Managerial Economics
 1. It is estimated that over 100,000 students will apply to the top 30 MBA programs in the United States this year.
 
a. Using the concept of net present value and opportunity cost, explain when it is rational for an individual to pursue an MBA degree.
 
b. What would you expect to happen to the number of applicants if the starting salaries of managers with MBA degrees remained constant but salaries of managers without such degrees decreased by 20%? Why?
 
2. Jaynet spends $30,000 per year on painting supplies and storage space. She recently received two job offers from a famous marketing firm—one offer was for $110,000 per year and the other was for $80,000. However, she turned both jobs down to continue a painting career. If Jaynet sells 25 paintings per year at a price of $8,000 each,
 
a. What are her accounting profits?
 
b. What are her economic profits?
 
3. Two months ago, the owner of a car dealership significantly changed his sales manager’s compensation plan. Under the old plan, the manager was paid a salary of $6,000 per month; under the new plan, she receives 2% of the sales price of each car sold. During the past two months, the number of cars sold increased by 40%, but the dealership’s margins (and profits) significantly declined. According to the sales manager, “Consumers are driving harder bargains and I have had to authorize significantly lower prices to remain competitive.” What advice would you give the owner of the dealership?
 
4. The demand for good X is given by ???????????? = 6,000 − ???????? − ???????? 9???????? ????
 
Research shows that the prices of related goods are given by ???????? = $6,500 and ???????? = $100, while the average income of individuals consuming this product is ???? = $70,000.
 
a. Indicate whether goods Y and Z are substitutes or complements for good X.
 
b. Is X an inferior or a normal good?
 
c. How many units of X will be purchased when ???????? = $5,230?
 
d. Find the inverse demand function for good X and draw a graph of it.
 
5. Consider a market where supply and demand are given by ???????????? = 92 − 2???????? ???????????? = −16 ???????? a. b. c. d. What is equilibrium quantities supplied and demanded? What is equilibrium price? What is the social (consumer producer) surplus? Suppose the government imposes a price floor of $40 on this market. What is the size of the dead weight loss as a percentage of the social surplus?
 
6. Some have argued that higher cigarette prices do not deter smoking. While there are many arguments both for and against this view, some find the following argument to be most persuasive of all: “The laws of supply and demand indicate that higher prices are ineffective in reducing smoking. In particular, higher cigarette prices will reduce the demand for cigarettes. This reduction in demand will push the equilibrium price back down to its original level. Since the equilibrium price will remain unchanged, smokers will consume the same number of cigarettes.” Do you agree or disagree with this view?
 
7. Demand for good X is given by ???????????? = 6,000????????−2????????−.5????????4????.002.
 
a. What is the own price elasticity of demand for X?
 
 b. Is good Y a complement or substitute for X? Why?
 
c. Is good Z a complement or substitute for X? Why? d. Is good X a normal or inferior good? Why?
 
e. Should the seller of this good raise or lower the price of X to increase revenues? Why?
 
 8. Killian’s Irish Pub is being sold for $2 million. The pub’s income statement indicates profits are currently $40,000, which have not yet been paid out in dividends. Assuming that the pub remains profitable indefinitely and that the interest rate remains at 5%, at what constant rate does the new buyer believe profits will grow? Does this sound reasonable? Explain.
 
9. Suppose the true inverse demand relation for good X is ???????????? = ????0 ????1???????? ????2???? ????. You estimated the parameters to be β0-hat = 22, β1-hat = -1.8, ????β0−hat = 2.5, ????β1−hat = 0.7.
 
a. What are the t-statistics for parameters ????0 ???????????? ????1?   
 
b. What are the 95% confidence intervals for parameters ????0 ???????????? ????1?
 
10.Using indifference analysis and by providing a graph including the consumer’s budget constraint between goods X and Y, provide a model where good X becomes less expensive and where X and Y are substitutes.
 
11.Using indifference analysis and by providing a graph including the consumer’s budget constraint between goods X and Y, derive the market demand for X.
 
 12.A worker views leisure and income as “goods” and has an opportunity to work at an hourly wage of $15/hour.
 
a. Illustrate the worker’s opportunity set in a given 24-hour period.
 
b. Assuming convex preferences, model the indifference curve of this worker that will lead her to prefer working 10 hours a day to 7.
 
13.Using indifference analysis between goods X and Y, demonstrate the difference between the income effect and substitution effect arising from a change in the price of X.