Part I. Give a short answer to each question.

1. What are the points of managerial economics? How is it helpful to managers? Answer with the
help of examples

Managerial economics is the application of economic theory and methods to business

management for decision making purposes. It focuses on how managers can make use of
economic theories, tools, and techniques to create value for an organization. Managerial
economics (ME) helps managers solve business problems and make informed decisions based on
data-driven analysis.

Some important points of managerial economics that help managers include:

1. Cost Analysis: ME helps managers identify ways to reduce costs while also maximizing
efficiency and effectiveness. For example, a manager can analyze different production strategies
in order to decrease labor costs while maintaining quality levels.

2. Demand Analysis: ME assists managers in understanding consumer demand for products,

prices, outputs, and other factors. This enables them to forecast consumer behavior and design
marketing strategies accordingly. For example, ME might be used to track consumer reaction
rates following a price change or product launch over time.

3. Optimization Techniques: ME equips managers with tools such as linear programming,

simulation models, game theory, inventory control models etc., which they can use to optimize
strategies employing the best cost solutions with minimum wastages of resources such as time
manpower money etc.. For instance if a company has limited resources then materials required
could be optimized using linear programming techniques and subset selection approach which
maximizes profits while utilizing only present resources efficiently by finding optimal levels of
input combinations that yield desired output levels at minimum cost or maximum profitability
respectively

2. Briefly discuss what does it mean by movement along the demand curve and shift of the
demand curve?
Movement along the demand curve refers to a change in demand due to a change in price, i.e., a
movement caused by the changing market forces of supply and demand at a given price point. As
prices increase or decrease, the quantity demanded of a good or service will also increase or
decrease, causing a movement along the demand curve?

A shift of the demand curve refers to when an external factor causes the entire demand for a
good or service to either increase or decrease regardless of its current price point, thus shifting
either rightward (increase in demand) or leftward (decrease in demand). This can be caused by
changes in tastes, income levels, prices of related goods, population size & composition, etc.

Part II. Workout.

1. Consider the general demand function:

Q1 = 8,000 - 16P + 0.75M + 30PR

A,) derive the equation for the demand function when m=$30,000 and pr=$50

Q1=8,000−16(50)+0.75(30000)+30PR

Q1=8,000−16(50)+0.75(30000)+30PR

Q1=8000−800+22500+30PR

Q1=8000−800+22500+30PR

Q1=29700+30PR

B). Interpret the intercept and slope parameters of the demand function derived in

Part A.

Q1=29700+30PR

 This equation obeys y=mx +c

 When x=0, the y intercept is =29700=29700
 The slope from the equation is =30=30
  Using the demand function from part a, calculate the quantity demanded when the

price of the good is $1,000 and when the price is $1,500.

Q1=29700+30(1000) =−300

Q1=29700+30(1500)

Q1=−15300

A. Qd = 8,000 - 16P + 0.75(30,000) + 30(50),

Qd = 38,500 - 16P

B. The intercept of this demand function is 38,500 and the slope is -16, so it can be inferred that
when the price is zero, customers will demand 38,500 goods, and for every one unit increase in
price, quantity demanded will decrease by 16 units.

C. The graph of the equation would be a straight line with a negative slope intersecting the
quantity-demanded axis at (38,500), and the price axis at (2500, 15).

D. When the price of the good is $1000: Qd = 38,500 - 16(1,000) = 2250 units When the price of
the good is $1500: Qd = 38,500 - 16(1,500) = 750 units

E, Inverse Demand Function: P= 2339.375-0.0625Q When Q = 24000: P= 1187.5 This means

that when 24000 units of goods are demanded then the associated price of each unit will be
1187.5

2. Suppose that the demand and supply functions for good X are

Qd=50−8 P
Qs=−17.5+10 P
Question with solutions:

a) The equilibrium is in the point, where Qd = Qs So, we put the equations of the demand and
supply
Into the equality.

50 - 8P = -17.5 + 10P

18P = 67.5

P = $3.75 is equilibrium price.

Q = 50 - 8*3.75 = 20 units is equilibrium quantity.

b) What is the market outcome if price is $2.75? What do you expect to happen? Why?

For the lower price the quantity demanded will rise and the quantity supplied will fall, so there
will be a

shortage of product on the market.

c) What is the market outcome if price is $65.25? What do you expect to happen? Why?

For the much more higher price the quantity demanded will fall sharply and the quantity supplied
will rise

sharply, so there will be a great surplus of the product on the market.

d) What happens to equilibrium price and quantity if the demand function becomes Qd = 59 -
8P?

Let us repeat the steps from the question 1.

Qd = Qs

59 - 8P = -17.5 + 10P

18P = 78.5

P = $4.36, Q = 24 units are new equilibrium price and quantity.

A. The equilibrium price and quantity for Good X is $3.56 and 31.6 respectively.
B. At the price of $2.75, there will be an excess demand of 10.4 units since the quantity
demanded (43.2) is greater than the quantity supplied (32.8). This will increase the price due to
increased competition in the market, as buyers compete to purchase limited quantities of the
good at this lower equilibrium price.

C. At the price of $4.25, there will be an excess supply of 11 units since the quantity supplied
(51) is greater than the quantity demanded (40). This will decrease the price due to decreased
competition in the market, as sellers compete to offer limited quantities of the good at this higher
equilibrium price.

D. If the demand function becomes Qd= 59-8P, then the equilibrium price and quantity for Good
X is $4 and 23 respectively.

E. If the supply function becomes Qs= -40 +10P, then the equilibrium price and quantity for
Good X is $3 and 27 respectively

3 a. False. Price inelastic demand means that changes in price do not significantly impact the
quantity demanded. Therefore, when the price of plastic surgery increases, the number of
operations may not decrease.

b. False. Price inelasticity means that the percentage change in quantity demanded is larger than
the percentage change in price.

c. False. Changes in price of plastic surgery can affect the number of operations, though due to
pricing elasticity they may not affect it much.

d. False. Due to pricing elasticity, quantity demanded is not typically very responsive to changes
in price.

e. False. An increase in plastic surgery operates would likely result in an increase in expenditures
on plastic surgery as well even if the prices remain constant or rise slightly due to supply and
demand curves changing accordingly with a higher quantity being supplied and a higher demand
for it resulting from its greater availability at or about the same cost per operation as before
increased service availability for this elective choice of medical care/procedure was available for
those wanting it/placing it among their priorities for health and wellness service needs or
exercise choices for improved appearance/satisfaction purposes which market demand has been
demonstrated applicable previously .

f. True If more units are sold then marginal revenue will be negative (as total revenue increases
but at a decreasing rate), relative to selling one less unit (assuming positive marginal costs).

A.The company's fixed cost is 190.

B.If the company produced 100,000 units of goods, the average variable cost per unit is 53.

C.The marginal cost per unit produced is 53.

D.The average fixed cost is 1.90.

Step 1: Fixed cost of the company

TC = 200 + 55q (in thousands)

The fixed cost is independent of the output quantity. Therefore, the fixed cost for the given short-
run cost function is $200,000.

Step 2: Average variable cost of the company

Step 3: The marginal cost of the production from the given cost function, the variable cost is 55q.

Thus the average variable cost for 100,000 units is $55,000 (= 55q/q in thousands).

Step 3: The marginal cost of the production

The marginal cost is the change in total cost by an additional unit of output. It is calculated as:

Thus, the marginal cost of production is $55,000.

Step 4: Average fixed cost of the company for 100,000 units

The fixed cost of production is $200,000, as given in the total cost function.

The average fixed cost is calculated as:

Thus, the average fixed cost for 100,000 units is 2.

Step 5: Formulating a new cost equation

The fixed cost increases by $50,000. Thus, the new fixed cost will be $250 (in thousands). The
variable cost per 1000 output has declined to $45 (in thousands). Also, the interest rate has come
into play for determining the variable cost. For each 1% increase in interest rate (i), income
increases by $3 (in thousands). So, the variable cost will depend on output and interest rate.

Hence, the new total cost function is:TC = 250 + 45q + 3i