Managerial Economics: Concepts, Analysis, and Decision-Making Strategies

Running head: MANAGERIAL ECONOMICS
Managerial Economics
Name of the Student
Name of the University
Course ID

1MANAGERIAL ECONOMICS
Table of Contents
Part A.........................................................................................................................................2
Answer 1................................................................................................................................2
Answer 2................................................................................................................................3
Answer 3................................................................................................................................4
Answer 4................................................................................................................................6
Answer 5................................................................................................................................9
Answer 6..............................................................................................................................14
Answer 7..............................................................................................................................17
Part B........................................................................................................................................21
Answer 1..............................................................................................................................21
Answer 2..............................................................................................................................24
Answer 3..............................................................................................................................27
References................................................................................................................................32

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Part A
Answer 1
In making any economic decision, an individual should consider both the explicit and
implicit cost associated with the decision. An explicit cost refers to the direct payment or
monetary cost associated with a business (Varian, 2014). It includes only the financial costs
during the course of an action. Implicit cost in contrast refers to the imputed cost or
opportunity cost related to the economic decision. Opportunity cost is the cost incurred from
forgoing the next best alternative (Cowen & Tabarrok, 2015). It is the indirect cost associated
with a decision. It is also termed as economic cost.
Mr. Rahim’s decision to pursue MBA involves both financial and economic costs.
The financial cost of pursuing MBA involve the direct costs of pursuing the course. These
include tuition fee, buy books and transport cost. In order to pursue the MBA program Mr.
Rahim has to forgone his current job yielding a salary of RM 2,500 per month.
Therefore, the financial and economic cost of doing MBA can be computed
Financial cost =Tuition fee+Cost of buying books+Transport cost
¿ RM 20,000+ RM 2,000+ RM 500
¿ RM 22500
Economic Cost =Forgone salary of the current job
¿ ( RM 2500 ×18 )
¿ RM 45000

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Answer 2
The Total Revenue (TR) function of the firm is given as
TR=60Q−Q2
The Total Cost (TC) function of the firm is given as
TC= 1
2 Q2+ 30Q+ 30
Profit maximization of firm occurs at the point where marginal revenue equals marginal cost
(Baumol & Blinder, 2015). From the given, total revenue function, marginal revenue of the
firm is obtained as
Marginal Revenue ( MR )= d (TR )
dQ
¿ d ( 60Q−Q2 )
dQ
¿ 60−2Q
Given the total cost function, marginal cost of the firm is obtained as
Marginal Cost ( MC )= d ( TC )
dQ
¿
d ( 1
2 Q2 +30 Q+ 30)
dQ
¿ Q+30
Profit maximization occurs
MR=MC
¿ , 60−2Q=Q+ 30

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¿ , 2Q+ Q=60−30
¿ , 3 Q=30
¿ , Q= 30
3
¿ , Q=10
The quantity level that maximizes total profit of the firm is obtained as 10.
Answer 3
Price elasticity of demand
The term price elastic of demand in economic measures the percentage change in
quantity demanded of a commodity in response to a percentage change in price (Whitehead,
2014). Price elasticity of demand actually measures the responsiveness of demand for a
change in price.
It is measured by computing the percentage change in quantity demanded with respect to
certain percentage change in price.
Price elasticity of demand= Percentage change ∈quantity demanded
Percentage chamge∈ price
Determinants of demand
The first primary determinant of demand is price of the product. Given all the factors,
an increase in price lowers demand and vice-versa. Except price, several factors influence
demand of the product. Some of the factors determining demand of a product are discussed
below.

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Income
In case of a normal good, income has a positive relation with demand. That is as
income increases, ceteris paribus demand for a good or service increases and vice-versa
(Kreps, 2019). Goods for which this does not hold, that is demand reduces with increase in
income are termed as inferior good.
Taste and preferences
Tastes and preferences capture personal like or dislike of buyers of various goods and
services. Tastes and preferences are again influenced by religious belief, advertising, culture,
government reports, promotions, campaign and such other factors. Increasing preference for a
good increases demand and vice-versa.
Price of related good
Related goods of particular goods referred as either substitutes or complements of the
good. When price of a substitute good increases, demand for the concerned good increases as
consumers look for relatively cheaper substitutes (Bade & Parkin, 2015). For example, tea
and coffee. When price of a complementary good increases, demand for the particular good
decreases as consumers to reduce demand for the good along with its complementary good.
For example car and petrol.
Number of consumers/population
The effect of number of buyers on demand for a product varies depending on interest
of changing demographics and associated tastes and preferences.
Future expectation
Buyers’ expectation that price of a good or service will increase in future; encourage
buyers to increase their current demand (McKenzie & Lee, 2016).

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Optimal Price ( P ) = Marginal Cost ( MC )
( 1+ 1
Ed )
¿ 200
1− 1
3
¿ 200
2
3
¿ 200 × 3
2
¿ RM 300
Answer 4
Price Discrimination:
Price discrimination refers to the producers’ practices of charging different prices to
different consumers for the same good or service. Under free market, total surplus is divided
between consumers and producers. When producers have sufficient market power then they
try to increase their surplus by practicing price discrimination (Paczkowski, 2019). There are
three types of price discrimination: first degree price discrimination, second degree price
discrimination and third degree price discrimination.
First degree price discrimination: Seller charges highest possible price for each unit of
good. In this case, there is no consumer surplus for the buyers. There is no deadweight loss in
the case of first-degree price discrimination. Social welfare is increased in this case even after
complete extraction of consumers’ surplus. (Pepall, Richards & Norman, 2014)
Second Degree price discrimination: Under second degree price discrimination, firm knows
that different consumers in the market has different demand functions however the demand

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function of a particular consumer is not known. Firm here offers a menu price for different
packages. Options are designed in such a way consumers can self-select by choosing suitable
package for themselves. Unlike first-degree price discrimination, firms by practicing second-
degree price discrimination cannot capture all consumer surplus.
Third Degree price discrimination: In this case, seller charges according to the elasticity of
demand among different group of buyers. Price discriminator will separate buyers in different
groups having different elasticity of demand (Waldman & Jensen, 2016). Now, the seller will
charge lower price for highly demand elastic market and higher price for lower demand
elastic market. Third degree price discrimination cannot increase the social welfare.
Conditions for Effective price discrimination:
To discriminate price effectively, seller need to identify the demands of the buyers or the
group of the buyers. Conditions for effective price discrimination are the following:
Immovability of buyers: In order the make price discrimination effective, sellers should
ensure that the buyers are not able to switch from one market to another market. That means
buyers cannot move from high price market to low price market (Gillespie, 2016). Markets
could be separated depending on the following factors:
Time: Different prices are charged in different times of a day or week or month.
Age: Prices are different for different age group. Example, due to reservation for old- age
people, they pay less than other people do.
Region: Transportation cost changes the price of same good. Where the transportation cost is
high, prices are higher in that place and vice versa.
Status: Prices can vary for the status or designation of the buyer. For an example, entry fee or
the charges in a club is different for the club members and non-members.