Kuliah 1The Fundamentals of

Managerial Economics

Chapter 1 Michael Baye

1. What is the manager?2. What is economics?3. Define managerial economics4. Overview the basic principles that comprise effective

management5. What is the profit?6. What is the eksplicit cost7. What is the implicit cost8. What is the opportunity cost9. What is difference between economic profit and accounting

profit10. What is the goal of firms in global economy?11. Recognize the time value of money12. What is the present value13. What is the meaning of profit maximization

Problems:1. The cost of attending a private college for one year is $ 6,000

for tuition, $ 2,000 for the room, $1,500 for meals and $500 for books and supplies. The student could also have earned $15,000 by getting a job instead of going to college and 10% interest on expenses he or she incurs at the beginning of the year. Calculate the explicit, implicit and the total economic costs of attending college.

2. A woman managing a duplicating (photocopy) establishment for $25,000 per year decides to open her own duplicating place. Her revenue during the first year of operation is $120,000 and her expenses are as follows:

Salaries to hired help $45,000Supplies 15,000

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Rent 10,000Utilities 1,000Interest on bank loan 10,000

Calculate (a) the explicit costs (b) implicit costs (c) the business/accounting profit (d) economic profit (e) the normal return on investment in this business

3. According to Milton Friedman, “Business has only one social responsibility - to make profits ( as long as its stays within the legal and morals rules of the game established by society). Few trends could so thoroughly undermine the very foundations of our society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible”. Explain why you agree or disagree with such a statement

4. Exercise from Baye page 28 # 8

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Managerial economics refers to the application of economic theory and decision science tools to find the optiomal solution to managerial decision problems.

FIGURE 1-1 The Nature of Managerial Economics

Management Decision Problems

Economic Theory :Microeconomics, macroeconomics

Decision sciences :Mathematical

economics, econometrics

MANAGERIAL ECONOMICS :

Application of economic theory and decision science tools to solve managerial decision

problems

OPTIMAL SOLUTIONTO

MANAGERIAL DECISION PROBLEMS

Kuliah 2

Market Forces : Demand and Supply

Chapter 2, Michael Baye

1. Define demand. Define supply2. List non price factors that influence demand and

supply3. In defining demand and supply, why do you think

economists focus on price while holding constant other factors that might have an impact on the behavior of buyers and sellers?

4. The law of demand and the law of supply5. Movement along the demand and the supply6. Shift the demand curve and supply curve7. What is the market equilibrium and restriction of

market equilibrium?8. Define consumer surplus9. Define producer surplus

10. Government controlled pricesWhat is the price ceilings?What is the price floors?

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Kuliah 3 Quantitative Demand Analysis

Baye chp 3

1. Explain what an elasticity of demand represents and how it is measured

2. Identify what factors determine whether demand is elastic or inelastic

3. Factors affecting the own price elasticity of demand4. Relation of elasticity and total revenue5. Perfectly elastic demand6. Perfectly inelastic of demand7. Explain the meaning of cross price elasticity of demand8. Explain the meaning of income elasticity of demand9. Explain the meaning elasticity of supply10. Understand the distinction between arc elasticity and

point elasticity

Short Problems for elasticity.

1. (a) Would you expect the price elasticity of demand to be higher for Chevrolet automobiles or for automobiles in general ? Why ? (b) Would you expect the price elasticity of demand for electricity for resindential use to be higher or lower than for industrial use ? Why ? (c) Would you expect the price elasticity of demand for electricity to be higher or lower in the short run as compared with the long run ? Why ?

2. Agricultural commodities are known to have a price – inelastic demand and to be necessities. How can this information allow us to explain why the income of farmers falls (a) after a good harvest ? (b) In relation to the incomes in other sectors of the economy ?

3. . Suppose that the cross-price elasticity of demand between McIntosh and Golden Delicious apples is 0,8, between apples and apple juice is 0,5, between apples and cheese is 0,4, and between apples and beer is 0,1. What can you say about the relationship between each set of commodities ?

4. .A researcher estimated that the price elasticity of demand for automobiles in the United States is – 1.2, while the income elasticity of demand is 3.0. Next year, U.S. automakers intend to increase the average price of

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automobiles by 5 percent, and they expect consumers; disposable income to rise by 3 percent. (a) If sales domestically produced

automobiles are 8 million this year, how many automobiles do you expect U.S. automakers to sell next year ? (b). By how much should domestic automakers increase the price of automobiles if they wish to increase sales by 5 percent next year ?

5. .The management of the Mini Mill Steel Company estimated the following elasticities for a special type of steel : Ep = - 2, EI= 1, and Exy = 1,5, where X refers to steel and Y to aluminum. Next year, the firm would like to increase the price of the steel it sells by 6 percent. The management forecasted that income will rise by 4 percent next year and that the price of aluminum will fall by 2 percent. (a) If the sales this year are 1,200 tons of the steel, how many tons can the firm expect to sell next year ? (b) By what percentage must the firm change the price of steel to keep its sales at 1,200 tons next year ?

6. Suppose the own price elasticity of demand for good X is - 2, its income elasticity is 3, its advertising elasticity is 4, and its cross price elasticity of demand between it and good Y is – 6. Determine how much the consumption of this good will change if:

a. The price of good X increases by 5%b. The price of good Y increases by 10%c. Advertising decreases by 2 %d. Income falls by 3%

7. The ACME Corporation determines that at current prices, the demand for its computer chips has a price elasticity of - 2 in the short run. The price elasticity of its disc drivers is – 1. a). If ACME decides to raise the price of both products by 10%, what will happen to its sales? To its sales revenue? b) Can you tell from the above information which product will generate more revenue? If yes, which one?

8. Integrating ProblemThe research depertment of the Corn Flakes Corporation (CFC) estimated the following regression for the demand of the cornflakes it sells :

Qx = 1.0 – 2.0 Px + 1.5I + 0.8Py – 3.0 Pm + 1.0A

Where Qx = sales of CFC cornflakes, in millions of 1- ounce boxes per year

Px = the price of CFC cornflakes, in dollars per 10 ounce box I = personal disposable income, in trillions of dollars per yearPy = price of competitive brand of cornflakes, in dollars per 10

ounce boxPm = price of milk, in dollars per quart

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A = advertising expenditures of CFC cornflakes, in hundreds of thousands of dollars per year

This year, Px = $2, I=$4, Py = $2,50, Pm= $1, and A =$2. (a) Calculate the sales of CFC cornflakes this year; (b) calculate the elasticity of sales with respect to each variable in the demand function; (c) estimate the level of sales next year if CFC reduces Px by 10 percent, increase advertising by 20 percent, I rises by 5 percent, Py is reduced by 10 percent, and Pm remains unchanged. (d) By how much should CFC change its advertising if it wants its sales to be 30 percent higher than this year ?

Kuliah 4

The Theory of Individual Behavior

Chp 4 – M. Baye

Questions1. What is the difference between ordinal utility and cardinal

utility?2. Explain four basic properties of consumers’ preference

ordering for a consumer’s indifference curves3. Suppose that a set of indifference curves was not

negatively sloped. What could you say about the desirability of the two goods?

4. Explain why two indifference curves cannot intersect.5. Explain why MRS between two goods must equal the

ratio of the price of the goods for the consumer to achieve maximum satisfaction

6. Explain the derivation of a demand curve using indifference analysis(PCC)

7. Distinguish between the income and substitution effects when price change (increase and decrease)

8. Distinguish between the inferior and normal goods when income change(Engel curve)

9. Explain the difference between each of the following term:

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a. Price consumption curve and demand curveb. An individual demand curve and a market demand

curvec. An Engel curve and demand curved. An income effect and substitution effect

Kuliah 5

The Production Process and CostsChp 5 M. Baye

1. What is the production function2. Distinguish between short run, long run and very long run

production function3. Explain 3 stages of production function4. What is increasing, decreasing and negative marginal return5. Define isoquant and isocost and compare with indifference

curve and budget line6. Explain cost minimizing rule7. What is fixed cost and variable cost8. Why is sunk cost irrelevance by decision maker?

When is it economies of scale/diseconomies of scale and constant return to s

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Chp 5 M. Baye

9. What is the production function10. Distinguish between short run, long run and very long run

production function11. Explain 3 stages of production function12. What is increasing, decreasing and negative marginal

return13. Define isoquant and isocost and compare with

indifference curve and budget line14. Explain cost minimizing rule15. What is fixed cost and variable cost16. Why is sunk cost irrelevance by decision maker?17. When is it economies of scale/diseconomies of scale and

constant return to scale exist?

Chapter 6 M Baye

1. What is the transaction cost2. Explain types of specialized investments3. How is the firm optimal procurement of inputs4. What is the vertical integration?5. Describe the principle-agent problem. How is the solution?

Kuliah 7 dan 8

QuestionsChapter 1 – 3 Besanko

1. Where do economies of scale come from?2. What is the definition of economies of scale?3. What is the definition of economies of scope?4. Mention three special sources of economies of scale and scope

that have to do with area other than production?5. What is the sources of dieseconomies of scale

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6. What is the concept of the learning curve7. What is the product life cycle?8. Question from chp 2, page 101 Besanko

Question # 1, 2, 3 and 8

9. Explain vertical chain of production for furniture?10. Explain benefit and cost using the market, make – or -

buy decision?11. Explain reason to buy?12. Explain reason to make?13. Why does asymmetric information lead to inefficient

action?

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Kuliah 9 dan 10

Questions

Chapter 8 and 9

1. What is the principal agent problem, and how is solution for that problem?

2. What is the key conditions for perfect competition market?

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3. Why does asymmetric information lead to inefficient action4. Explain how a firm determines profit maximizing output under perfect

competition (graph)5. Explain how the short run industry supply curve can be derived under

perfect competition (graph)6. Describe the role of entry and exit of firms in achieving long run market

equilibrium7. Under what condition should a firm continue to produce in the short run

if it incurs losses at the best level of output? What is shut down point?8. Define sources of monopoly power9. Explain how a firm determines profit maximizing output under monopoly

(graph)10.Compare supply curve under monopoly and perfect competition11.Define deadweight loss12.Define consumer surplus13. Define producer surplus14. Regardless of the economic environment, every firm will maximize

profits by operating at the minimum point of its average total cost curve. Is this statement true or false? Explain. 

15.Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q. Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q2. At the profit-maximizing combination of output and price, deadweight loss is …………

16.Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q. Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q2. At the profit-maximizing combination of output and price, consumer surplus is ……..

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17.Beta Industries manufactures floppy disks that consumers perceive as identical to those produced by numerous other manufacturers. Recently, Beta hired an econometrician to estimate its cost function for producing boxes of one dozen floppy disks. The estimated cost function

is . a. What are the firm's fixed costs?b. What is the firm's marginal cost?Now suppose other firms in the market sell the product at a price of $10c. How much should this firm charge for the product?d. What is the optimal level of output to maximize profits?e. How much profit will be earned?f. In the long run, should this firm continue to operate or shut down? Why? 

18.You are the manager of a firm that has an exclusive license to produce

your product. The inverse market demand curve is . Your

cost function is . Determine the output you should produce, the price you should charge, and your profits. 

19. . You are a monopolist with the following cost and demand conditions:

 and .a. Determine the profit-maximizing output and priceb. Graph this solutionc. Show your profits and the deadweight loss to society in your graphd. Determine the actual amount of deadweight loss 

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