Tutorial- Managerial Economic – Introduction

Analytical Questions

1. Following are examples of typical economic decisions made by the managers of a firm. Determine
whether each is an example of what, how, or for whom.

a. Should the company make its own spare parts or buy them from an outside vendor?
b. Should the company continue to service the equipment that it sells or ask customers to use
independent repair companies?
c. Should a company expand its business to international markets or concentrate on the domestic
market?
d. Should the company replace its own communications network with a “virtual private network” that is
owned and operated by another company?
e. Should the company buy or lease the fleet of trucks that it uses to transport its products to market?

2. Discuss the importance of the command process and the market process in the making of
management decisions. Illustrate specific ways in which managers must take these two processes into
account.

3. Compare and contrast microeconomics with macroeconomics. Although managerial economics is

based primarily on microeconomics, explain why it is also important for managers to understand
macroeconomics.

4. “If Congress levies an additional tax on luxury items, the prices of these items will rise. However, this
will cause demand to decrease, and as a result the prices will fall back down, perhaps even to their
original levels.” Do you agree with this statement? Explain.

5. Overheard at the water cooler in the corporate headquarters of a large manufacturing company: “The
competition is really threatening us with their new product line. I think we should consider offering
discounts on our current line in order to stimulate demand.” In this statement, is the term demand
being used in a manner consistent with economic theory? Explain. Illustrate your answer using a line
drawn to represent the demand for this firm’s product line

6. Suppose there is a linear downward-sloping demand curve and a linear upward-sloping

supply curve for a good. The price of a substitute good increases and the price of an input to
production also increases. Graph the original demand and supply curves, and the curves after
the substitute good and input prices increase. How will the equilibrium price change after the
substitute and input prices increase?

7. Illustrate the example of the world sugar market with supply and demand diagrams. Be sure
to show how the relative shifts in supply and demand have led to the reduction in the world
price of sugar.
8. Let us assume that price and the nonprice factors affect the demand for pizza in the following
way:
QD = -100P + 1.5Phd - 5Psd + 20A + 15Pop
where QD = quantity demanded for pizza (pies)
Phd = price of hot dogs (cents)
Psd = price of soft drinks (cents)
A =advertising expenditures (thousands
of dollars)
Pop =percentage of the population aged 10 to 35

Suppose we hold constant all factors affecting the quantity demanded for pizza except price by
assuming the values of these nonprice factors to be

Phd =$1.00
Psd = $.75 or 75 cents)
A = $20,000)
Pop =35 percent

a. Determine the demand function for Piza and plot the demand curve.
b. Suppose the price of hot dogs increases to $1.20, show the change in demand function
and graph
c. Let assume demand function is QS = -100 + 100P, find the equilibrium price and
quantity.

9. A travel company has hired a management consulting company to analyze demand in twenty-six
regional markets for one of its major products: a guided tour to a particular country. The consultant
uses data to estimate the following equation

Q = 1,500 - 4P + 5A + 10I + 3PX

where Q = amount of the product demanded

P = price of the product in dollars
A = advertising expenditures in thousands of dollars
I = income in thousands of dollars
PX = price of some other travel products offered by a competing travel company

a. Calculate the amount demanded for this product using the following data:
P = $400
A = $20,000
I = $15,000
PX = $500

b. Suppose the competitor reduced the price of its travel product to $400 to match the price of this firm’s
product. How much would this firm have to increase its advertising in order to counteract the drop in its
competitor’s price? Would it be worth it for them to do so? Explain.

c. What other variables might be important in helping estimate the demand for this travel product?