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com




MANAGERIAL
ECONOMICS




















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Question 1: Read the following information and answer the questions below.
a. Use a simple supply and demand model to describe how price is determined in the oil
market?
Answer:
The oil price was recorded at $30/barrel and now it was decreased around $5 and
benchmarked at $26/barrel on USA market. Due to the over supply of OPECs quotas, around
24mbarrels a day more than 2m barrels a day as agreed quotas of members, it made the price
of oil low.

First, the equilibriumof quantity demanded and price at $30/barrel (E
1
). After that the supply
curve is shift to the right (S1 =>S2). New equilibriumwas established (E
2
). As we can see
more detail at figure 1 below.














Figure 1

b. How should fears of war affect the price? How should attempts to restrict supply affect price?
Answer:
As usually when Middle Eastern and Iraq wars happening would usually rise up the oil price
due to lack of oil supply or shortage. It would lead to many troubles in daily life. So
P



$30

$26

Q
D
S1 S2
E1
E2
Q1 Q2


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consumption countries would rush to buy and store oil for their current usage and in the
future. That means the price of oil would be increased. However, oppositely the oil price in
the article was affected differently due to over supply fromOPEC.
Attempts to strict price due to the supply can be as follow:
- Rising tax to export the oil
- Policy to prevent buyers to reach the oil as much as possible
- Oil export quota applied
- Reducing oil supply
- Etc.

c. What are the paradoxes this article refers to?
Answer:
Shortage of the oil supply was expected and so the oil price would be increased due to the
Iraq war was happening. However, the price was recorded fallen from$30 to $25 and
increased a little bit to $26/ barrel. The paradoxes in the article is that oil price down
although Iraq war was happening.

Question 2: Given the following data for a firm:
a. Complete the table
Q TFC TVC TC AFC AVC ATC MC
0.0 100.0 0.0 100.0
1.0 100.0 90.0 190.0 100.0 90.0 190.0 90.0
2.0 100.0 170.0 270.0 50.0 85.0 135.0 80.0
3.0 100.0 240.0 340.0 33.3 80.0 113.3 70.0
4.0 100.0 300.0 400.0 25.0 75.0 100.0 60.0
5.0 100.0 370.0 470.0 20.0 74.0 94.0 70.0
6.0 100.0 450.0 550.0 16.7 75.0 91.7 80.0
7.0 100.0 540.0 640.0 14.3 77.1 91.4 90.0
8.0 100.0 650.0 750.0 12.5 81.3 93.8 110.0
9.0 100.0 780.0 880.0 11.1 86.7 97.8 130.0
10.0 100.0 930.0 1,030.0 10.0 93.0 103.0 150.0


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b. Graph TFC, TVC, TC. Explain the law of diminishing returns influences the shapes of the
variable cost and total cost curves?
0.0
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1 2 3 4 5 6 7 8 9 10 11

Figure 2
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
1 2 3 4 5 6 7 8 9 10 11

Figure 3
We see that TFC curve is a straight line. TVC and TC curves have the same shape. TC
curve is above TVC curve because of TFC amount (figure 2).
And we look at MC curve has an U-shape (figure 3) and at its lowest point at Q =4.5
and then when we look at Figure 2, at point A the law of diminishing returns begins to
operate. On the left side hand of point A both curves of TC and TVC face down but
TFC
TVC
TC
MC
A


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frompoint A to the right hand side both curves of TC and TVC face up which means
an increase of the rate.

c. Graph AFC, AVC, ATC and MC. Explain the derivation and shape of each of these four
curves and the relationships they have to one another. Specifically, explain why MC cuts
both AVC and ATC at the minimumpoints?
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0
1 2 3 4 5 6 7 8 9 10 11

Figure 4

We can see at Figure 4, four curves of AFC, AVC, ATC and MC as follow:
- AFC declines steadily over the range of production.
- ATC and AVC curves have a U-shape. ATC curve is above AVC curve due to AFC
amount.
- MC curve has a U-shape too. And MC curve reaches AVC curve at its lowest point
because when ATC curve and AVC curve to decline, MC must be lower than them; and
for curves of ATC and AVC to rise, MC must be higher. At the lowest points of ATC and
AVC curves, ATC and AVC are neither rising nor declining so MC equal them. And we
have:
When MC =AVC, AVC is at a minimum.
When MC <AVC, AVC is falling.
When MC >AVC, AVC is rising.
And
MC
ATC
AVC
AFC


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a. When MC =ATC, ATC is at a minimum.
b. When MC <ATC, ATC is falling.
c. When MC >ATC, ATC is rising.

d. What would happen to the curves that you have derived if TFC increased to $200?
Q TFC2 TVC TC AFC AVC ATC MC
0.0 200.0 0.0 200.0
1.0 200.0 90.0 290.0 200.0 90.0 290.0 90.0
2.0 200.0 170.0 370.0 100.0 85.0 185.0 80.0
3.0 200.0 240.0 440.0 66.7 80.0 146.7 70.0
4.0 200.0 300.0 500.0 50.0 75.0 125.0 60.0
5.0 200.0 370.0 570.0 40.0 74.0 114.0 70.0
6.0 200.0 450.0 650.0 33.3 75.0 108.3 80.0
7.0 200.0 540.0 740.0 28.6 77.1 105.7 90.0
8.0 200.0 650.0 850.0 25.0 81.3 106.3 110.0
9.0 200.0 780.0 980.0 22.2 86.7 108.9 130.0
10.0 200.0 930.0 1,130.0 20.0 93.0 113.0 150.0
Figure 5
0.0
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1 2 3 4 5 6 7 8 9 10 11
TFC
TVC
TC
AFC
AVC
ATC
MC

Figure 6
When TFC increased to $200, all amounts and curves related to TFC such as TFC, AFC,


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TC and ATC will be increased a suitable rate to amount of $200. However, amount and
curves of TVC, AVC and MC are the same.

e. What would happen to the curves that you have derived if wage rates, TVC reduced by
10% at all levels of output?
TVC 1 Q TFC TVC2 TC AFC AVC ATC MC
0.0 0.0 100.0 0.0 100.0 --- --- --- ---
90.0 1.0 100.0 81.0 181.0 100.0 81.0 181.0 81.0
170.0 2.0 100.0 153.0 253.0 50.0 76.5 126.5 72.0
240.0 3.0 100.0 216.0 316.0 33.3 72.0 105.3 63.0
300.0 4.0 100.0 270.0 370.0 25.0 67.5 92.5 54.0
370.0 5.0 100.0 333.0 433.0 20.0 66.6 86.6 63.0
450.0 6.0 100.0 405.0 505.0 16.7 67.5 84.2 72.0
540.0 7.0 100.0 486.0 586.0 14.3 69.4 83.7 81.0
650.0 8.0 100.0 585.0 685.0 12.5 73.1 85.6 99.0
780.0 9.0 100.0 702.0 802.0 11.1 78.0 89.1 117.0
930.0 10.0 100.0 837.0 937.0 10.0 83.7 93.7 135.0
Figure 7
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
900.0
1,000.0
1 2 3 4 5 6 7 8 9 10 11
TFC
TVC2
TC

Figure 8


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0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0
1 2 3 4 5 6 7 8 9 10 11
AFC
AVC
ATC
MC

Figure 9
When TVC reduced 10%, TFC and AFC curves are the same. However, curves
related to TVC such as TVC, TC, AVC, ATC and MC will be changed. They are
reduced an amount respectively to the 10% decreased at figures 7, 8, 9.

Question 3
Suppose that you have the following game:
Firm B
Low price High price
Low price 10,10 100,-50
Firm A
High price -50,100 50,50

a. Find out Nash equilibrium if any?
Answer: we call Low price =l and High price =h; We have:
Firm A (l) =l
Firm A (h) =l
Firm B (l) =l
Firm B (h) =l
Nash equilibrium=(low price, low price) or (10,10)




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b. Explain the concept of mutual interdependence?
Answer:
When taking an action, FirmA has to have a look at behaviors of competitor (FirmB)
and vice versa.

c. Assuming no collusion, what is the likely outcome of the game?
Answer:
With no collusion, each Firm will take the best possible actions for itself given the action
of the other Firm. Each Firmwill offer the best strategy regardless of the other Firms
action. They will decide at Nash equilibrium(10,10).

d. Given your answer to (c), explain why collusion is mutually profitable?
Answer:
With the given outcome above, if both Firms talk to each other and co-operate each other,
they can get mutual benefits. Because with no collusion, and they have to take their best
actions and act safely and earn (10,10) but if they cooperate, they can get (50,50).

e. Why might there be a temptation to cheat on the collusive agreement?
Answer:
A temptation to cheat can bring maximumbenefits to themor can make competitors
looses the most. If both of them promise to choose high price, and if Firm B cheats,
Firm B gets 100 while FirmA lost (-50); and vice versa if FirmA cheats, Firm A earns
100 while Firm B lost (-50).