Running Head: MANAGERIAL ECONOMICS.

Managerial Economics.

Name.

Institutional Affiliation.

Date.
MANAGERIAL ECONOMICS. 2

1. a) Total Fixed Cost

FC =TC−VC (Q )

Total Cost =20+ 4 ( 10 )

Total ¿ Cost =20

b) Total Variable Cost

FC =TC−VC (Q )

Total Cost =20+ 4 ( 10 )

Total Variable Cost =4

c) Average Total Cost

Total Cost
AT C=
Number of ∏ . Units

60
AT C=
4

AT C=15

d) Average Fixed Cost

AFC=Total ¿Cost ¿
Number of ∏ . Units

20
AFC=
4

AFC=5
MANAGERIAL ECONOMICS. 3

2. a) What is the price elasticity of demand?

The price elasticity of demand is calculated as the percentage change in quantity demanded

divided by a percentage change in price.

4,000−5,000
percentage change ∈quantity demanded =
5,000

¿−0.2∗100

¿−20 %

9.50−8.50
percentage change ∈price .=
8.50

¿ 11.76 %

20
Price elasticity of demand=
11.76

¿−1.7007

b) Was raising the price profitable?

Since the demand is inelastic, the increase in price increases revenue hence profits are made.

3. A) Yes the conditions are necessary for price discrimination so as profits to be met. This

conditions are enhanced by two factors. They include: the firm is able to recognize its main

objective that is to maximize profits. Secondly, the firm is able to recognize the differences

in demand. This include the elasticity for BC is -2 for residents and non-residents -1.5

B) Profit maximization to charge BC Residents:

( p−mc ) 1
¿ =
p e

100
Mark −up=
2

¿ 50 % inelastic
MANAGERIAL ECONOMICS. 4

P−6
¿ =50 %
P

P−6=0.5 P

P−0.5 P=6

0.5 P=6

P=$ 12

C) Profit maximization to charge non-residents:

( p−mc ) 1
¿ =
p e

100
Mark −up=
1.5

¿ 66.67 %

P−6=0.6667 P

0.3333 P=6

P=$ 18

4. The expected profits earned when a new product is introduced will be:

0.2 ( 80,000 ) +0.8 ( 60,000 )

¿ 16,000+48,000

¿ 64,000

The expected profits after revamping:

0.2 ( 50,000 ) +0.8 ( 60,000 )

¿ 58,000

When a new product is introduced, the firm is expected to have more profits than revamping.

This results to a conclusion that the risk averse manager should introduce the new product

rather than revamping the existing production.