Download Midterm Exam of Managerial Economics Part I: 40% 1.The price of

Midterm Exam of Managerial Economics
Part I: 40%
1.The price of mobile telephone calls is 10 cents a minute. Antonella buys 200
minutes a month. Illustrate her demand curve and identify her buyer surplus.
Explain how a mobile phone company can use the concept of buyer surplus to raise its
own revenue. (Graphical and descriptive explanations are required)
2. A new birth-control device protects women against pregnancy but not sexually
transmitted diseases. How will the introduction of this product affect each of the
following? Explain why.
(a)The demand for male condoms
(b)The demand for birth-control pills
3. Suppose that the elasticity of the demand for Nike sports shoes with respect to
changes in the price of Adidas sports shoes is 1.3. Do you expect the elasticity with
respect to changes in the price of Ferragamo shoes to be a smaller or larger number?
Explain why.
4. Suppose that disposable diaper manufacturers cut their wholesale price by 50 cents
a package. Consider the retail market. Explain the difference between receipt and
incidence of the wholesale price cut for retailers. (Graphical and descriptive
explanations are required)
5. How would the following simultaneous changes affect the market for sugar?
Development of a new zero-calorie sweetener, and a cut in the wages of farm workers
(Graphical and descriptive explanations are required)
6. True or false? “Deadweight losses from rent controls will be smaller if demand is
more elastic and if supply is more inelastic”. (Graphical and descriptive explanations
are required)
7. Luna Software has priced its new spreadsheet program such that its marginal
revenue is smaller than its marginal cost. Advise the company how to raise its profit.
8. The profit-maximizing price for Luna Software’s spreadsheet program is $100. At
that price, the advertising elasticity of the demand is 0.01 and sales are 500,000 units
a year. The marginal cost of production is $40 per unit. How much should Luna spend
on advertising?
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Part II: 60%
1. The price of Chanel perfume is around $200 per fluid ounce, while the price of
Arrowhead bottled water is $1 per gallon. Nancy buys 2 fluid ounces of Chanel
and 10 gallons of bottled water a month.
a. Using relevant demand curves, illustrate Nancy's choices. Illustrate how
the following changes will affect Nancy's demand for Chanel perfume: (i)
price increase to $220 per fluid ounce, and (ii) cut in price of another of
Nancy's favorite perfumes.
b. Nancy spends more money each month on perfume than bottled water.
Does this necessarily mean that perfume gives her more total benefit than
water? Use appropriate demand curves to address this question.
2. Drugs that are not covered by patent can be freely manufactured by anyone. By
contrast, the production and sale of patented drugs is tightly controlled. The
advertising elasticity of the demand for antihypertensive drugs was around 0.26
for all drugs, and 0.24 for those covered by patents. For all antihypertensive
drugs, the own price elasticity was about -2.0 without advertising, and about -1.6
in the long run with advertising.
a. Consider a 5% increase in advertising expenditure. By how much would
the demand for a patented drug rise? What about the demand for a drug
not covered by patent?
b. Why is the demand for patented drugs less responsive to advertising than
the demand for drugs not covered by patent?
c. Suppose that a drug manufacturer were to increase advertising. Explain
why it should also raise the price of its drugs.
3. Industry researchers R.S. Platou predicted that, between 2003–04, oil prices would
fall by 5%, production of oil by OPEC and the former Soviet Union would
increase, and deliveries of new tankers would exceed scrappage of older vessels.
a. Using suitable diagrams, explain how each of the following would affect
the market for tanker services: (i) a fall in oil prices; (ii) an increase in
production by OPEC and the former Soviet Union; (iii) new tanker
deliveries; and (iv) scrappage of older vessels.
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b. Suppose that the net effect is to increase tanker rates. Illustrate the net
effect on a single diagram. Explain the impact on the quantity of tanker
services used.
c. In actuality, oil prices increased by 25% between 2003 and 2004 and
OPEC and the former Soviet Union production increased by about 10%.
Modify your analyses in (a) for these changes.
4. Typical real-estate broker: "In California, the seller always pays the broker's
commission, so, buyers get brokerage services free."
MBA: "If the custom were for the buyer to pay the commission, then would sellers
get brokerage services free?"
Real-estate broker, clearly losing patience: "That is a purely hypothetical scenario, but
if that situation were to arise, yes, I guess you're right."
a. Assume that each seller pays a brokers' commission of $18,000. Then,
the supply of houses includes the cost of brokerage. Illustrate the market
equilibrium with a price of $310,000 per house and sale of 200,000 houses
a year.
b. Now suppose that buyers rather than sellers pay the $18,000 commission.
Using your figure, illustrate the following: (i) shift the supply curve down
by $18,000 since sellers do not pay the commission, and (ii) shift the
demand curve down by $18,000 since buyers now pay the commission.
c. Compare the market equilibria of (a) and (b) in terms of (i) the net price
received by sellers, and (ii) the net price paid by buyers. (Net prices are
net of brokerage commission, if any).
5. Qantas operates a fleet of over 100 Boeing jet aircraft. Commercial passenger
jets must be operated by a pilot and co-pilot. Many jets carry cargo in their
"bellies", under the passenger seating areas. Consider each of the following
costs. Identify which are joint costs of passenger and belly cargo services, which
are fixed costs of passenger service, and which are both.
a. Cockpit personnel: All jets, large and small, require a pilot and co-pilot.
Belly cargo service requires no additional officers in the cockpit.
b. Airport landing fees: Some airports charge landing fees by weight of the
aircraft, while others levy a fixed fee, regardless of weight.
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c. Fuel: Larger aircraft and those carrying heavier loads will consume
relatively more fuel.
6. E-commerce is predicted to reduce the cost of intermediary services such as those
of travel agencies, real-estate brokers, and investment advisors. Consider the
market for air travel. Suppose that, with conventional travel agencies, the market
equilibrium price is $300 per ticket, including a $15 intermediation cost. The
quantity bought is 2 million tickets a year. With e-commerce, however, the
intermediation cost falls to $2 per ticket.
a. Using suitable demand and supply curves, illustrate the original
equilibrium with conventional travel agencies. Represent the
intermediation cost by shifting the supply curve.
b. Illustrate the new equilibrium with e-commerce.
c. What factors determine the extent to which consumers will benefit from
e-commerce? Explain your answer with demand and supply curves.
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