Question 1:
a) State the general meaning of elasticity as it applies to economics. Define the price elasticity of demand.
b) A storm destroys half the banana crop. Is this event more likely to hurt banana farmers if the demand for bananas is very elastic or very inelastic? Explain.
c) Define the law of diminishing returns. Why is this law considered a short-run phenomenon?
d) Although managerial economics is based primarily on microeconomics, explain why it is also important for managers to understand macroeconomics
e) Define scarcity and opportunity cost. What role do these two concepts play in the making of management decisions?
Question 2:
a) What are the key points in a short-run production function that delineate the three stages of production?
b) Explain the relationship between the law of diminishing returns and the three stages of production.
c) Explain the relationship between a firm's short-run production and its short-run cost function. (Focus on the marginal product of an input and the marginal cost of production).
Question 3:
A firm has the following short-run production function:
Q = 50L + 6L2 -0.5L3
where Q = Quantity of output per week L = Labor (number of workers)
a. When does the law of diminishing returns take effect?
b. Calculate the range of values for labor over which Stages I, II, and III occur.
c. Assume each worker is paid $10 per hour and works a 40-hour week. How many workers should the firm hire if the price of the output is $10? Suppose the price of the output falls to $7.50. What do you think would be the short-run impact on the firm's production? The long-run impact?
Question 4:
Fence Right is a firm that supplies and installs fence. Its output follows the production function Q = 20L - 0.5L2; where L denotes labour hours and Q the length of the fence in feet. The firm hires labour at a wage of $25 per hour.
Hint: MRPL = MRC
a) DD has received an offer to install 200 feet of fence for a price of $480. Should DD accept the offer?
b) What offer would be profitable if the company desires a price of $5 per foot of fence installed (show all workings)?
Answer Question 5 or 6
Question 5
The demand function for a cola-type soft drink in general is Q = 20 - 2P, where Q stands for quantity and P stands for price.
a. Calculate point elasticities at prices of 5 and 9.
b. Is the demand curve elastic or inelastic at these points?
c. Calculate arc elasticity at the interval between P = 5 and P = 6.
d. At which price would a change in price and quantity result in approximately no change in total revenue?
e. Why?
Question 6
Greg's Hardware has determined the following demand and supply equations for nails
QD = 10,000-25P
QS = -5,000 + 50P
a. How many nails would be sold for $100?
b. At what price would nail sales be zero?
c. When P = $200, what is total revenue? What is marginal revenue?
d. What is the relationship between quantity supplied and quantity demanded at a price of $300?