Final Examination

Managerial Economics

Instruction: Answer the following questions

1. Define the concept of scarcity. Explain the significance of this concept in relation to the concept
of opportunity cost. Are opportunity cost and sacrifice the same thing? Would you say that a
sacrifice represents the cost of a particular decision?

This concept of scarcity leads to the idea of opportunity cost. The opportunity cost of an action is what
you must give up when you make that choice. Another way to say this is: it is the value of the next best
opportunity. Opportunity cost is a direct implication of scarcity. People have to choose between
different alternatives when deciding how to spend their money and their time. Milton Friedman, who
won the Nobel Prize for Economics, is fond of saying "there is no such thing as a free lunch." What that
means is that in a world of scarcity, everything has an opportunity cost. There is always a trade-off
involved in any decision you make.

2. The opportunity cost of any decision includes the value of all relevant sacrifices, both explicit and
implicit. Do you agree? Explain The concept of opportunity cost is one of the most important ideas in
economics.
Consider the question, “How much does it cost to go to college for a year?” We could add up the direct
costs like tuition, books, school supplies, etc. These are examples of explicit costs, i.e., costs that require
a money payment. However, these costs are small compared to the value of the time it takes to attend
class, do homework, etc. The amount that the student could have earned if she had worked rather than
attended school is the implicit cost of attending college. Implicit costs are costs that do not require a
money payment. The opportunity cost includes both explicit and implicit costs. Explicit costs are costs
that require a money payment. Implicit costs are costs that do not require a money payment.
Opportunity cost includes both explicit and implicit costs.

3. Silkwood Enterprises specializes in gardening supplies. The demand for its new brand of fertilizer,
Meadow Muffins, is given by the equation Q = 120 - 4P.

a. Silkwood is currently charging Php10 for a pound of Meadow Muffins. At this price, what is the price
elasticity of demand for Meadow Muffins?
b. At a price of Php10, what is Silkwood’s marginal revenue?
c. What price should Silkwood charge if it wishes to maximize its total revenue?
d. At the total revenue maximizing price, what is the price elasticity of demand for Meadow Muffins?
e. Diagram your answers to parts a through D.

4. The demand curve for widgets is QD = 10,000 - 25P.

a. How many widgets could be sold for $100?

b. At what price would widget sales fall to zero?
c. What is the total revenue (TR) equation for widgets in terms of output, Q? What is the marginal
revenue equation in terms of Q?
 d. What is the point-price elasticity of demand when P = $200? What is total revenue at this price?
What is marginal revenue at this price? Explain your result.
e. Suppose that the price of widgets fell to P = $150. What would be the new point-price elasticity
of demand? What is total revenue at this price? What is marginal revenue at this price? Explain
your result.
f. Suppose that the price of widgets rose to P = $250. What would be the new point-price elasticity
of demand? What is total revenue at this price? What is marginal revenue at this price? Explain
your result.
g. Suppose that the supply of widgets is given by the equation QS = -5,000 + 50P.What is the
relationship between quantity supplied and quantity demanded at a price of $300?
h. In this market, what is the equilibrium price and what is the quantity?

5. Consider the monopolist that faces the following market demand and total cost functions:

a. Find the profit-maximizing price (Pm) and output (Qm) for this firm. At this price–quantity
combination, how much is consumer surplus?
b. How much economic profit is this monopoly earning?
c. Given your answer to part a, what, if anything, can you say about the redistribution of income from
consumer to producer?
d. Suppose that government regulators required the monopolist to set the selling price at the long-run,
perfectly competitive rate. At this price, what is consumer surplus?
e. Relative to the perfectly competitive long-run equilibrium price, what is the deadweight loss to
society at Pm?