MANAGERIAL ECONOMICS

ASSIGNMENT # 2
CHAPTER 3 & 5
PREPARED BY

SAAD KARIMI (4123541)

DATED: 28TH JAN 2016

CHAPTER 3
Question 4: You are interviewing three people for one sales job. On the basis of your experience and insight, you believe
Jane can sell 600 units a day, Joe can sell 450 units a day, and Joan can sell 400 units a day. The daily salary each person
is asking is as follows: Jane, $200; Joe, $150; and Joan, $100. How would you rank the three applicants?
Answer:
I would choose Jane because he is expected to sell more units daily
on least per unit salary.

Question 11: A decision maker wishes to maximize the total benefit associated with three activities, X, Y, and Z. The price
per unit of activities X, Y, and Z is $1, $2, and $3, respectively. The following table gives the ratio of the marginal benefit to
the price of the activities for various levels of each activity:

a. If the decision maker chooses to use one unit of X, one unit of Y, and one unit of Z, the total benefit that results is $____ .
b. For the fourth unit of activity Y, each dollar spent increases total benefit by $ ______. The fourth unit of activity Y
increases total benefit by $_______ .
c. Suppose the decision maker can spend a total of only $18 on the three activities. What is the optimal level of X, Y, and Z?
Why is this combination optimal? Why is the combination 2X, 2Y, and 4Z not optimal?
d. Now suppose the decision maker has $33 to spend on the three activities. What is the optimal level of X, Y, and Z? If the
decision maker has $35 to spend, what is the optimal combination? Explain.
Answer:
a) 10+22+14 = $46.
b) For the fourth unit of activity Y, each dollar spent increases total benefit by $10, and total benefit by $10.
c) 2 units of X, 4 units of Y, and 3 units of Z will be the optimal level because the commulative expenditure will be
equal to $18. Where as 2X, 2Y AND 4Z will give total expenditure of $18 but marginal benefit will not be maximum.
d) 5 units of X, 5 units of Y and 6 units of Z will be the optimal level as marginal benefit will be maximum and total
expenditure will be $33.
7 units of X, 5 units of Y and 6 units of Z will be the optimal level as marginal benefit will be maximum and total
expenditure will be $35.
Question 12: Suppose a firm is considering two different activities, X and Y, which yield the total benefits presented in the
schedule below. The price of X is $2 per unit, and the price of Y is $10 per unit.

a. The firm places a budget constraint of $26 on expenditures on activities X

and Y. What are the levels of X and Y that maximize total benefit subject to
the budget constraint?
b. What is the total benefit associated with the optimal levels of X and Y in
part a?
c. Now let the budget constraint increase to $58. What are the optimal levels
of X and Y now? What is the total benefit when the budget constraint is $58?

Answer:
a) 3 units of X and 2 units of Y at a budget
constraint of $26.
b) 3 units of X = 72
2 units Y = 190
Total = $262
c) 4 units of X and 5 units of Y at budget
constraint of $58. Total benefit would be
$484.
APPLIED PROBLEMS:
Question 8: Bavarian Crystal Works designs and produces lead crystal wine decanters for export to international markets.
The production manager of Bavarian Crystal Works estimates total and marginal production costs to be
TC = 10,000 + 40Q + 0.0025Q2 and MC = 40 + 0.005Q where costs are measured in U.S. dollars and Q is the number of
wine decanters produced annually. Because Bavarian Crystal Works is only one of many crystal producers in the world
market, it can sell as many of the decanters as it wishes for $70 apiece. Total and marginal revenue are TR = 70Q and
MR = 70 where revenues are measured in U.S. dollars and Q is annual decanter production.
a) What is the optimal level of production of wine decanters? What is the marginal revenue from the last wine decanter
sold?
b) What are the total revenue, total cost, and net benefit (profit) from selling the optimal
number of wine decanters?
c) At the optimal level of production of decanters, an extra decanter can be sold for $70, thereby increasing total revenue by
$70. Why does the manager of this firm not produce and sell one more unit?
Answer:
a) MC = MR
40 + 0.005Q = 70
So;
Q = 6,000 wine decanters
MR6,000 = $70
b) TR6,000 = 70 6,000 = $420,000
TC6,000 = 10,000 + 40(6,000) + 0.0025(6,000)2 = $340,000
Profit = $420,000 $340,000 = $80,000
c) The 6,001st decanter adds $70 to total revenue and slightly more than $70 to total cost.
Therefore the 6,001st unit would (slightly) reduce profit.
Question 9: Joy Land Toys, a toy manufacturer, is experiencing quality problems on its assembly line. The marketing division
estimates that each defective toy that leaves the plant costs the firm $10, on average, for replacement or repair. The engineering

department recommends hiring quality inspectors to sample for defective toys. In this way many quality problems can be caught and
prevented before shipping. After visiting other companies, a management team derives the following schedule showing the
approximate number of defective toys that would be produced for several levels of inspection:

The daily wage of inspectors is $70.

a. How many inspectors should the firm hire?
b. What would your answer to a be if the wage rate is $90?
c . What if the average cost of a defective toy is $5 and the wage rate of inspectors is $70?
Answer: Selecting the option which is showing least cost.
a) 5
b) 4
c) 3

Chapter 5:
TECHNICAL PROBLEMS:
Question 5: A consumer buys only two goods, X and Y.
a. If the MRS between X and Y is 2 and the marginal utility of X is 20, what is the marginal utility of Y?
b. If the MRS between X and Y is 3 and the marginal utility of Y is 3, what is the marginal utility of X?
c. If a consumer moves downward along an indifference curve, what happens to the marginal utilities of X and Y? What happens to the
MRS?
Answer:
a) MRS = MUx/MUy
MUy = Mux/MRS
MUy = 20/2 = 10
b) MRS = MUx/MUy
MUx = MRS*MUy
MUx= 3*3 = 9
c) Marginal utility of X increases and marginal utility of Y decreases, where as MRS will increase.
APPLIED PROBLEMS:
Question 2: Suppose Bill is on a low-carbohydrate diet. He can eat only three foods: Rice Krispies, cottage cheese, and popcorn. The
marginal utilities for each food are tabulated below. Bill is allowed only 167 grams of carbohydrates daily. Rice Krispies, cottage
cheese, and popcorn provide 25, 6, and 10 grams of carbohydrates per cup, respectively. Referring
to the accompanying table, respond to the following questions:

a. Given that Bill can consume only 167 grams of

carbohydrates daily, how many cups of each food will
he consume daily? Show your work.
b. Suppose Bills doctor tells him to further reduce his
carbohydrate intake to 126 grams per day. What
combination will he consume?

Answer:

a) (3*25)+(7*6)+(5*10) =
167grm
3, 7, and 5 cups per day of
Rice Krispies, cottage
cheese, and popcorn,
respectively.
b) (2*25)+(6*6)+(4*10) =
126grm
2, 6, 4 cups per day of Rice
Krispies, cottage cheese,
and popcorn, respectively.