Managerial Economics | Questions and Answer

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MANAGERIAL ECONOMICS

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Contents
Question 1..................................................................................................................................3
Question 2..................................................................................................................................3
Question 3..................................................................................................................................4
Question 1..................................................................................................................................5
Question 2..................................................................................................................................6
Question 3..................................................................................................................................6
Reference....................................................................................................................................8

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Question 1
1. The explicit cost of the industry is the salaries provided to the workers and the
implicit costs are the opportunity cost of investing this money in other industries.
2. The NPV= F / [ (1 + i)^n ] => 10/[(1+0.06)^3]= 8.39 Million SAR. Therefore, it can
be sold in any price more than the NPV in order to earn profit.
3. The industry is economically profitable as the Net Present value of the industry is less
than the expected return from the investment.
4. The difference between the economic and accounting profit is mainly due to the
incorporation of opportunity cost. The economic profit in this case is, (12-8.39)= 3.61
Million SAR. On the other hand the accounting profit is, (12-10)= 2 Million SAR.
Therefore the difference is 1.61 Million SAR.
5. The high unexpected inflation rate in the economy would increase the interest rates in
other industries and hence the present value of the industry will reduce.
Question 2
1. The relationship of price with quantity demanded is negative and with quantity
supplied is positive. This is consistent with the law of demand as the demand
increases when the price falls and supply increases when the price increases.
2. The coefficient of M, in the equation of quantity demand is positive. That means, with
increase in the income, the demand for the date increases. In case of an inferior good
the coefficient of M would have been negative. However, the coefficient of M is 0.01
which means that for 1 unit increase in the income the demand for date increases by
0.01 units.
3. The determinants of demand as per the demand functions are, Price of dates, Income,
price of related goods and expected price of dates.
4. According to the demand function, the coefficient of price of related product is
positive. That means if the price of related product which in this case is chocolate
increases, the demand for date increases. Therefore, here the cross price elasticity of
demand for date is positive and hence the related product (Chocolate) is substitute to
date.