sh

4. The industry elasticity of demand for airline travel is -3, and the elasticity of demand for an individual
carrier is -4. What is the Rothschild index for this industry?

ET
R=
EF

This study source was downloaded by 100000827475242 from CourseHero.com on 12-08-2021 22:14:55 GMT -06:00

https://www.coursehero.com/file/60136169/Exam-2-Math-Examples-Solveddocx/
 −3
R= = 0.75
−4

This means demand for an individual carrier is a little more elastic than that of the industry as a whole.
5. A firm in the airline industry has a marginal cost of $200 and charges a price of $300. What are the Lerner
index and markup factor?

P−MC $ 300−$ 200 1

1/3 of price pad for a flight is above & beyond marginal cost
1 1
= =1.5
Markup factor is 1−L 1
1−
3

Price is 50% higher than marginal cost

m
er as
co
6.

eH w
o.
rs e
ou urc
7.
o
aC s
vi y re
ed d

8.
ar stu
is
Th

9.
sh

This study source was downloaded by 100000827475242 from CourseHero.com on 12-08-2021 22:14:55 GMT -06:00

https://www.coursehero.com/file/60136169/Exam-2-Math-Examples-Solveddocx/
 10.

11.

12.

m
er as
co
eH w
o.
rs e
ou urc
13.
o
aC s
vi y re

14.
ed d
ar stu
is
Th

15.
sh

16.

This study source was downloaded by 100000827475242 from CourseHero.com on 12-08-2021 22:14:55 GMT -06:00

https://www.coursehero.com/file/60136169/Exam-2-Math-Examples-Solveddocx/
 17.

18.

m
er as
co
eH w
o.
19. rs e
ou urc
o
aC s
vi y re

20.
ed d
ar stu
is
Th
sh

This study source was downloaded by 100000827475242 from CourseHero.com on 12-08-2021 22:14:55 GMT -06:00

https://www.coursehero.com/file/60136169/Exam-2-Math-Examples-Solveddocx/
Powered by TCPDF (www.tcpdf.org)