Othman Yeop Abdullah Graduate School of Business Universiti Utara Malaysia BEEG5103 Managerial Economics Exercise #1 1.

Jane has compiled the following list of expenses after completing one year of college. Assume that Jane would be living with her parents and working if she weren't attending college. Use this information to calculate Jane's economic cost of attending college for one year. Tuition $ 8,000 Dormitory room 4,000 Books and supplies 1,000 Food plan 3,000 Foregone income 19,000 Entertainment expenses 1,000 Clothing 2,000 Health insurance 1,000 Before Sarah quit her job as a carpenter, she was earning $35,000 per year. She rented a building for $12,000 per year and opened a cabinet shop. She spends $148,000 per year for labor, materials, utilities, and advertising. (i) How much revenue will the business have to earn in order to break even in terms of business profit? (ii) How much revenue will the business have to earn in order to break even in economic terms? Victoria quit her $80,000 a year job as an artist to move to Los Angeles and work as an investment consultant. The gallery that displayed and sold her paintings provided all of the canvas, paint, and other supplies she needed without charge. If Victoria finds 10 clients per year, how much must she get paid by each one on average in order to earn an economic profit of zero?

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4. Climate Control Devices, Inc. estimates that sales of defective thermostats cost the firm an average of 25 each for replacement or repair. An independent engineering consultant has recommended hiring quality control inspectors so that defective thermostats can be identified and corrected before shipping. The following schedule shows the expected relation between the number of quality control inspectors and the thermostat failure rate, defined in terms of the percentage of total shipments that prove to be defective. Number of Quality Control Inspectors 0 1 2 3 4 5 Thermostat Failure Rate (percent) 5.0 4.0 3.2 2.6 2.2 2.0

The firm expects to ship 250,000 thermostats during the coming year, and quality control inspectors each command a salary of 30,000 per year. i. ii. iii. Construct a table showing the marginal failure reduction (in units) and the value of these reductions (in ) for each inspector hired. How many inspectors should the firm hire? How many inspectors would be hired if additional indirect costs (lost customer goodwill and so on) were to average 30% of direct replacement or repair costs?

5. The demand for housing is often described as being highly cyclical, and very sensitive to housing prices and interest rates. Given these characteristics, describe the effect of each of the following in terms of whether it would increase or decrease the quantity demanded or the demand for housing. Moreover, when price is expressed as a function of quantity, indicate whether the effect of each of the following is an upward or downward movement along the given demand curve or instead involves an outward or inward shift in the relevant demand curve for housing. Explain your answers. i. ii. iii. iv. v. vi. An increase in housing prices A fall in interest rates A rise in interest rates A severe economic recession A robust economic growth (expansion) A rule that bank should offer loan based on net income rather than gross income.

6. Demand and supply conditions in the market for unskilled labour are important concerns to business and government decision makers. Consider a case of a federally mandated minimum wage set above the equilibrium or market clearing, wage level. Some of the following factors have the potential to influence the demand or quantity demanded of unskilled labour. Influences on the supply and quantity supplied may also result. Holding all else equal (ceteris paribus), describe these influences as increasing, decreasing, and indicate the direction of the resulting movement along or shift in the relevant curve(s). i. ii. iii. iv. v. An increase in quality of secondary education A rise in welfare benefits An increase in popularity of self-service gas (petrol) stations, car washes, etc. A fall in interest rates An increase in minimum wage.

7. The demand for personal computers can be characterised by the following elasticities: Price elasticity = -5 Cross price elasticity with software = -4 Income elasticity = 2.5

Indicate whether each of the following is true or false, and explain your answer. i. A price reduction for personal computers will increase both the number of units demanded and the total revenue of sellers.
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The cross price elasticity indicate that a 5% reduction in the price of personal computers will cause a 20% increase in software demand. Demand for personal computers is price elastic, and computers are normal goods. Falling software prices will increase revenues received by sellers of both computers and software. A 2% price reduction would be necessary to overcome the effects of 1% decline in income.