Managerial Economics &

Business Strategy
Chapter 1
The Fundamentals of Managerial
Economics

Lets try some homework (number 3)

Suppose that the total benefit and total cost from an activity
are, respectively, given by the following equations:
B(Q) = 150+28Q-5Q2 and C(Q) = 100+8Q

Write out the equation for net benefits

What are the net benefits when Q=1? Q=5?
Write out the equation for marginal net benefits
What are the marginal net benefits when Q=1? Q=5?
What level of Q maximizes net benefits?
At the value of Q that maximizes net benefits, what is the value of
marginal net benefits?

Conclusion
Make sure you include all costs and benefits
when making decisions (opportunity cost).
When decisions span time, make sure you
are comparing apples to apples (PV
analysis).
Optimal economic decisions are made at the
margin (marginal analysis).

Appendix A
Calculus of Maximizing Net Benefits
And other useful Math stuff

Variables and Functions

Variable

Something that can assume different values

Can be measured

What does optimal mean??

Best outcome possible given circumstances

Doesnt have to be the BIGGEST
Maximum profits but Minimum Cost

Function

Mathematical depiction of the key components of a variable

TR = f(Q)
Which is the independent variable?
Q

Which is the dependent variable?

TR

What are the pieces?

Y a bX
Dependent Variable

Independent Variable

Y-intercept

Slope

What is slope???

Marginal Analysis
Looks at the change in the dependent variable that
results from a unit change in the independent
variable
Price

Profit

Revenue
Cost

Profit

Why use Calculus??

Looks at rates of change in a continuous function

Assume economic variables are related to each other in a

continuous fashion but are valid only at stated discrete intervals

Calculus, first of all, is wrongly named. It should

never have been given that name. A far truer and
more meaningful name is SLOPE-FINDING.
Eli Pines How to enjoy Calculus
Slope of a linear function

Constant
Y = mX + b

Nice butour functions are typically continuous

Derivatives
The derivative of Y with
respect to X

Slope of the tangent line to the

point in question on the curve
d is used to mean changes in Y
relative to very SMALL changes
in X
is used to look at changes
BETWEEN two points

dY
dX

Derivative RULES

Y bX

Constants

ALWAYS ZERO!!!
What is the derivative of 10?
Zero

Power Functions

Y 10X

dY
( n 1)
nbX
dX
dY
2
30X
dX

More Rules
Sums and Differences

The derivative of the sum

(difference) is equal to the sum
(difference) of the derivatives of
the individual terms
If U=g(x) and V=h(x) then

Y 3X 4 X
2

dY dU dV

dX dX dX

dY
2
6 X 12 X
dX

And more
Products

The derivative of the product of

two expressions is equal to the
first term multiplied by the
derivative of the second, PLUS the
second term times the derivative
of the first

Y 5 X (7 X )
2

dY
dV
dU
U
V
dX
dX
dX
dY
2
10 X (7 X ) 5 X
dX
dY
70 X 10 X 2 5 X 2
dX
dY
70 X 15 X 2
dX

And more
Quotient

Denominator MULTIPLIED by
derivative of the numerator
MINUS numerator MULTIPLIED
by the derivative of the
denominator ALL DIVIVED BY
the denominator squared

5X 9
Y
2
10 X

dY V (dU dX ) U (dV dX )

2
dX
V

dY 10 X (5) (5 X 9)(20 X )

2 2
dX
(10 X )
2

dY 50 X 100 X 180 X

4
dX
100 X
dY 5 X 10 X 18

3
dX
10 X
dY 18 5 X
Divide by 10X

3
dX
10 X
2

Total Revenue
TR = 7Q 0.01Q2
What is the Marginal Revenue function?

MR = 7 - 0.02Q

TC = 100 8Q + 10Q2
What is the Marginal Cost function?

MC = -8 + 20Q