Midterm Examination of Managerial Economics

Fall 2022

I. Short Answer Questions: 60 points

1.In each of the following instances, discuss whether horizontal or vertical boundaries
have been changed, and whether they were extended or shrunk. (5 points)

(i)TSMC is building new factories in Arizona, USA.

(ii)Both National Chiao-Tung university and National Yang-Ming University were
merged into National Yang Ming Chiao Tung University.

2. A seller with a strong market power can use either package deal or two-part pricing
to leave buyers with zero buyer surpluses. Use both graphical and descriptive analyses
to explain why. (5 points)

3. To raise total revenue, NYC Transit authority raises the price of one trip ticket, the
price of one-day pass, and the price of one-month pass, respectively. On the other
hand, it provides more discount incentives to Mass Transit card holders. Explain why
the NYC transit authority decides to make these fee changes. (5 points)

4. A perfectly competitive firm currently faces the following conditions:

Price Marginal Marginal Average Average Average
Revenue Cost Cost Variable Cost Fixed Cost
100 100 70 110 80 30
Please show the current conditions in a graph containing cost and revenue curves. As
a consultant of this perfectly competitive firm, what are you going to suggest the firm
to do in the short run? (5 points)

5.Consider the effect of an increase in demand on the market for coffee. Compare the
short-run changes in price and quantity with the long-run changes. (a graphical
analysis is required) (5 points)

6. When the annual Valentine’s Day is coming, the demands for rose flower,
handmade chocolate, and love card suddenly increase. Please make comparisons in
the change (fluctuation) size of price between these products. Explain your reasoning
graphically and descriptively. (5 points)

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7. Managerial economics teaches us that relevant costs should be considered and
irrelevant costs should be ignored while making decisions. Relevant costs may be
hidden and irrelevant costs may be shown in accounts. Please specify a decision you
would like to make and give examples of relevant costs that are hidden and irrelevant
costs that are shown in accounts for this decision. (5 points)

8.Suppose that Taiwanese government would like to levy a tax on beer. There are two
ways to levy the tax. First, it levies $10 tax per bottle bought. Second, it levies $10
per bottle sold. Use two separate graphs to analyze the impacts of beer tax on the
quantity, price paid by buyer, price received by sellers, government revenue, and
deadweight loss. (5 points)

9.Suppose that disposable diaper manufacturers would like to promote its sale
quantity in the perfectly competitive retailing market. There are two options for them.
First, they cut their wholesale price by 50 cents a package. Second, they distribute 50
cent coupons to consumers. Use two separate graphs to analyze the effects of each
option on the market equilibrium and stakeholders (buyers and retailers). Based on
your point of view, which strategy is a better choice for manufacturers? (5 points)

10.How would the following simultaneous changes affect the market for new homes?
Household incomes fall, and the current price of building materials rises. (Graphical
and descriptive explanations are required) (5 points)

11. True or False. Explain why. (10 points)

(1)Farmer John’s fixed cost of growing corn is higher than that of Farmer Jill. It
implies that Farmer John’s marginal costs of growing corn is higher than that of
Farmer Jill.
(2)Some companies continue in business even though they are losing money. They
make a mistake.
(3)The demand for business travel is less elastic than that for leisure travel.
(4)The price elasticity of demand for automobile is smaller than the price elasticity of
demand for Toyota.
(5)When marginal cost is higher than average cost, the average cost is falling.

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II. Discussion Questions: 40 points (10 points/ each)

1. The price of Chanel perfume is around $200 per fluid ounce, while the price of
bottled water is $1 per liter. Maya buys 2 fluid ounces of Chanel and 10 gallons of
bottled water a month.

(a) Using relevant demand curves, illustrate Maya's choices. Illustrate how the
following changes will affect Maya's demand for Chanel perfume: (i) price increase to
$220 per fluid ounce, and (ii) cut in price of another of Maya's favorite perfumes.
(b) Maya spends more money each month on perfume than bottled water. Does this
necessarily mean that perfume gives her more total benefit than water? Use
appropriate demand curves to address this question.

2. Industry researchers R.S. Platou predicted that, between 2003 and 2004, oil prices
would fall by 5%, production of oil by OPEC and the former Soviet Union would
increase, and deliveries of new tankers would exceed scrappage of older vessels.
Using suitable diagrams, explain how each of the following would affect the market
for tanker services:
(a) fall in oil prices
(b) increase in production by OPEC and the former Soviet Union
(c) new tanker deliveries
(d) scrappage of older vessels.

3.In 1998, the value of worldwide sales of recorded music in the form of singles,
music cassettes, and CDs was $38.7 billion. Americans bought 3.1 CDs and 0.6
music cassettes per capita, while Mexicans bought 0.5 CD and 0.3 music cassettes per
capita.

(A)On a suitable diagram, draw the U.S. demand for music CDs. Explain how the
following changes would affect the demand curve: (i) increase in the price of CDs; (ii)
fall in the price of music cassettes.
(B)On another diagram, draw the demand for music CDs in Mexico. Explain how the
following changes would affect the demand curve: (i) fall in advertising by music
publishers such as Sony and Time Warner; (ii) reduction in the penalty for copyright
infringement.

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4.Barrick Gold owns the Bulyanhulu mine in Tanzania and the Karlgoolie mine in
Australia. Table 1 reports information on selling prices and costs for the two mines.
Barrick’s selling price of gold differs from the spot price as some production is sold
through long-term contract and also owing to the company’s use of hedging. The
“average cash cost”(average variable cost) includes operating cost, royalties, and
taxes, while the “average cost” includes the cash cost as well as amortization.

(A)Suppose that the Bulyanhulu mine always produces at the scale where its marginal
cost equals the selling price of gold. Its marginal cost curve, however, shifts with
changes in electricity prices, wages, and other factors. Using the data from table 1,
illustrate the shifts in Bulyanhulu’s marginal cost curve, the selling price, and profit-
maximizing scale of production between 2002 and 2004.
(B)In 2003, Barrick continued to produce from the Bulyanhulu mine even though the
selling price of gold, $366 per ounce, was less than its average production cost of
$369 per ounce. Was this a mistake?
(C)Use Barrick’s 2004 data to compare the (i) short-run break even conditions for
Bulyanhulu and Karlgoolie; and (ii) the long-run break even conditions for the two
mines.

Table 1: Barrick Gold

Bulyanhulu Karlgoolie
2002 2003 2004 2004
Production (thousand ounces) 356 314 350 444
Selling price ($ per ounce) 339 366 391 391
Average cash cost ($ per ounce) 198 246 284 234
Average cost ($ per ounce) 300 369 384 278
Source: Barrick Gold Corporation, Annual Reports