Managerial Economics

To provide basic knowledge to the learners

about the economic concepts, tools of
analysis and their applications in the process
of business decision-making.
Prof. (Dr.) T.R. Dash

Prepared by: CHUOP Theot Therith

2010

Managerial Economics
Part I: Questions & Problems
1. As a manager of a firm, how the study of managerial economics will help you in the
process of decision making? Explain your answer with the help of examples.
2. What are the determinants of demand in general? Select a product/ service; find out its
determinants. Show how they affect the demand for the product/ service.
3. Two managers of Mobitel Mr. Sokheng and Ms. Sokny estimated the expected sales of
cell card worth of $10 along with further reduction of its price for the month of April, 2009
as follows:
Values ($)
10
09
08
07
06
05
04

Sokhengs estimate Soknys estimate

Quantity
Quantity
200
150
220
180
230
240
250
300
280
400
300
600
350
800

Calculate the Total Revenue (TR), Marginal Revenue (MR) and Average Revenue
(AR) for each value (price $).
Show whether demand is elastic or inelastic on the basis of each set of estimates.
What is the relationship between TR and elasticity?
(Calculations should be done at each value and not only total)
4. The demand for public travel is always linked to the prices of petrol and diesel.
Whenever there is a rise in the prices of petroleum products, not only the prices of public
transport system increase but also their demand since many people shift from private
travel to public travel.
Which concept in economics describes the effect of a change in the price of one
good on the prices and demand for related goods? explain in detail.
5. The short run costs (STC) for different levels of output (Q) are given as follows:
Q
STC($)

0
80

20
200

40
60
80
260 300 320

100
340

120
370

140
420

150
453

160
500

180
720

The total revenue (TR) of the firm is $ 4Q.

Find out the levels of output at which
i.
ii.
iii.

Total loss is maximized.

Total profit is maximized.
Break even points.

6. The total product of labor (TPL), average product of labor (APL), and the marginal
product of labor (MPL) schedules are given below. It is assumed that the wage per unit of
labor over a period of time is $ 600.
L
TPL
APL
MPL

0
0
-

1
200
200
-

2
600
300
400

3
1400
466
800

4
2000
500
600

5
2400
480
400

6
2600
434
200

7
2700
388
100

You are required to derive the total variable cost (TVC), average variable cost (AVC), and
the marginal cost (MC) schedules, from the above data.
7. Explain the application of Break even analysis in managerial decision making with
examples.

***

Managerial Economics
Part II: Answers and Solution
1. As a manager of a firm, the study of managerial economics will help me in the process
of decision making such following:
This course provides me with an understanding of how economics can be used by
business leaders to manage and compete more effectively. Tools of microeconomics will
be used to evaluate the internal structure, incentives, and decisions within a firm as well
as the competitive forces external to the firm.
After the study of this course I am able to understand and apply appropriate economic
concepts to assist managerial decision making, such the nature and scope of managerial
economics, demand and supply analysis, product analysis, theory of cost, break-even
analysis, and competition and market structures.
Especially it helps me in the process of decision making to reach the business success
with 8 factors understanding. Firstly, economic environment is analyzing on the
environment of economic PEST Political, Economic, Social and Technological and
economic system plans, policies, program, and problem of economic. Example, whats
economics problem in Cambodia? As we know, Cambodia income from agriculture,
tourism and garment factory but Cambodia imports technology and raw material from the
other countries. So the major problem is low diversity of economic activity (only produce).
Secondly consumer behavior, we must understand the need of consumer i.e. in Cambodia
GNI per capita in 2006 is 490 dollars or income a day per one is 490/(12*30) = 1.1 $.
Means the need of Cambodian consumer is low priced/inexpensive but high volume.
Thirdly, understanding production, as a manager must know the market needs what
business to start, the process of production, and proper utilization of resource.
Fourth, Understanding cost of operation means manager must well know the factor of
production such as rental expense, wage, interest, salary. And the other 4 are:
understanding competition, understanding investment decision, understanding profit and
break even point and understanding macro variable.

2. In general, the determinants of demand are:

Price of the own commodity (P)
P increases D decreases: Negative relation
Income of the consumer (Y)
Y increases D increases: Positive relation
Taste & Preference of the Consumer (T)
T increases D increases: Positive relation
Price of Related Commodities (Pr)
Price of Substitutes (Ps)
PTea increases Dcoffee increases: Positive relation
Price of Complementary (Pc)
Pvcd player increase Dvcd decreases: Negative relation
Expectation of the Consumer (E)
Expectation of the Future Price (Ep)
Ep increases Cd (Currend demand) increases: Positive relation
Expectation of the Future Income (Ey)
Ey decrease Cd decrease: Positive relation
Number of Consumers (N)
N increases D increases: Positive relation
Distribution of Consumers (D)
Advertisement (A) A increases D increases: Positive relation
Find out the determinants of a product Coffee
D = f(P, Y, PTea, PSugar, Nconsumer, ) where P is price of coffee, Y is consumers income,
PTea is price of tea, PSugar is price of suger, Nconsumer is number of consumer, and etc.
Affecting demand for the coffee:
if P increases D decrease, Y increases D increases, PTea increases D increases,
PSugar increases D decreases, N increases D increases.
D is demand for coffee. It means P and PSugar are negative relation with D (demand for
coffee) and Y, PTea, and N are positive relation with D.
3. a/. Calculate the Total Revenue (TR), Marginal Revenue (MR) and Average
Revenue (AR) for each value
Values
($)
10
09
08
07
06
05
04

Quantity
200
220
230
250
280
300
350

Sokhengs estimate
TR
MR
2000
1980
-1
1840
-14
1750
-4.5
1680
-2.3
1500
-9
1400
-2

AR
10
09
08
07
06
05
04

Quantity
150
180
240
300
400
600
800

Soknys estimate
TR
MR
1500
1620
4
1920
5
2100
3
2400
3
3000
3
3200
1

AR
10
09
08
07
06
05
04

b/. Show whether demand is elastic or inelastic on the basis of each set of
estimates
Sokhengs estimate
. At basis value = $10
Ep =

220 200 10
= 1 Unit elastic
x
9 10
200

. At basis value = $9

230 220 9
Ep =
= 0.41 inelastic
x
89
220

. At basis value = $8
Ep =

250 230 8
= 0.69 inelastic
x
7 8
230

. At basis value = $7

280 250 7
Ep =
= 0.84 inelastic
x
67
250

. At basis value = $6

300 280 6
Ep =
= 0.43 inelastic
x
56
280

. At basis value = $5
Ep =

350 300 5
= 0.83 inelastic
x
45
300

So, 0<Ep<1 demand is inelastic

Soknys estimate
. At basis value = $10
Ep =

180 150 10
= 2 elastic
x
9 10 150

. At basis value = $9
Ep =

240 180 9
= 3 elastic
x
89
180

. At basis value = $8
Ep =

300 240 8
= 2 elastic
x
7 8
240

. At basis value = $7
Ep =

400 300 7
= 2.33 elastic
x
67
300

. At basis value = $6
Ep =

600 400 6
= 3 elastic
x
56
400

. At basis value = $5
Ep =

800 600 5
= 1.66 elastic
x
45
600

So, Ep>1 demand is elastic

c/. The relationship between TR and elasticity

Demand is Inelastic when a certain % cut in price leads to a smaller percentage
increase in the QD, in which case total revenue falls.
Demand is Elastic when a certain % cut in price brings about more than
proportionate expansion in demand so as to increase total revenue.
4. The demand for public travel is always linked to the prices of petrol and diesel.
Whenever there is a rise in the prices of petroleum products, not only the prices of public
transport system increase but also their demand since many people shift from private
travel to public travel.
The effect of a change in the price of one good on the prices and demand for related
goods describes the concept of Cross Elasticity of Demand, means the Degree of
Responsiveness of QD of one good to changes in the price of another. Either be Positive
or negative depending upon whether the two goods considered are Substitutes or
Complements.
In this case, a rise in the prices of petrol and diesel lead to the prices of either private or
public transport increase (complements), and also increases in the demand of public
transport. But the demand of private transport decreases (Substitutes)

private transport,

public transport,

D private transport

petrol and diesel

public transport

5. According to the given of the short run costs (STC) for different levels of output (Q)
and the total revenue (TR) of the firm - $ 4Q, Calculate the total revenue (TR) and profit
or loss (P/L) as following:
Q
STC($)
TR
P/L
As the result
iv.
v.
vi.

0
80
0
-80

20
40
200 260
80
160
-120 -100

60
300
240
-60

80
320
320
0

100
340
400
60

120
370
480
110

140
420
560
140

150
453
600
147

160
500
640
140

180
720
720
0

table above, the levels of output at:

Maximized total loss is Q = 20
Maximized total profit is Q = 150
Break even points is Q1 = 80 (1st B-E) and Q2 = 180 (2nd B-E)

6. Derive the total variable cost (TVC), average variable cost (AVC), and the
marginal cost (MC):
L
TPL
APL
MPL
TVC
AVC
MC

0
0
0
-

1
200
200
600
3
3

2
600
300
400
1200
2
1.5

3
1400
466
800
1800
1.28
0.75

4
2000
500
600
2400
1.2
1

5
2400
480
400
3000
1.25
1.5

6
2600
434
200
3600
1.38
3

7
2700
388
100
4200
1.55
6

7. Application of Break-Even Analysis in managerial decision making:

i. Useful in deciding to manufacture product under two or more technologies, means to
choose the best technology or plant.
Example: from the below data, find out the most profitable and suitable technology if the
estimated minimum sales volume is 26,050 units.

TFC
AVC
Price

Technology I
100,000 $
5$
10 $

Technology II
200,000 $
3$
10 $

Technology III
300,000$
2$
10 $

Solution: Calculate the B-E point of each technology QB1, QB2, and QB3
General formula: QB = TFC/ (P TVC)
QB1= 100,000/ (10-5) = 20,000 < 26,050
QB2= 200,000/ (10-3) = 28,572 > 26,050
QB3= 300,000/ (10-2) = 37,500 > 26,050
As the result, QB1 of technology I < Estimated sales (Es), so technology I is the best.
ii. A means in taking make or buy decision
Example: Mr. THERITH plant to run a business. His business need out-source material
from the market that costs 14 dollars per unit. If manufactured bye his own business, the
TFC would be 40,000 $ and the AVC would be 3 $ per unit. What decision Mr. Therith will
consider if the requirement of material for the business is 3,850 units.
Solution: Calculate the B-E point: QB= 44,000/ (14 3) = 4,000 > 3,850
According to calculation, QB > Requirement, therefore Mr. Therith will decide to buy
material from the market.
iii. Helps in allocating budget for promotional activities
Example: the FC for producing a product is 10,000 $. The AVC is 1 $, the sale price is 3 $.
Whether the firm will decide to incur an expenditure of 2,000 $ towards promotion if it
expects its sale to increase to 7,500 units. The firm will incur the expenditure on
promotion or not.
Solution: find out the B-E point, QB= (10,000+2,000)/ (3-1) = 6,000 < 7,500
So, the firm will incur the expenditure on promotion because expected sale > QB.
iv. Guides in Production planning. It is an indicator of maximum contribution towards
profit and loss.
Example: A university intends to find out the most profitable item to be produced out of
running PhD program or DBA program. The Total Fixed Cost is 80,000 dollars in both
cases. The fee of program is 1,000 dollars and 1,200 dollars and the Average Variable
Cost is 200 $ and 300 $ for PhD program and DBA program respectively. Which one
should be produced by the university?
Solution: Calculate the B-E point for each case. Let QB1 is B-E point of PhD program and
QB2 is B-E point of DBA program.
QB1 = 80,000/(1,000-200) = 100 and QB2 = 80,000/(1,200-300) = 88
As the result, QB2 < QB1, so the university should produce DBA program.