Explaining opportunity cost and discounting principle

Attempt all the questions.


Question1) What are the key points in short run production functions which delineate three stages of production? Describe the relationship between law of diminishing return and three stages of production.

Question2) “Because of economics of scale, it is sometimes more cost effective for a firm to operate a large plant at less than maximum efficiency than the small plant at maximum efficiency”.  Do you agree with this statement?  Describe.

Question3) Describe the following concepts with appropriate example.

(a) Opportunity Cost

(b) Discounting principle

Question4) “Managerial economics involves use of economic analysis to make business decisions involving the best use of a firm’s scarce resources” Describe the statement with appropriate example.


Case Study

Travel Company has hired the management consulting company to analyze demand in 26 regional markets for one of its major products: a guided tour to the particular country.  Consultant uses data to estimate the following equation:

Q = 1,500 = 4P + 5A+ 10I +3PX

where  Q = amount of the product demanded

P = price of the product in dollars
A= advertising expenditures in thousands of dollars.
I = income in thousands of dollars
PX = price of some other travel products offered by a competing travel company


a) Compute amount demanded for this product using the following data:

P = $400
A= $20,000
I = $15,000
PX = $500                                        

b) Assume the competitor reduced price of its travel products to $400 to match price of this firm’s product.  How much will this firm have to increase its advertising in order to counteract the drop in its competitor’s price?  Will it be worth it for them to do so?  Describe.                    

c) What other variables might be important in helping estimate the demand for this travel product?

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Managerial Economics: Explaining opportunity cost and discounting principle
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