Managerial Economics – 2022/2023 Seminar 1

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Managerial Economics – 2022/2023

Seminar 1 (Lecture 1)

Please attempt the exercises below before your seminar. Solutions to selected exercises will be made available after the seminar.

1. Describe the concept of “consumer surplus”.

2. Explain why the demand curve can be called the “willingness-to-pay”.

3. Suppose that the total revenue and total cost from a continuous activity are given by the following equations:

R(Q) = 76 + 24Q -2Q², and C(Q) = 60 + 6Q,

respectively.

a) Write down the equation for the profits.

b) What are the profits if Q=2? Q=4?

The marginal revenues and marginal costs are given by

MR(Q) = 24-4Q, and MC(Q) = 6,

respectively.

c) Write down the equation for the marginal profits.

d) What are the marginal profits if Q=2? Q=4?

e) What level of Q maximizes profits?

4. Consider the market for breakfast cereals. For each of the following cases, describe how the supply and demand curves shift and describe the effect on the equilibrium.

a. The price of bread falls.

b. The price of grain has gone up as a result of a bad summer.

c. The price of milk falls.

d. The firm has heard that a renowned magazine is going to publish an article next week that states that eating cereal is healthier than eating bread. Therefore, the firm expects demand to increase in the future.

e. New regulations make producing cereals more expensive.

For each of the cases above describe what happens to the consumer and producer surplus.

5. YummyCrisps is a company that produces typically British crisps and sells them for £1 per bag in the UK and for €1.50 in Spain. The manager of YummyCrisps proposed to increase the price by 10% and has asked an independent company to do some research on this. It has found that total revenue will increase in Spain by 10%, but the total revenue in Britain will drop by approximately 5%.

a. Can you explain why revenues will increase in Spain but not in the UK?

b. Would you advise the manager to increase prices?

End of chapter exercises:

Chapter 2: 1, 3, 6

Chapter 5: 2.1