Managerial Economics

Problem Set 1

Directions:

Please review carefully the syllabus in order to complete and hand in this
assignment appropriately. I will not accept assignments that do not follow my
instructions. Graphs are essential when asked for – write them clearly and label
everything!

1. Suppose I own a store and am only interested in increasing the number of potential
customers that enter my store. Further, I believe that advertising could influence how
many people enter my establishment. Based on past experience with similar stores, I
estimate the following relationship between number of customers (C) and the amount of
advertising (A) to be:

C = 100 + 6A – A2/100.

a. (2 points) Graph this function and describe (in economic terms!) the intercept and
slope.

b. (2 points) Does this functional form seem reasonable? Explain.

c. (3 points) What level of advertising would maximize the number of customers
entering my store? Show all your work and explain the economics behind the
steps!

2. (3 points) Pick a “how much” decision you have recently made and, using the
cookies example from class as a reference, describe fully how marginal analysis
can be used to determine the optimal decision. Be sure to draw a graph and
provide a clear description of the marginal analysis technique as applied to your
example.