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Second Quiz: Review Managerial Economics: Eco 685
The quiz covers long run costs, pricing, and sections I and II of strategy (pure strategies). The pages in the notes are 33 to 58. We skipped section VI of Cost Theory and section IV of Pricing, All questions come from the class notes. The chapters in the book are 9 (Long run costs only), 3, 13, and 12. Additional study materials: study guide, list of definitions, homework 3, and this review sheet. Note: this review covers only material since the last homework. The following equations are provided.
π = T R − T C
∂bLc ∂L
= bcLc−^1 ,
∂a + bLc ∂K
∂ objective ∂ decisions
= 0 at the maximum
ep =
( P Q
) ( ∂Q ∂P
)
percent change in Q percent change in P
P =
1 ep + 1^
MC, Markup =
P − cost cost
Optimal Mark up =
ep + 1
eI =
∂Q
∂I
I
Q
percent change in Q percent change in I
Shorter Questions
Question 1
Explain how a small firm may have an advantage over a large firm in the price cutting game.
Question 2
Give one advantage and one disadvantage of pricing a good at $9.99 rather than $10.
Question 3
A car manufacuturer estimates that the cost of all parts and raw materials of a car are $20,000 per car. The company uses cost plus pricing with a 10% markup. The company also estimates it takes $4000 of labor costs per car to assemble the car. The price elasticity is equal to -6.
a. Calculate the cost plus price.
b. If the company wants to earn a 10% return on each vehicle produced, what price should the company charge?
c. Calculate the optimal price. Explain why the optimal price differs from (a) and (b).
Longer Questions
Question 4
A maker of a particular chemical that has use both in the dental (d) industry and to con- sumers (c) wishes to price discriminate. Demand in the two markets and total costs are:
Pd = 210 − 10 Qd (1)
Pc = 110 − 5 Qc (2)
T C = 100 + 10 (Qd + Qc) (3)
a. Suppose the company price discriminates between dental customers and retail (con- sumer customers). Calculate the optimal price and quantity in each market.
b. Calculate the price elasticity in each market. Which type of customer is more price sensitive and how is that reflected in the price?
c. Give one possible reason why price discrimination might not work in this case.
Question 5
d. Suppose the union introduces in it’s bylaws an automatic strike if management resists. Similarly, the firm adopts a policy to automatically resist given a strike. Calculate the new payoff matrix and repeat (a) and (b).
