01 Oct The Firms and its Goals
Instructions
Answer question number 1 from chapter 2, question number 6 from chapter 3 and question numbers 1 and 3 from chapter 4. Submit your answer in a Word document by the end of Saturday. Other questions will not be graded, but review them for the upcoming tests.
Chapter 1: Introduction
Chapter 2:The Firms and its Goals
1. What is managerial economics and what are the questions we will try to answer in this course?
2. In your own words describe the process of change for businesses (4 stage model) and explain where in that process the firm you work at would be?
3. Relate the concepts of scarcity and opportunity cost.
4. What is the opportunity cost of you taking ECO607 this month?
5. Explain how the ‘what, how and whom’ questions are solved in the US economy and give instances of it
1. Why does a firm perform certain functions internally and others through the market? Provide instances of both functions in your work place.
2. What is profit maximization hypothesis? Is this the goal of the firm you work for?
3. What is the difference between optimizing and satisficing? What firms do in reality?
4. How do we measure risk and how do we calculate stockholder’s wealth?
5. How implicit costs and opportunity costs differentiate financial profits from economic profits?
6. Explain how the Economic Value Added is the closest measure for economic profit?
Chapter 3: Supply and Demand
Chapter 4: Demand Elasticity
1. What is Demand?
2. What is market demand function? Think
in a real product and provide the demand function of it with 5 specific variables. 3. What is the difference between shifts in demand vs. changes in quantity demanded?
4. What is Supply?
5. What is a supply function? Think in the same
product you presented for question two and
provide the supply function for it with 5 specific
variables.
6 . What is the difference between shifts in supply vs. changes in quantities supplied ?
7. Think in your last visit to a mall and identify a case of market shortage and another case of market surplus. Make a market graph for each case (Demand and Supply, Price and Quantity of equilibrium). 8. Assume that family income goes down and nothing else changes. What will happen to the price and quantity of equilibrium in the market of high definition TVs?
1. Assume that a department store was selling a brand of men’s dress shirt at $100.00 per shirt. At that price, the store sold 50 shirts in one week. Next week, the store declared a “sale – buy one get one free”. As a result, sale of the dress shirt increased to 300 in that week. Based on these information, calculate the price elasticity of demand using the arc elasticity formula (p 70-71 of the textbook). What does the coefficient of elasticity indicate?
2. Describe the relationship between price elasticity of demand and total revenue. As a manager, how will you decide what products to put on sale? Explain with appropriate examples.
3. Define cross-price elasticity of demand. Explain how the sign of the coefficient of cross-price elasticity (positive or negative) indicates if the two goods are substitute goods or complementary goods.
Supplement to Chapter 4
Table 1: Some Real-World Price Elasticities of Demand (All elasticities are in absolute values)
Metals
1.52
Electrical engineering products
1.39
Mechanical engineering products
1.3
Furniture
1.26
Motor vehicles
1.14
Instrument engineering products
1.1
Professional services
1.09
Transportation services
1.03
Gas, electricity, and water
0.92
Chemicals
0.89
Drinks (all types)
0.78
Clothing
0.64
Tobacco
0.61
Banking and insurance services
0.56
Housing services
0.55
Agricultural and fish products
0.42
Books, magazines and newspapers
0.34
Food
0.12
Oil
0.05
Source: Microeconomics, Parkin, p. 87
Table 2: Some Real-World Income Elasticies of Demand
Airline travel
5.82
Movies
3.41
Foreign travel
3.08
Electricity
1.94
Restaurant meals
1.61
Local buses and trains
1.38
Haircuts
1.36
Automobiles
1.07
Tobacco
0.86
Alcoholic drinks
0.62
Furniture
0.53
Clothing
0.51
Newspapers and magazines
0.38
Telephone
0.32
Food
0.14
Source: Microeconomics, Parkin, p.91
