Midterm Examination of Managerial Economics

Fall 2021

I. Short Answer Questions (60 points; 5 points each question)

1.According to the report of Reuters, Taiwan’s TSMC and Japan’s Sony group
corporate are considering jointly building a chip factory in Kumamoto, Japan. How
will TSMC change its boundaries by doing this? How will Sony change its boundaries
by doing this? Explain your answers.

2. The following diagram shows Antonella’s demand curve for mobile telephone
services. When the price of mobile telephone calls is 1 dollar a minute, Antonella
buys 90 minutes a month. Identify the area representing her buyer surplus and
calculate the size of her buyer surplus. Explain how a mobile phone company can use
package deal or two-part pricing to raise its revenue. Suppose that you are the
marketing manager of the company. Describe your package deal strategy and two-part
pricing strategy

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q

90 100
Note: Please copy this diagram to the answer sheet.

3. When Valentine’s Day is near, price of handmade chocolate always rises much
more than the price of greeting cards. Why? Both descriptive analysis and graphical
analysis are required.

4. Prior to 2020, a passenger who used Taipei Easy Card to take MRT could have 20%
off for each trip. Starting from Feb. of 2020, this discount policy was changed. A
passenger who had 11-20 MRT trips during the previous month could have 10% off.
The discount rate rises when the number of cumulative MRT trips during the previous
month increases. It is 15% (21-30 trips), 20% (31-40 trips), 25% (41-50 trips), or 30%
(more than 50 trips), respectively. In other words, Taipei MRT company raises the fare
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for passengers who took less than 20 trips during the previous month, while it lowers
the fare for passengers who took more than 20 trips during the previous month. Do
you expect that this new fare policy would raise or lower total revenue of Taipei MRT
company? Explain your answer.

5. A big hurricane tracks over Central America which is one of the most important
coffee growing regions. At the same time, the COVID-19 pandemic reduces
consumers’ trips to coffee shops. What do you expect to happen in the world coffee
market? What are the combined effects of these two events on the equilibrium price
and equilibrium quantity in the coffee market? Both descriptive analysis and graphical
analysis are required.

6.Suppose the US government removes a tax on buyers of a good and levies a tax of
the same size on sellers of the good. How does this change in tax policy affect the
market equilibrium price? How does this change in tax policy affect price that buyers
pay for this good, the amount sellers receive net of the tax, and the quantity of the
good sold? Both descriptive analysis and graphical analysis are required.

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

Price Marginal Marginal Average Average Quantity
Revenue Cost Cost Variable Cost
100 100 70 110 80 30
On a diagram, draw the average variable cost curve, the average cost curve, and the
marginal cost curve. Show the current conditions on this diagram. As a consultant of
this perfectly competitive firm, what are you going to suggest the firm to do in order
to maximize its profit in the short run? Both descriptive analysis and graphical
analysis are required.

8.V Cinema has many theaters that are located in different cities of Taiwan. All branch
theaters charge for the same price regardless of their locations. As a result, there is
always a shortage of seats (long queue) at Taipei theaters. However, one the other
hand, there is often a surplus of seats (empty seats) at other theaters in those relatively
less-developed cities. Please analyze the shortage problem in Taipei theaters and the
surplus problem in other theaters. Both descriptive analysis and graphical analysis are
required.

9.Managerial economics teaches us that relevant costs should be considered and

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irrelevant costs should be ignored when making decisions. Please specify a decision
or two separate decisions you have ever made and give an example of relevant cost
and an example of irrelevant cost in this particular decision(s).

10. Suppose that the demand increases. Why does the price increase more in the short
run than in the long run? Why does the production increase more in the long run than
in the short run? Both descriptive analysis and graphical analysis are required.

11. WalMart learns that demand for private-label cola is less elastic than the demand
for Coca Cola. Why is private-label cola less elastic than Coca Cola? Should WalMart
set a higher price for private-label cola? Explain your answer.

12.True or False? Explain why.

(1)Suppose that airport landing fees are based on the weight of aircraft. Therefore,
landing fees are joint costs of the passenger and belly cargo services.
(2)The price elasticity of demand for beer is smaller than the price elasticity of
demand for Taiwan beer

II. Discussion Questions (40 points; 10 points each question)

1.The price of Chanel perfume is around $150 per fluid ounce, while the price of
bottled water is $1 per gallon. Tiffany buys 2 fluid ounces of Chanel and 10 gallons of
bottled water a month.

(A)Using relevant demand curves, illustrate Tiffany's choices. Illustrate how the
following changes will affect Tiffany's demand for Chanel perfume: (i) price
decreases to $140 per fluid ounce, and (ii) increase in price of another of Tiffany's
favorite perfumes. (5 points)
(B)Tiffany spends more money each month on perfume than bottled water. Does this
necessarily mean that water gives her less total benefit than perfume? Use
appropriate demand curves to address this question. (5 points)

2.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 cassette per capita, while Mexicans bought 0.5 CD and 0.3 music cassette per
capita.

(A)On a suitable diagram, draw the U.S. demand for music CDs. Explain how the
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following changes would affect the demand curve: (i) increase in the price of CDs; (ii)
rise in the ownership of CD players; and (iii) fall in the price of music cassettes. (5
points)
(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; and (iii) increase in the price of hamburgers. (5 points)

3.In January 2005, the world’s total supply of oil tankers amounted to 304.1 million
deadweight tons (dwt). During 2005, 28.0 million dwt of new tankers were delivered
into service, while 5.1 million dwt were scrapped or otherwise removed from service.
Hence, at the end of the year, the world’s total supply was 326.9 million dwt. Among
tankers and chemical carriers in operation of 200,000 dwt or larger, 60% by tonnage
was less than 10 years old, 37% was 10–20 years old, and the remainder was more
than 20 years old. Typically, older tankers are more costly to operate.
(A).Identify the following as either a short- or long-run decision: (i) lay-up (idling the
vessel); (ii) scrapping. (3 points)
(B).Explain how the owner of a tanker should decide whether to continue to operate,
lay-up, or scrap a vessel. (3 points)
(C).The marginal cost of keeping a tanker in service (“lay-up equivalent”) is the
tanker’s operating cost minus the cost of lay-up. When tanker rates fall, identify
which tanker owners would first lay up. (4 points)

4.Typical real-estate broker: "In California, the seller always pays the broker's
commission, so, buyers get brokerage services free."

MBA: "If the custom were for the buyer to pay the commission, then would
sellers get brokerage services free?"

Real-estate broker, clearly losing patience: "That is a purely hypothetical scenario,

but if that situation were to arise, yes, I guess you're right."

(A)Assume that each seller pays a brokers' commission of $18,000. Then, the supply
of houses includes the cost of brokerage. Illustrate the market equilibrium with a
price of $310,000 per house and sale of 200,000 houses a year. (3 points)
(B)Now suppose that buyers rather than sellers pay the $18,000 commission. Using
your figure, illustrate the following: (i) shift the supply curve down by $18,000 since
sellers do not pay the commission, and (ii) shift the demand curve down by $18,000
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since buyers now pay the commission. (4 points)
(C)Compare the market equilibria of (A) and (B) in terms of (i) the net price received
by sellers, and (ii) the net price paid by buyers. (Net prices are net of brokerage
commission, if any). (3 points)