Managerial Economics Final Exam – W2012 Instructor: Dr. David K.

Lee
Name:________________________________________ID:__________________________________________
Instructions:
Clearly identify your name and ID in both, the question sheet and exam book, and submit both.
Show your answers only in the exam book. Any writing in the question sheet will not be read for grading.
Answer any 9 questions only. If you answer more than 9, only the first 9 will be read for grading.
10 points for each question.
1. You are a hotel manager, and are considering four projects that yield different payoffs,
depending upon whether there is an economic boom or recession. The potential payoffs
and corresponding payoffs are summarized in the following table.

a. If you are the manager of the firm, which project will you choose and why?
b. If a manager adopted both project A and B simultaneously, what would the
expected value of this joint project be?
2. Suppose that the Expected Benefit Schedule for searching is given as EB = 5+0.2P,
and the marginal cost per searching is $10 for shopping a good.
a. Compute the reservation price for shopping.
b. You just stopped at a shop and know that the price is $15. Will you buy it? Why or
why not?
3. You are the manager of a gas station and your goal is to maximize profits. Based on
your past experience, the elasticity of demand by Texans for a car wash is -4, while
the elasticity of demand by non-Texans for a car wash is -6. If you charge Texans $20
for a car wash, how much should you charge a man with Oklahoma license plates
for a car wash?
4. A local video store estimates their average customer's demand per year is Q = 20 -
4P, and knows the marginal cost of each rental is $1.00. How much should the store
charge for an annual membership in order to extract the entire consumer surplus via
an optimal two-part pricing strategy?
5. You are a truck farmer and bring produce to a farmer's market every Wednesday.
You have found that on a typical day five other farmers bring their produce to
market. Years of experience have taught you that you make the most money by
pricing your produce at 1.15 times your marginal cost. What is your elasticity of
demand in this Cournot oligopoly? What it the market elasticity of demand?

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Managerial Economics Final Exam – W2012 Instructor: Dr. David K. Lee

6. Suppose a local energy company faces two demand functions, peak time demand
and off-peak time demand, as follows:
PPEAK=100-0.5QPEAK, POFF-PEAK=50-QOFF-PEAK and MC=10, and the maximum quantity
produced =80.
Compute the prices to be charged per unit consumption of the energy.

7. Using the following hypothetical payoff matrix, explain how trigger strategies can be
used to support the collusive level of advertising in an infinitely repeated game. For
what values of the interest can collusion be sustained?

8. The inverse demand curve for a Stackelberg duopoly is P=100-Q . The leader's cost
structure is CL(QL) = 2QL . The follower's cost structure is CF(QF)=4QF .
a. Determine the reaction function for the follower.
b. Determine the equilibrium output and price levels for both the leader and the
follower.
9. In Gelate, Pennsylvania, the market for compact discs has evolved as follows. There
are two firms that each use a marquee to post the price they charge for compact
discs. Each firm buys CDs from the same supplier at a cost of $5.00 per disc. The
inverse market demand in their area is given by P=10-2Q, where Q is the total output
produced by the two firms.
a. Solve for the Bertrand equilibrium price and market output.
b. Would your answer differ if the products were not perfect substitutes? Explain.
10. Suppose that the demand for coffee at a branch of Tim Hortons has the following
schedule: QXd = 100 - 2PX + 3PY + 0.5M, where X is the Tim Hortons’ coffee, Y is Starbuck’s
coffee, and M is the average income per day for customers. And assume that currently
Px=$2, Py=$3, and M=$100.
a. Calculate the numerical value of the own price elasticity of demand for X, and
interpret it.
b. Calculate the numerical value of the cross elasticity between X and Y, and interpret
it.
c. Calculate the numerical value of income elasticity for X, and interpret it.