Managerial Economics

Homework Assignment Two

Due at the beginning of class on Thursday, May 9

(64 pts.) !!!  Don't wait until the last minute!!

 

 

Copy and paste this into a word document (make sure you add spaces for graphs in your word document before you print it out) and then type your answers.  Don't put graphs on a separate sheet of paper. Graphs do not have to be typed but word answers that are not typed will not be graded.

 

ALWAYS SHOW ALL WORK

 

1.  This problem only involves demand.  Your data analysts have provided you with the following demand information for the balloons you sell.

 

Qd = 40 - 5P

 

a.  Explain why there is a negative sign before 5P. (2 pts.)

 

 

b.  At what price do consumers demand zero balloons?  SHOW ALL WORK!  (1 pt.)

 

 

 

c.  Now your data analysts have given you more information about the demand for your balloons.  So now:

 

Qd = 40 - 5P - 3I + 2Ps

 

Where I is income and Ps is price of a substitute.

 

Explain why there is a negative sign in from of 3I.  Is this a normal or inferior good?  Explain. (2 pts.)

 

 

d.  Assume that I is 10 and Ps is 10.  What is your new shortened version of your demand curve?  (2 pts.)

 

 

 

e.  At a price of $3, what is consumer surplus?  (2 pts.)

 

 

f.  Graph your consumer surplus (shade in the area) and put all numbers on your graph.  (3 pts.)

 

 

 

 

 

2.  New Problem:  Explain why diminishing marginal returns happens in the short run (in your answer make sure you define all terms - including what the "short run" means).  (3 pts.)

 

 

3.  Now explain how diminishing marginal returns relates to the upward sloping supply curve.  Make sure you talk about quantity supplied and price!!  (3 pts.)

 

 

 

 

4.  This problem only involves supply.  Your data analysts have provided you with the following supply information for the chips that you sell.

 

Qs (chips) = -20 + 5P

 

a.  Explain why there is a positive sign before 5P:  (2 pts.)

 

 

b.  At what price do suppliers just supply zero? SHOW ALL WORK!  (1 pt.)

 

 

 

c.  Graph this supply function - put numbers on your a. Q intercept, b. the price where Q = 0 and c.  the Q where price = $6.00 (put this price on your graph too).  (3 pts.)

 

 

 

 

 

 

 

5.  New Problem:

 

Suppose Qs = -34 + 6P - 3W - 3M + 4T

 

W = the average hourly wage for labor

M = an index measuring materials costs

T = factor for technology

a.  If W = 7 and M = 4 and T = 10, what is the market supply curve or function (meaning the shortened equation)? (2 pts.)

 

 

b.  Graph this curve - showing the price where Q = zero and one other price above this price. (2 pts.)

 

 

c.  Now, suppose that M increases to 8 and T increases to 15, what is the new shortened version of the supply function?  (3 pts.)  Graph this curve showing the price where Q = zero. (3 pts.)

 

 

 

 

d.  Will the supply curve shift left or right? (1 pt.)  Explain what has happened and why. (3 pts.) 

 

e.  Determine producer surplus both before and after the change that happened in "c" above at a price of $8.00. (3 pts.) 

 

 

New Problems (these problems include both supply and demand):

6.  Using both supply and demand:

a.  Graphically show a situation in a market where this is shortage of the good at a price of $10. (2 pts.)

 

 

 

b.  What inventory costs are high and why?  (3 pts.)

 

 

c.  How will producers respond to this situation (if there are no regulations in the market) and why?  (3 pts.)

 

 

7.  New Problem:  Suppose you have the following information regarding your demand and supply functions for your good, which is footballs.

Qd = 50 - 4P + 16I - 4Pc, and

Qs = -12 + 8P - 5W + 3T - 2Psb

Where:

I = Income

Pc = Price of cleats

W = average hourly wage for labor

T = technology factor that increases productivity of supply

Psb = price of soccer balls                                  

a,  If W = 12, T = 3, Psb = 25, I = 30, Pc = 50, what are the market clearing values of Q and P for your footballs? (2 pts.)

Qd =

Qs =

So P =

 

So QD =

   

So QS =

b. What would the situation be in this market if the price = $50?

    1. What would Qd be now? (1 pt.)

 

    2. What would Qs be now? (1 pt.)

 

    3.  Draw this situation on a graph - put the following on your graph:  market clearing price and quantity, price of $50, Qd and Qs at that price. (5 pts.)

 

 

    4.  What is happening in this market?  Use a number in your answer.  (2 pts.)

 

8.  Explain what "satisfactory inventory level" means.  In your answer explain where inventory costs come from.  (4 pts.)