Managerial Economics Problem Set
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nishant.a23xManagerial Economics Problem Set
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nishant.a23xCommon questions
Powered by AIA 10% decrease in price with elasticity -0.2 leads to a 2% increase in quantity demanded, whereas a 4% increase in advertising (elasticity 3.5) increases demand by 14%. Therefore, advertising provides a more effective strategy for increasing demand .
A technological breakthrough reduces production costs, leading to decreased RAM prices. Concurrent income growth increases demand, counteracting the price decrease. Overall outcome depends on the relative strength of supply increase versus demand shift .
An increase in the price of nuts (PN) decreases the demand for beer, as the term -PN in the demand equation indicates a negative relationship. This means beer and nuts are demand complements .
At equilibrium, set the demand and supply equations equal: 25 - 2Q = 1 + Q. Solving gives Q = 8 and P = 9. Consumer surplus is calculated as the area above price and below the demand curve: 0.5 * 8 * (25 - 9) = 64. Producer surplus is the area below price and above the supply curve: 0.5 * 8 * (9 - 1) = 32. Hence, consumer surplus is 64 and producer surplus is 32 .
The deadweight loss caused by a price floor is the loss of economic efficiency when the equilibrium quantity is reduced. In the demand and supply diagram, it is represented by the triangle between the supply and demand curves, where quantity decreases from equilibrium. The area of this triangle gives the deadweight loss value, which requires calculating the difference in quantity times the price difference .
The inverse demand curve is P = 50 - 1/7Q. The choke price, where quantity demanded becomes zero, is when Q = 350, hence P = 50. Price elasticity of demand at P = 50 is calculated as (dQ/dP)*(P/Q), where dQ/dP = -7. At P=50, Q=0, thus elasticity is undefined since it involves division by zero, indicating perfectly elastic demand at choke price .
With income elasticity of 1.75, a 4% income decrease results in a 7% decline in coffee sales (4% * 1.75). This substantial drop signifies high sensitivity of demand to income changes .
The initial consumer surplus is given by the area under the demand curve above the price line, from 0 to the initial quantity. With a price drop from $5 to $1, the initial consumer surplus is the integral from 0 to 50 (since when p=1, x=98) of (50 - 0.5x) - 1, which equals 1225. When the price rises to $5, the new consumer surplus is the integral from 0 to 90 (since when p=5, x=90), totaling an area of 1012.5. Thus, the loss in consumer surplus is 1225 - 1012.5 = 212.5 .
Given elasticities: -1 for price and 1 for income, it means neither Q, P, nor M are directly affected in terms of percentage change as they are perfectly compensating. Setting elasticity formulas yields: -1 = (-50,000P/Q) and 1 = (4M/Q). Solving these simultaneously needs hypothetical values of P and M to resolve Q numerically or graphically .
Equilibrium is initially found where 12 - 0.5Q = 0.1Q; solving gives Q=20 and P=10. After a price floor of $2.50, QD=19, surplus occurs as suppliers offer QS=25. The government must purchase 6 units to sustain the price floor, resulting in welfare losses due to reduced trade efficiency .
