Download Week 6

Welcome to
EC 209: Managerial
Economics- Group A
By: Dr. Jacqueline Khorassani
Week Six
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Managerial Economics
Week Six- Class 1
Monday, October 8
11:10-12:00
Fottrell (AM)
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This week’s Aplia
Assignment
IS DUE BEFORE 5:00 PM tomorrow
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I received a question

I don't fully understand a question on pure
price effect and bandwagon effect.
The question for example says there is a fall
in price from $70 to $30 and
you are told to get the change in quantity
demanded and then you are asked
what is the pure price effect and the
bandwagon effect. I can't do that bit.
I did the practice assignment first but i still
can't answer this question.
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My answer
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The price effect refers to buying more because
price goes down.
The bandwagon effect refers to buying more
because others buy more.
The initial demand curve in the question shows the
combined effect.
Then they tell you how much of the increase in
quantity demand is because of price.
So what is left over is because of the bandwagon
effect.
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Framing: the importance of
how choices are presented
to individuals
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Suppose there is a rare fatal disease that
will kill 600 people. Individuals are asked to
choose between 2 options for reducing the
death rate. Group 1 is asked to choose
between A and B.
A: Save 200 people with certainty
B: Save 600 people with a probability of
0.333 and save nobody with a probability of
.666
72% of people would choose A
Yet there is no statistical difference between
A&B
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Framing: the importance of
how choices are presented
to individuals
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Suppose there is a rare fatal disease that will kill
600 people. Individuals are asked to choose
between 2 options for reducing the death rate.
Group 2 is asked to choose between options C and
D
C: 400 people will die
D: 0.333 chance that nobody will die while there is
a 0.666 chance that all 600 people will die.
78% of people would choose D.
Yet there is no statistical difference between C & D
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How can predict people’s
behaviour? Are they any
rules?
Yes, Rules of Thumb
1. Availability or Accessibility
– If I remember it then it must have
happened a lot
– I remember most recent things better
– People tend to assign too much weight
to recent information when making
decisions.
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Rules of Thumb
2. Representative Bias.
– If Kathleen is a shy person, what is the
likelihood that she is a librarian rather
than a sales person?
– Very high
– Most librarians are shy
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But look, there are more
shy salespersons around.
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Rules of Thumb
3. Valuations of familiar products are
strongly influenced by arbitrary
anchors such as the last two digits of
one’s social security number.
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Choosing between Two
Apartments: which one?
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Adding an Irrelevant
Alternative C: Now which
one?
Studies show when
you add C to the
package, most
people choose B
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Chapter 5 of Baye:
Production Analysis

What is a production function?
– It is a function that show the
maximum amount of output that
can be produced with K units of
capital and L units of labor.
– Q = F(K,L)
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How is short-run different
from long run?
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
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In short run there is at least one fixed
factor of production (assumed to be K)
Example of Short run production
function:
Q = (16).5 L.5 = 4 L.5
How much is output when 100 units of
labor are used?
Q = 4 (100).5 = 4(10) = 40 units
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
In long run all inputs (factors of
production) are variable
Q = (16)
.5
L
.5
K
0.5
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What is the difference between
fixed /variable factors of
production?
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The amount of fixed factor of
production can not be change quickly
The amount of variable factor of
production can be changed quickly
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What is a Cobb- Douglas production
function?
Capital and labor are imperfect
substitutes
Example: in production of wheat K and
L are imperfect substitutes
Q = KaLb
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What is a Leontief
production function?
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Capital and labor are perfect
complements.
Example: in production of taxi service
K and L are perfect complements
Q = min {bK, cL}
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Managerial EconomicsGroup A

Week Six, Class 2
– Tuesday, October 9
– 15:10-16:00
– Cairnes

Aplia Assignment is due before 5PM
today
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Let’s produce widgets

Production in short run
– Fixed input = stapler= K
– Variable input = labor=L
– Production per minute
– I need one labor
– Now let’s hire one more labor
– And more
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Let’s produce widgets
Day
1
2
3
4
5
6
7
K
1
1
1
1
L
1
2
3
4
Q
6
16
17
14
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Managerial Economics

Week Six- Class 3
– Thursday, October 11
– 15:10-16:00
– Tyndall
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Next Aplia Assignment is due before
Wednesday, October 17 at 5 PM
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We produced widgets in
our last class.
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
Take your papers out and let’s check
our numbers
We will go through everything but Part
3.
– Go over part 3 on your own and ask me
questions
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Labor Productivity
Figures
K
1
1
1
1
1
L
0
1
2
3
4
Q
0
6
16
17
14
AP
-6/1=6
16/2=8
5.7
3.5
MP
-6/1=6
10/1=10
1
-3
APL = Q/L
MPL = ΔQ/ΔL
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Productivity Graphs
Q
10
Increasing
Marginal
Returns
Diminishing
Marginal
Negative
Marginal
Returns
Returns
Q
8
5.7
AP
3.5
6
MP
1
1
2
3
L
4
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Total Cost Figures
K
L
Q
FC
VC
TC
1
1
1
1
1
0
1
2
3
4
0
6
16
17
14
20
20
20
20
20
0
5
10
15
20
20+0 = 20
20+5 =25
30
35
40
Price of K = $20
Wage = $5/worker
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Cost Graphs
$
FC: Costs that do
not change as output
changes.
TC = VC + FC
VC(Q)
Sunk Cost: A cost
that is forever lost
after it has been
paid.
20
30
FC
20
10
16
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Q
Average and Marginal
Cost Figures
Q
FC
VC
TC
MC
AFC
AVC
ATC
0
20
0
20
--
--
--
--
6
20
5
25
5/6=0.8 20/6
=3.3
5/6=0. 4.1
8
16 20
10
30
0.5
1.3
0.6
1.9
17 20
15
35
5
1.2
0.9
2.1
14 20
20
40
---
1.4
1.4
2.8
MC = ΔTC/ΔQ= cost of additional unit of output
AFC = FC/Q, AVC=VC/Q, ATC = TC/Q
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Cost Graphs
$
MC
ATC
AVC
AFC
0.5
16
Q30
Note: FC = AFC * Q
$
ATC
FC= $20
AVC
1.9
AFC
Fixed Cost
0.6
16
Q
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Note: VC= AVC * Q
$
ATC
VC = $10
AVC
0.6
Variable Cost
16
Q
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Revenue and Profit
Q
TR
TC
Profit
0
0
20
-20
6
24
25
-1
16
64
30
34
17
68
35
33
14
56
40
16
P widget = $4
Profits are maximized at Q = 16
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How many workers
should the manager hire?
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In our example 2
In general
The answer relies on the value of the
marginal product of labor (VMP)
– VMP = MPL * P
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widgets
The rule: hire labor until the value of
marginal product of labor equals the
wage:
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In our example
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When L = 2
– VMP = $4 * 10 = $40
– W = $5
– VMP> W
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When L = 3
– VMP = $4 * 1 = $4
– W = $5
– VMP <W
Need to hire
somewhere
between 2 to
3 workers
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