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ECON5501: Managerial Economics

Assignment No. 1

Instructions:

(1) Do not re-write or copy and paste of the questions. I just want to see your answer sheet.

(2) Maximum number of pages allowed for your script is FIVE pages.

(3) Do not attached a cover sheet.

(4) Please write your name and matric number at the top RHS of the first page of your answer sheet.

(5) Marks will be deducted if you fail to follow these simple instructions.

Q1: Consider the general demand function:

a) Derive the equation for the demand function when M = $30,000 and P_R = $50.

b) Interpret the intercept and slope parameters of the demand function derived in a).

c) Using the demand function from part a), calculate the quantity demanded when the price of the good is $1,000 and when the price is $1,500.

Q2: Suppose the demand and supply function of good X are: Q_d = 50 – 8P and Q_s = -17.5 + 10P.

a) What are the equilibrium price and quantity?

b) What is the market outcome if price is $2.50? What do you expect to happen? Why? (Reveal your calculation)

c) What is the market outcome if price is $4.50? What do you expect to happen? Why? (Reveal your calculation)

Q3: Fill in the blanks in the following table to answer the questions below:

a) What is the optimal level of activity in the table above?

b) What is the value of net benefit at the optimal level of activity? Can net benefit be increased by moving to any other level of activity A? Explain.

c) Using the numerical values in the table, comment on the statement, “The optimal level of activity occurs where marginal benefit is closest to marginal cost.”

Q4: Ten data points on Y and X are employed to estimate the parameters in the linear relation

Y = a + bX. The computer output from the regression analysis is the following:

a) What is the equation of the sample regression line?

b) Test the intercept and slope estimates for statistical significance at the 5 percent significance level. Explain how you performed this test, and present your results.

c) Interpret the p-value for the parameter estimates.

d) Test the overall equation for statistical significance at the 1 percent significance level.

e) If X equals 140, what is the fitted (or predicted) value of Y?

Q5: The general linear demand for god X is estimated to be:

                            Q = 250,000 – 500P – 1.50M - 240P_R.

Where P is price of good X; M is average income of consumers, and P_R is the price of related good R. The values of P, M, and P_R are expected to be $200; $60,000; and $100, respectively. Use these values at this point on demand to make the following computations.

a) Compute the quantity of good X demanded for the given values of P, M, and P_R.

b) Calculate the price elasticity of demand. At this point on the demand for X, is demand elastic, inelastic or unitary elastic? How would increasing the price of X affect total revenue? Explain.

c) Calculate the income elasticity of demand. Is good X is normal or inferior? Explain how a 4 percent increase in income would affect the demand for X, ceteris paribus.

d) Calculate the cross-price elasticity of demand. Are the goods X and R substitutes or complements? Explain how a 5 percent decrease in the price of related good R would affect demand for X, ceteris paribus.