ECON 625 Managerial Economics

Problem Set 3

1)

Questions 1 through 5 are based on the following scenario (adapted from

Chapter 5 demand estimation question number 3, p.163)
The maker of a leading brand of low-calorie microwavable food estimated the
following demand equation for its product using data from 26 supermarkets
around the country for the month of April:
Q = -5,200 42P + 20Px + 5.2l + 0.20A + 0.25M
(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)
R2 = 0.55
n = 26
F = 4.88
Assume the following values for the independent variables:
Q = Quantity sold per month
P (in cents) = Price of the product = 500
Px (in cents) = Price of leading competitors product = 600
I (in dollars) = Per capita income of the standard metropolitan statistical area
(SMSA) in which the supermarket is located = 5,500
A (in dollars) = Monthly advertising expenditure = 10,000
M = Number of microwave ovens sold in the SMSA in which the supermarket is
located = 5,000
Calculate the quantity using the given values for the independent variables.

2)

Refer to question 1. Calculate the price elasticity of demand. Hint: Use the point
elasticity method described on page 72. A numeric example is demonstrated in
the second paragraph on that page.

3)

Based on the price elasticity of demand, do you think that this firm should cut its
price to increase its market share?
No, demand is inelastic so cutting price would reduce revenue.
No, demand is elastic so cutting price would reduce revenue.
Yes, demand is inelastic so cutting price would increase revenue.
**Yes, demand is elastic so cutting price would increase revenue.

4)

Using the information in question 1, compute the income elasticity.

ECON 625 Managerial Economics

Problem Set 3

5)

Based on the price elasticity of income, do you think that this company would be
extremely concerned about the impact of a recession on its sales?
Yes, income elasticity is relatively high, so a recession (with lower income) would
likely reduce sales.
Yes, income elasticity is relatively low, so a recession (with lower income) would
likely reduce sales.
No, income elasticity is relatively high, so a recession would not have a large
impact on sales.
No, income elasticity is relatively low, so a recession would not have a large
impact on sales.

6)

What proportion of the variation in sales is explained by the independent

variables in question 1?

7)

Office Enterprises (OE) produces a line of metal office file cabinets. The
companys economist, having investigated a large number of past data, has
established the following equation of demand for these cabinets:
Q = 10,000 + 60B 100P + 50C where
Q = Annual number of cabinets sold
B = Index of nonresidential construction
P = Average price per cabinet charged by OE
C = Average price per cabinet charged by OEs closest competitor
It is expected that next years nonresidential construction index will stand at 160,
OEs average price will be $40, and the competitors average price will be $35.
Forecast annual sales. Enter your response as a whole number without the dollar
sign.

8)

What will be the new sales forecast if the competitor lowers its price to $32?

9)

What will be the new sales forecast if OE reacts to the decrease mentioned in the
previous question by lowering its price to $37? (The competitors price will now
be $32 and the firms own price will be $37.)

ECON 625 Managerial Economics

Problem Set 3

10)

If the index forecast was wrong, and it turns out to be only 140 next year, what
will be OEs projected sales assuming the original price information of P = $40
and C = $35? Enter your answer as whole numbers.

11)

The Ocean Pacific fleet has just decided to use a pole-and-line method of fishing
instead of gill netting to catch tuna. The latter method involves the use of miles of
nets strung out across the ocean and therefore entraps other sea creatures
besides tuna (e.g. porpoises, sea turtles). Concern for endangered species was
one reason for this decision, but perhaps more important was the fact that the
major tuna canneries in the United States will no longer accept tuna caught by
gill netting. Ocean Pacific decided to conduct a series of experiments to
determine the amount of tuna that could be caught with different crew sizes. The
results of these experiments follow.
Number of
Daily Tuna Catch (lb)
Fishermen
0
0
At what point
(what number of
1
50
fishermen)
does diminishing
2
110
3
300
returns
occur?
4
450
5
590
6
665
7
700
Refer to the
previous question.
8
725
Indicate the
number of
9
710
fishermen at
the points that
delineate the three stages of production. Enter your answers as whole numbers.

12)

ECON 625 Managerial Economics

Problem Set 3

13)

Refer to question 11. Suppose the market price of tuna is $3.50/pound. How
many fishermen should the company use if the daily wage rate is $100?

14)

Refer to question 11. a glut in the market for tuna causes the price to fall to
$2.75/pound. At this new price, how many fishermen should the company now
use if the daily wage rate remains at $100?

15)

Refer to question 11. Suppose the price of tuna rises to $5.00/pound. At this new
price, how many fishermen should the company now use if the daily wage rate
remains at $100?

16)

The owner of a small car rental service is trying to decide on the appropriate
numbers of vehicles and mechanics to use in the business for the current level of
operations. He recognizes that his choice represents a trade-off between the two
resources. His past experience indicates that this trade-off is as follows:
Vehicles
Mechanics
If the annual leasing
cost per vehicle is
100
2.5 (includes part$6000 & the annual
salary per mechanic is
time)
70
5
$25,000. What
combination of
50
10
vehicles & mechanics
should he employ?
40
15
35
25
32
35

ECON 625 Managerial Economics

Problem Set 3

17)

An American company that sells consumer electronics products has

manufacturing facilities in Mexico, Taiwan, and Canada. The average hourly
wage, output, and annual overhead cost for each site are as follows:
Mexico
Taiwan
Canada
Hourly Wage Rate
$1.50
$3.00
$6.00
Output per Person
10
18
20
Fixed Overhead
$150,000 $90,000 $110,000
Cost
If we use output per person as a proxy for marginal product, what is output/wage
rate for each country?

18)

Which location has the highest MP per dollar?

Mexico
Taiwan
Canada
Cannot determine with the information available.