To provide basic knowledge to the learners
To provide basic knowledge to the learners
about the economic concepts, tools of
about the economic concepts, tools of
analysis and their applications in the process
analysis and their applications in the process
of business decision-making.
of business decision-making.
Prof.
Prof. (Dr.) (Dr.) T.R. T.R. Dash Dash Prepared Prepared by: by: CHUOP CHUOP Theot Theot TherithTherith
2010
2010
Managerial Economics
Part I: Questions & Problems
1. As a manager of a firm, how the study of managerial economics will help you in the process of decision making? Explain your answer with the help of examples.
2. What are the determinants of demand in general? Select a product/ service; find out its determinants. Show how they affect the demand for the product/ service.
3. Two managers of Mobitel Mr. Sokheng and Ms. Sokny estimated the expected sales of cell card worth of $10 along with further reduction of its price for the month of April, 2009 as follows:
Values ($) Sokheng‟s estimate Sokny‟s estimate
Quantity Quantity 10 200 150 09 220 180 08 230 240 07 250 300 06 280 400 05 300 600 04 350 800
Calculate the Total Revenue (TR), Marginal Revenue (MR) and Average Revenue
(AR) for each value (price $).
Show whether demand is elastic or inelastic on the basis of each set of estimates.
What is the relationship between TR and elasticity?
(Calculations should be done at each value and not only total)
4. The demand for public travel is always linked to the prices of petrol and diesel. Whenever there is a rise in the prices of petroleum products, not only the prices of public transport system increase but also their demand since many people shift from private travel to public travel.
Which concept in economics describes the effect of a change in the price of one
Find out the levels of output at which
i. Total loss is maximized.
ii. Total profit is maximized.
iii. Break even points.
6. The total product of labor (TPL), average product of labor (APL), and the marginal
product of labor (MPL) schedules are given below. It is assumed that the wage per unit of
labor over a period of time is $ 600.
L 0 1 2 3 4 5 6 7
TPL 0 200 600 1400 2000 2400 2600 2700
APL - 200 300 466 500 480 434 388
MPL - - 400 800 600 400 200 100
You are required to derive the total variable cost (TVC), average variable cost (AVC), and the marginal cost (MC) schedules, from the above data.
7. Explain the application of Break even analysis in managerial decision making with examples.
Managerial Economics
Part II: Answers and Solution
1. As a manager of a firm, the study of managerial economics will help me in the process of decision making such following:
This course provides me with an understanding of how economics can be used by business leaders to manage and compete more effectively. Tools of microeconomics will be used to evaluate the internal structure, incentives, and decisions within a firm as well as the competitive forces external to the firm.
After the study of this course I am able to understand and apply appropriate economic concepts to assist managerial decision making, such the nature and scope of managerial economics, demand and supply analysis, product analysis, theory of cost, break-even analysis, and competition and market structures.
Especially it helps me in the process of decision making to reach the business success with 8 factors understanding. Firstly, economic environment is analyzing on the environment of economic „PEST – Political, Economic, Social and Technological‟ and economic system – plans, policies, program, and problem of economic. Example, what‟s economics problem in Cambodia? As we know, Cambodia income from agriculture, tourism and garment factory but Cambodia imports technology and raw material from the other countries. So the major problem is low diversity of economic activity (only produce). Secondly consumer behavior, we must understand the need of consumer i.e. in Cambodia GNI per capita in 2006 is 490 dollars or income a day per one is 490/(12*30) = 1.1 $. Means the need of Cambodian consumer is low priced/inexpensive but high volume.
Thirdly, understanding production, as a manager must know the market needs – what business to start, the process of production, and proper utilization of resource.
P increases D decreases: Negative relation
Income of the consumer (Y)
Y increases D increases: Positive relation
Taste & Preference of the Consumer (T)
T increases D increases: Positive relation
Price of Related Commodities (Pr)
Price of Substitutes (Ps)
PTea increases Dcoffee increases: Positive relation
Price of Complementary (Pc)
Pvcd player increase Dvcd decreases: Negative relation
Expectation of the Consumer (E)
Expectation of the Future Price (Ep)
Ep increases Cd (Currend demand) increases: Positive relation
Expectation of the Future Income (Ey)
Ey decrease Cd decrease: Positive relation
Number of Consumers (N)
N increases D increases: Positive relation
Distribution of Consumers (D)
Advertisement (A) A increases D increases: Positive relation
Find out the determinants of a product “Coffee”
D = f(P, Y, PTea, PSugar, Nconsumer, …) where P is price of coffee, Y is consumer‟s income,
PTea is price of tea, PSugar is price of suger, Nconsumer is number of consumer, and etc.
Affecting demand for the coffee:
if P increases D decrease, Y increases D increases, PTea increases D increases,
PSugarincreases D decreases, N increases D increases.
D is demand for coffee. It means P and PSugar are negative relation with D (demand for
coffee) and Y, PTea, and N are positive relation with D.
3. a/. Calculate the Total Revenue (TR), Marginal Revenue (MR) and Average Revenue (AR) for each value
Values ($)
Sokheng‟s estimate Sokny‟s estimate
Quantity TR MR AR Quantity TR MR AR 10 200 2000 - 10 150 1500 - 10 09 220 1980 -1 09 180 1620 4 09 08 230 1840 -14 08 240 1920 5 08 07 250 1750 -4.5 07 300 2100 3 07 06 280 1680 -2.3 06 400 2400 3 06 05 300 1500 -9 05 600 3000 3 05 04 350 1400 -2 04 800 3200 1 04
b/. Show whether demand is elastic or inelastic on the basis of each set of estimates
Sokheng‟s estimate Sokny‟s estimate
. At basis value = $10 Ep = 200 10 10 9 200 220 x
= 1 Unit elastic . At basis value = $9 Ep = 220 9 9 8 220 230 x
= 0.41 inelastic . At basis value = $8 Ep = 230 8 8 7 230 250 x
= 0.69 inelastic . At basis value = $7 Ep = 250 7 7 6 250 280 x
= 0.84 inelastic . At basis value = $6 Ep = 280 6 6 5 280 300 x
= 0.43 inelastic . At basis value = $5 Ep = 300 5 5 4 300 350 x
= 0.83 inelasticSo, 0<Ep<1 demand is inelastic
. At basis value = $10 Ep = 150 10 10 9 150 180 x
= 2 elastic . At basis value = $9 Ep = 180 9 9 8 180 240 x
= 3 elastic . At basis value = $8 Ep = 240 8 8 7 240 300 x
= 2 elastic . At basis value = $7 Ep = 300 7 7 6 300 400 x
= 2.33 elastic . At basis value = $6 Ep = 400 6 6 5 400 600 x
= 3 elastic . At basis value = $5 Ep = 600 5 5 4 600 800 x
= 1.66 elasticSo, Ep>1 demand is elastic
c/. The relationship between TR and elasticity
Demand is Inelastic when a certain % cut in price leads to a smaller percentage
increase in the QD, in which case total revenue falls.
Demand is Elastic when a certain % cut in price brings about more than
proportionate expansion in demand so as to increase total revenue.
4. The demand for public travel is always linked to the prices of petrol and diesel. Whenever there is a rise in the prices of petroleum products, not only the prices of public transport system increase but also their demand since many people shift from private travel to public travel.
The effect of a change in the price of one good on the prices and demand for related goods describes the concept of Cross Elasticity of Demand, means the Degree of Responsiveness of QD of one good to changes in the price of another. Either be Positive or negative depending upon whether the two goods considered are Substitutes or
5. According to the given of the short run costs (STC) for different levels of output (Q) and the total revenue (TR) of the firm - $ 4Q, Calculate the total revenue (TR) and profit or loss (P/L) as following:
Q 0 20 40 60 80 100 120 140 150 160 180
STC($) 80 200 260 300 320 340 370 420 453 500 720
TR 0 80 160 240 320 400 480 560 600 640 720
P/L -80 -120 -100 -60 0 60 110 140 147 140 0
As the result table above, the levels of output at:
iv. Maximized total loss is Q = 20
v. Maximized total profit is Q = 150
vi. Break even points is Q1 = 80 (1st B-E) and Q2 = 180 (2nd B-E)
6. Derive the total variable cost (TVC), average variable cost (AVC), and the marginal cost (MC): L 0 1 2 3 4 5 6 7 TPL 0 200 600 1400 2000 2400 2600 2700 APL - 200 300 466 500 480 434 388 MPL - - 400 800 600 400 200 100 TVC 0 600 1200 1800 2400 3000 3600 4200 AVC - 3 2 1.28 1.2 1.25 1.38 1.55 MC - 3 1.5 0.75 1 1.5 3 6
7. Application of Break-Even Analysis in managerial decision making:
i. Useful in deciding to manufacture product under two or more technologies, means to choose the best technology or plant.
Example: from the below data, find out the most profitable and suitable technology if the estimated minimum sales volume is 26,050 units.
Technology I Technology II Technology III
TFC 100,000 $ 200,000 $ 300,000$
AVC 5 $ 3 $ 2 $
Price 10 $ 10 $ 10 $
petrol and diesel
Solution: Calculate the B-E point of each technology QB1, QB2, and QB3
General formula: QB = TFC/ (P – TVC)
QB1= 100,000/ (10-5) = 20,000 < 26,050
QB2= 200,000/ (10-3) = 28,572 > 26,050
QB3= 300,000/ (10-2) = 37,500 > 26,050
As the result, QB1 of technology I < Estimated sales (Es), so technology I is the best.
ii. A means in taking “make or buy decision”
Example: Mr. THERITH plant to run a business. His business need out-source material from the market that costs 14 dollars per unit. If manufactured bye his own business, the TFC would be 40,000 $ and the AVC would be 3 $ per unit. What decision Mr. Therith will consider if the requirement of material for the business is 3,850 units.
Solution: Calculate the B-E point: QB= 44,000/ (14 – 3) = 4,000 > 3,850
According to calculation, QB > Requirement, therefore Mr. Therith will decide to buy
material from the market.
iii. Helps in allocating budget for promotional activities
Example: the FC for producing a product is 10,000 $. The AVC is 1 $, the sale price is 3 $. Whether the firm will decide to incur an expenditure of 2,000 $ towards promotion if it expects its sale to increase to 7,500 units. The firm will incur the expenditure on promotion or not.
Solution: find out the B-E point, QB= (10,000+2,000)/ (3-1) = 6,000 < 7,500
So, the firm will incur the expenditure on promotion because expected sale > QB.
iv. Guides in Production planning. It is an indicator of maximum contribution towards profit and loss.
Example: A university intends to find out the most profitable item to be produced out of running PhD program or DBA program. The Total Fixed Cost is 80,000 dollars in both cases. The fee of program is 1,000 dollars and 1,200 dollars and the Average Variable Cost is 200 $ and 300 $ for PhD program and DBA program respectively. Which one should be produced by the university?