Managerial Economics for MBA

This document provides answers to questions on economic profit computation, inelastic demand, equilibrium parameters, and iso-cost line in the context of Managerial Economics for MBA. It discusses the concept of economic profit and opportunity cost, the relationship between price and revenue in inelastic demand, the computation of equilibrium price and quantity, the concept of producer surplus, and the impact of price ceiling on market equilibrium. It also includes a computation of iso-cost line in a budget constraint scenario.

MANAGERIAL ECONOMICS FOR MBA
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Question 1
It is imperative to note that economic profit computation does not only consider the explicit costs
but also considers the implicit costs. A key implicit cost is the opportunity cost involved with
conducting the current business. The implicit costs are not considered in the computation of
accounting profits. As a result, it is possible that the company is making profits but when the
opportunity costs are considered, the result would be an economic loss. Considering that the
economic cost is so large, hence the remedy to this situation would be a shift in the current
business to an alternative business where higher profits can be made.
Question 2
a) For a firm which faces inelastic demand, the revenues can be increased by increasing the
price. This is because the inelastic demand would ensure that with the price increase, the
corresponding decrease in quantity demanded in percentage terms would be lower than the
percentage increase in price. The net result would be that there is increased revenue.
b) Elasticity = Percentage change in quantity demanded/ Percentage change in price
Percentage change in quantity demanded = -10 %
Hence, 0.75 = -10 %/( Percentage change in price)
Therefore, Percentage change in price = 13.33%
c) Rothschild Index value = (Elasticity of industry/Elasticity for company) = (0.25/0.75) = 0.33
The value of Rothschild Index lies between zero and 1. A higher value of this index would
indicate high extent of concentration in the industry as 1 corresponds for monopoly while 0 is for
perfect competition. Considering the computed value of 0.33, it is apparent that the industry is
not concentrated since the index value is lesser than 0.5.

Question 3
a) The equilibrium parameters can be estimated by simultaneous equating of the demand and
supply curve as shown below.
70 – 2Q= 10+Q
Solving the above, we get Q = 20 units
P= 10 + 20 = $ 30
Hence, the equilibrium price is $30 per unit while the equilibrium quantity is 20 units.
b) The computation of the producer surplus is indicated below.
It is known that the supply curve would intersect the vertical axis or price axis when Q = 0. At
this value, the price is $10. This is the minimum price that the producers would take.
Producer surplus = 0.5*(30-10)*20 = $20
c) It is evident that the price ceiling is introduced at a price lower than the equilibrium price. As
a result it is would be effective and would cause a demand supply mismatch in the market.
This would arise as demand at $ 20 would be higher than the corresponding supply at this
price. Therefore there would be a shortage for the product. As a result, the equilibrium
quantity would be equal to the supply at that price which can be determined as shown below.
20 = 10 + Q
Solving the above Q = 10 units
Total decrease in economic surplus = (30-20)*(20-10)= $100
Question 4

a) The requisite computation is shown below.
Budget (C) = 1000
PL=$ 10
PK=$ 10
Now,
Equation of iso-cost line
( PL∗L)+( PK∗K )=C
10 L+ 10 K =1000
When L= 0
10 K=1000
K=100 … … ….. ( 1 )
When K = 0
10 L=1000
L=100 … …… .. ( 2 )
When L=K
10 L+ 10 L=1000
L=50
Or
L=K =50
b) The requisite graph indicating the above three points is shown below.