Managerial Economics

Running head: Managerial Economics
Managerial Economics
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Managerial Economics1
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

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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

Managerial Economics3
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.