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Assignment 2 Managerial Economic

Advanced Demand Analysis
1. The Accuweather Corporation manufactures barometers and thermometers for weather forecasters. In an attempt to forecast its future needs for mercury, Accuweather's chief economist estimated average monthly mercury needs as: N = 500 + 10X Where N = monthly mercury needs (units) and X = time period in months ( Base Month Begin at January 2008= 0, Feb. 2008 = 1, March 2008 = 2, April 2008= 3 etc etc). The following monthly seasonal adjustment factors have been estimated using data from the past five years: Month January April July September December (a) (b) Adjustment Factor 15% 10% 20% 5% 10%

Forecast Accuweather's mercury needs for January, April, July, September, and December of 2010. The following actual and forecast values of mercury needs in the month of November have been recorded:

Year Actual Forecast 2008 456 480 2009 324 360 2007 240 240 What seasonal adjustment factor should the firm use for November? Answers a) Jan ;N = 500 + 10 x = 500 + 10 (0) = 500 Adjustment factor 15% ; = 500 +(0.15* 500) = 575

Apr ;N = 500 + 10 x = 500 + 10 (3) = 530 Adjustment factor 15% ; = 530 + (0.10* 530) = 583 July:N = 500 + 10 x = 500 + 10 (6) = 560 Adjustment factor -20% ; = 560 + (-0.20* 560) = 448 Sept ;N = 500 + 10 x = 500 + 10 (8) = 580 Adjustment factor 15% ; = 580 + (0.05* 580) = 609

Dec ;N = 500 + 10 x = 500 + 10 (11) = 610 Adjustment factor 15% ; = 580 + (-0.10* 610) = 549

b) Year 2008 2009 2007

Actual 456 324 240

Forecast 480 360 240

Actual / Forescast 0.95 0.90 1.0 = 2.85

Adjustment factor

= 2.85/3 = 0.95

2. Given the following demand function: Q = 2.0 P1.33 Y2.0 A.50 where Q = quantity demanded (thousands of units) P = price ($/unit) Y = disposable income per capita ($ thousands) A = advertising expenditures ($ thousands)

determine the following when P = $2/unit, Y = $8 (i.e., $8000), and A = $25 (i.e., $25,000) (a) (b) (c) Price elasticity of demand The approximate percentage increase in demand if disposable income percentage increases by 3%. The approximate percentage increase in demand if advertising expenditures are increased by 5 percent. a) Q = 2.0 ($2)1.33 ($8)2.0 ($25).50 = 2 (0.3978) (64) (5) = 254.59

3. The manager of the TESCO UK accidentally mismarked a shipment of 20-pound bags of charcoal at $4.38 instead of the regular price of $5.18. At the end of a week, the store's inventory of 200 bags of charcoal was completely sold out. The store normally sells an average of 150 bags per week. (a) (b) What is the store's arc elasticity of demand for charcoal? Give an economic interpretation of the numerical value obtained in part (a)

4. The Future Flight Corporation manufactures a variety of Frisbees selling for $2.98 each. Sales have averaged 10,000 units per month during the last year. Recently Future Flight's closest competitor, Soaring Free Company, cut its prices on similar Frisbees from $3.49 to $2.59. Future Flight noticed that its sales declined to 8,000 units per month after the price cut. (a) (b) What is the arc cross elasticity of demand between Future Flight's and Soaring Free's Frisbees? If Future Flight knows the arc price elasticity of demand for its Frisbees is 2.2, what price would they have to charge in order to obtain the same level of sales as before Soaring Free's price cut?

4 5. The British Automobile Company is introducing a brand new model called the "London Special." Using the latest forecasting techniques, BAC economists have developed the following demand function for the "London Special": QD = 1,200,000 40P What is the point price elasticity of demand at prices of (a) $8,000 and (b) $10,000?

Assignment 3 Managerial Economic Production and Cost Analysis

1.Emco Company has an assembly line of fixed size A. Total output is a function of the number of workers (crew size) as shown in the following schedule: Crew Size (No. of Workers) Total Output (No. of Units)

MPL

0 1 2 3 4 5 6

0 10 35 50 56 59 60

0 10 25 15 6

5 7 8 60 58

Determine the following schedules: (a) marginal productivity of labor (b) average productivity of labor (c) elasticity of production with respect to labor a) b) APL = (58-0) / (8-0) = 7.25 C) 2. Sunrise Juice Company sells its output in a perfectly competitive market. The firm's total cost function is given in the following schedule: Output (Units) 0 10 20 30 40 50 60 Total Cost ($) 50 120 170 210 260 330 430 MPL = Q / L

Total costs include a "normal" return on the time (labor services) and capital that the owner has invested in the firm. The prevailing market price is $7 per unit. (a) (b) (c) Prepare (i) marginal cost and (ii) average total cost schedules for the firm. What is the firm's profit maximizing output level? Is the industry in long-run equilibrium? Justify your answer.

3. Offshore Petroleum's fixed costs are $2,500,000 and its debt repayment requirements are $1,000,000. Selling price per barrel of oil is $18 and variable costs per barrel are $10. (a) (b) (c) Determine the breakeven output (in dollars). Determine the number of barrels of oil that offshore must produce and sell in order to earn a target (operating) profit of $1,500,000. Determine the degree of operating leverage at an output of 400,000 barrels.

4. Superior Metals Company has seen its sales volume decline over the last few years as the result of rising foreign imports. In order to increase sales (and hopefully, profits), the firm is considering a price reduction on luraniuma metal that it produces and sells. The firm currently sells 60,000 pounds of luranium a year at an average price of $10 per pound. Fixed costs of producing luranium are $250,000. Current variable costs per pound are $5. The firm has determined that the variable cost per pound could be reduced by $.50 if production volume could be increased by 10 percent (fixed costs would remain constant). The firm's marketing department has estimated the arc elasticity of demand for luranium to be 1.5. (a) (b) How much would Superior Metals have to reduce the price of luranium in order to achieve a 10 percent increase in the quantity sold? What would the firm's (i) total revenue, (ii) total cost, and (iii) total profit be before and after the price cut?

Monopoly Pricing
5. Zar Island Gas Company is the sole producer of natural gas in the remote island country of Zar. The

company's operations are regulated by the State Energy Commission. The demand function for gas in Zar has been estimated as: P = 1,000 .2Q where Q is output (measured in units) and P is price (measured in dollars per unit). Zar Island's cost function is: TC = 300,000 + 10Q This total cost function does not include a "normal" return on the firm's invested capital of $4 million. (a) In the absence of any government price regulation, determine Zar Island's optimal (i) output level, (ii) selling price, (iii) total profits, and (iv) rate of return on its asset base.= Profit/Capital Invested