Managerial Economics

This document covers topics such as market failure, demand and supply, price discrimination, and more in Managerial Economics. It includes solved assignments and essays. The subject is not mentioned, but the course code, course name, and university are not provided.

Running head: Managerial Economics
Managerial Economics
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1Managerial Economics
Table of Contents
Section A.........................................................................................................................................2
Answer 1......................................................................................................................................2
Answer 2......................................................................................................................................3
Answer 3......................................................................................................................................5
Answer 4......................................................................................................................................6
Answer 5......................................................................................................................................6
Section B..........................................................................................................................................7
Answer 1......................................................................................................................................7
Answer 2......................................................................................................................................8
Reference.......................................................................................................................................11

2Managerial Economics
Section A
Answer 1
Market failure occurs when there exist resource allocation inefficiency. The solution of
this problem of market failure is often dealt by government by implementation of various tools
or instruments. The major four such instruments are discussed below:
1. Corrective tax: The policy of corrective tax is used to reduce the negative externality that
occurs due to production of goods that generates effluents. The effluents cause air or water
pollution. Thus, the imposition of corrective tax on production increases the cost of production
and thereby discourages more production (Alexander and Neill 2017). Hence, the negative
externality reduces due to fall in production. Corrective tax is also known as Pigovian tax.
2. Public goods: The goods that are non-exclusive and non-rival by character that is its
consumption is open to all at the same time is called public goods (Belletti, Marescotti and
Touzard 2017). Example of public good is street lights. Therefore, the private sector do not
produce this kind of goods because goods with excludability and rivalry can only fetch profit for
private sector.
3. Price ceiling: It is the government tool that is used to reduce the exploitation of the consumer
that occurs due to high price charged by the seller. The imposition of price ceiling restricts the
price charging ability of sellers (Herings 2018). Thus, the seller cannot charge price higher than
the fixed ceiling that reduces the exploitation of the consumer and thereby mitigates loss in
consumer surplus. Therefore, negative externality decreases in the market.
4. Licence fee: This tool is used when the government wants to solve the problem of overusing
of things that affects the society in negative ways. For example, over consumption of alcohol

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causes health issues and hampers the health of the consumers (Raab 2016). Thus, the government
charges fee for providing licence to the sellers of the alcoholic drink such that the sales of
alcohol can be controlled and thereby consumption can be restricted. As a result health issues
due to alcohol consumption decreases.
The steel plant in the United States generates one unit of sludge by producing one unit of
steel. Therefore, to reduce the sludge production the government should reduce the production of
steel first. Thus, the government should impose corrective tax on production of steel to decrease
the production of sludge.
Answer 2
(a) Potatoes market demand is
Q=1000−250 P
Potatoes market supply is
Q=150 P
Market equilibrium occurs when market supply equals market demand. Therefore, equating
market supply and market demand for potatoes to find price.
1 50 P=1000−2 50 P
¿ , 400 P=1000
¿ , P=2.5
Therefore, each bag of potatoes are priced at 2.5.

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Putting the value of price in supply equation to find the equilibrium quantity of potato bags
traded.
Q=150 P
¿ , Q=2.5 ×150
¿ , Q=375
Thus, the equilibrium number of bags of potatoes is 375.
Diagram 1: Quantity and price
of potatoes at equilibrium
Source: (Created by the Author)
(b) At the equilibrium consumer surplus is
Consumer suprlus= 1
2 × 2.5× 375
¿ , Consumer suprlus=468.75

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The consumer surplus is shown as green shaded region in diagram 1.
(c) At the equilibrium producer surplus is
Producer suprlus= 1
2 × 2.5× 375
¿ , Producer suprlus=468.75
The producer surplus is shown as yellow shaded region in diagram 1.
(d) Three reason due to which the demand for potatoes might increase are scientific research
proves the consumption of potato is healthy, potato price reduction and increase in price of
substitute product of potato.
(e) Three reasons due to which the supply of potatoes decreases are imposition of tax on potato
production, insufficient labour and occurrence of natural calamity that reduces land for potato
production.
Answer 3
(a) Cigarettes, cigars and chewing tobacco are substitute products as they are all tobacco based
product.
(b)

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Diagram 2: Increase in demand for cigar and tobacco
Source: (Created by the Author)
The imposition of tax on cigarettes increase the price of the product and thus the
consumers will reduce consumption of cigarettes and increase the consumption of cigars and
chewing tobacco (Pesko and Warman 2017). Thus, demand for cigarette decreases from C1 to
C2 and the demand for cigar and chewing tobacco increases from CT1 to CT2.
(c) To reduce the total consumption of tobacco, the policymakers should impose tax on
production of tobacco such that the supply of tobacco increases the price of tobacco products and
thereby decreases the consumption of tobacco.
Answer 4
Firms use price strategy to charge separate customers separately in order to maximize
revenue and thereby profit. This pricing strategy is called price discrimination. Under this
strategy firms charges the maximum price a consumer is willing to pay and thus some are
charged low and some are charged high price (Waldman and Jensen 2016). Thus, by this firms
maximize sales and appropriates every consumers’ surplus. Therefore under price discrimination
consumer surplus reduces.
Answer 5
The reason for long gas lines is due to unavailability of sufficient oil. OPEC has
increased the price but due to government policy of limiting oil price the retailers could not
increase price proportionately and thus to avoid loss they are holding the oils causing
unavailability of sufficient oil.

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Section B
Answer 1
(a)
(b) The
demand curve points of Laura’s Bookstore are 57, 56, 55, 54, 53, 52, 53, 51, 50, 49, 48, 47, 46
and 45.
(c) 19 is profit maximizing output of Laura. Selling price of books will be $47 and $466 is total
economic profit of Laura
(d)
Diagram 3: Equilibrium of Laura

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Source: (Created by the Author)
The equilibrium quantity is 19 and equilibrium price is $47 of Laura is $47. In diagram 3
yellow rectangle is the economic profit.
Answer 2
(a)
Diagram 4: Market
Source: (Created by the Author)
Diagram 5: Individual firm

10Managerial Economics
Source: (Created by the Author)
(b)
Diagram 6: Market
contraction
Source: (Created by the Author)
Owing to restriction in pretzel-stand licenses the number of pretzel stands reduced to 800
as result the supply of the market reduce to S1 from S2 and the equilibrium price increased to P1
and equilibrium quantity reduced to Q1. However, there will be no change in the individual firm.
(c) The imposition of licence fee increases the cost of production of the individual firms and thus
the profit of the firms decrease. In order to raise profit as much as possible and to assure the
survival of all the 800m pretzel stand the government should increase the licence fee until the
ATC is not above price.

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Diagram 7: Licence fee
maximizing revenue of the government
Source: (Created by the Author)

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Reference
Alexander, D.L. and Neill, J.R., 2017. Estimating the corrective tax for goods whose
consumption affects the consumer’s health. Atlantic Economic Journal, 45(1), pp.103-117.
Belletti, G., Marescotti, A. and Touzard, J.M., 2017. Geographical indications, public goods, and
sustainable development: The roles of actors’ strategies and public policies. World
Development, 98, pp.45-57.
Herings, P.J.J., 2018. Equilibrium and matching under price controls. Journal of Economic
Theory, 177, pp.222-244.
Pesko, M. and Warman, C., 2017. The Effect of Prices on Youth Cigarette and E-cigarette Use:
Economic Substitutes or Complements?. Available at SSRN 3077468.
Raab, T., 2016. Germany:: Federal Administrative Court denies unconstitutionality of
broadcasting licence fee for private households. IRIS: Legal Observations of the European
Audiovisual Observatory, (6), p.8.
Waldman, D.E. and Jensen, E.J., 2016. Industrial organization: theory and practice. Routledge.