Managerial Econ2

1 . Individual Problems 4-1

Which of the following is an example of an extent decision?

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Should the advertising budget be changed for the upcoming year?

Should your company expand an existing product into a new region?

Should you develop a new product for an existing product line?

How much of a discount should be given on products during the upcoming holiday sale?

2 . Individual Problems 4-2

You run a game-day shuttle service for parking services for the local ball club. Suppose you are compensated $30 per customer, per ride. In other words, your marginal revenue is $30. Your costs for different customer loads are summarized in the following table.

For each customer load, calculate both the marginal cost and the average cost. Then answer the question that follows.

Note: Round your answers to the nearest cent.

Customers Total Cost Marginal Cost Average Cost
  ($) ($ per customer) ($ per customer)
1 $30    
2 $36    
3 $48    
4 $66    
5 $90    
6 $120    
7 $156    
8 $198    


In order to maximize profits, you should carry_____    customers per load.

a. 2

b. 3

c. 8

d. 6

3 . Individual Problems 4-3

Children in poor neighborhoods often have bleak outlooks on life and see little gain from studying. In a recent experiment, children in poor neighborhoods were paid $100 for each A they earned during a six-week grade reporting cycle.

Suppose a participant in this experiment was expending $0 worth of effort in studying for each class before the experiment. Over the next 6 weeks, the student has a math class and an English class, where getting an A in math would require the student to exert $107 worth of effort, while getting an A in English would require the student to exert $115 worth of effort.

In this experiment, the student________    increase time studying for math, and the student________    increase time studying for English.

Would or would not / would or would not


4 . Individual Problems 4-4

Your company is contemplating bidding on an RFP (Request For Proposal) to produce 100,000 units of a specialized part. Suppose, however, that the requesting company really needs only 90,000 units of the part. Also assume that, because the part is specialized, potential suppliers do not yet possess the machines and factories needed to produce it and that overhead expenses involved in production have yet to be incurred.

Suppose the average costs of all potential suppliers are as follows:

Units Average Total Cost
  (Dollars Per Unit)
90,000 3
100,000 2


True or False: The requesting company can solicit lower bids by requesting 100,000 units as opposed to 90,000.



5 . Individual Problems 4-5

Your insurance firm processes claims through its two facilities: facility A and facility B. Each month, facility A handles 9,000 claims and incurs in $162,000 fixed costs and $180,000 in variable costs. Each month, facility B handles 11,000 and incurs $95,000 in fixed costs and $143,000 in variable costs.

Hint: Be careful not to commit the sunk-cost fallacy in your analysis.

If you anticipate a moderate decrease in the number of claims, you should lay off workers in facility ________  in order to decrease costs.

A 0r B

6 . Individual Problems 4-6

A copy company wants to expand production. It currently has 20 workers who share eight copiers. Two months ago, the firm added two copiers, and output increased by 280,000 pages per day. One month ago, the firm added five workers, and productivity also increased by 100,000 pages per day. A copier costs about twice as much as a worker.

Assume these increases in productivity per worker and productivity per copier are good proxies for future increases in productivity when hiring additional workers or purchasing additional copiers.

Based on this information, the copy company should____________    in order to expand output.

A. hire another worker

B. purchase another copier

7 . Individual Problems 5-1

George’s T-Shirt Shop produces 5,000 custom-printed T-shirts per month. George’s fixed costs are $15,000 per month. The marginal cost per T-shirt is a constant $8.

George’s break-even price is


per shirt.

Suppose George sells 50% more T-shirts per month.

At this quantity of shirts, George’s break-even price is


per shirt.


8 . Individual Problems 5-2

Suppose an initial investment of $80 will return $40/year for three years (assume the $40 is received each year at the end of the year).

At a discount rate of 30%, this investment____________    profitable. ( is not / is)

9 . Individual Problems 5-3

Perhaps the most important kind of capital is human capital. For example, most lawyers spend years learning to practice law. Lawyers are willing to make large investments in their human capital because they expect to be compensated for doing so when they begin work. Suppose the government nationalizes the market for legal services, resulting in lower compensation for lawyers. Assume lawyers cannot easily move to other countries.

True or False: The investment in human capital for lawyers is subject to post-investment hold-up.



10 . Individual Problems 5-4

A university spent $1.6 million to install solar panels atop a parking garage. These panels will have a capacity of 400 kilowatts (kW) and have a life expectancy of 20 years. Suppose that the discount rate is 10%, that electricity can be purchased at $0.30 per kilowatt-hour (kWh), and that the marginal cost of electricity production using the solar panels is zero.

Hint: It may be easier to think of the present value of operating the solar panels for 1 hour per year first.

Approximately how many hours per year will the solar panels need to operate to enable this project to break even?




If the solar panels can operate only for 1,410 hours a year at maximum, the project___________    break even.

(Would / would not)

Continue to assume that the solar panels can operate only for 1,410 hours a year at maximum.

In order for the project to be worthwhile (i.e., at least break even), the university would need a grant of at least______________   

a. $ 159,501.70

b. $ 207,352.21

c. $ 95,701.02

d. $ 175,451.87


11 . Individual Problems 5-5

Last year, a toy manufacturer introduced a new toy truck that was a huge success. The company invested $6.50 million in a plastic injection molding machine (which can be sold for $6 million immediately) and $100,000 in plastic injection molds specifically for the toy (not valuable to anyone else). The cost of labor and materials necessary to make each truck runs about $2. This year, a competitor has developed a similar toy, significantly reducing demand for the toy truck. Now, the original manufacturer is deciding whether it should continue production of the toy truck.

If the estimated demand is 100,000 trucks, the break-even price is


per truck.

12 . Individual Problems 5-6

In early 2008, you purchased and remodeled a 120-room hotel to handle the increased number of conventions coming to town. By mid-2008, it became apparent that the recession would kill the demand for conventions. Now, you forecast that you will be able to sell only 10,000 room-nights, which cost $40 per room per night to service. You spent $25.00 million on the hotel in 2008, and your cost of capital is 20%. The current going price to sell the hotel is $20 million.

If the estimated demand is 10,000 room-nights, the break-even price is


per room, per night. (Hint: Remember that the cost of capital is the opportunity cost, or true cost, of making an investment.)

13 . Individual Problems 5-7

A firm sells 1,000 units per week. Suppose the average variable cost is $40, and the average cost is $85.

In the short run, the break-even price is


. In the long run, the break-even price is



Suppose the firm charges a price of $63 per unit.

Use the following table to indicate whether the firm will shut down or continue to produce in the short run and the long run.


Time Continue to Produce Shut Down
Short Run      
Long Run