Managerial Economics Assignment: Cost, Profit, and Decision Analysis

This managerial economics assignment solution analyzes cost functions, profit maximization, and decision-making under uncertainty. It includes scatter diagrams of total and average variable costs, estimations of quadratic average variable cost functions, and evaluation of regression results. The assignment explores profit maximization based on market prices, including shut-down points, and analyzes decision-making for Remox Corporation under different scenarios. It computes expected profits, probabilities for indifference, standard deviations, and applies various decision rules like mean-variance, coefficient of variation, maximax, minimax, and equal probability criteria to determine optimal choices. The solution is well-structured, providing detailed explanations and calculations to support the conclusions.

Running Head: MANAGERIAL ECONOMICS 1
MANAGERIAL ECONOMICS
AUTHORS NAME
UNIVERSITY OF AFFILIATION

MANAGERIAL ECONOMICS 2

MANAGERIAL ECONOMICS 3
Plot a scatter diagram of TVC on the vertical axis and Q on the horizontal axis. Does the
scatter diagram suggest a functional form for TVC? Explain briefly
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f(x) = 41.1218682730502 x − 4312.17895368179
R² = 0.976275076350626
TVC vs Q
Linear (TVC vs Q)
Linear (TVC vs Q)
QUANTITY
TVC
The scatter diagram represents the relationship between independent and dependent variable. The
independent variable is the quantity produced monthly while the dependent variable is the total
variable cost. The relationship between the two variables is a positive relationship since the y-
axis tends to increase as the x-axis increase. The correlation between the quantity produced per
month and the total variable cost is very strong. These are because upon drawing line of best fit;
half the points are below the line while another half above the line. From the diagram, an
increase in quantity produced monthly cause an increase in Total variable cost.
The functional form
y=41.122x-4312.2

MANAGERIAL ECONOMICS 4
Plot a scatter diagram of AVC on the vertical axis and Q on the horizontal axis. Does the
scatter diagram suggest a functional form for AVC? Explain briefly
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f(x) = 0.00700855542054485 x + 28.3982435855191
R² = 0.672867433594354
AVC vs Q
Linear (AVC vs Q)
Linear (AVC vs Q)
QUANTITY
AVC
The scatter diagram represents the relationship between independent and dependent variable. The
independent variable is the quantity produced monthly while the dependent variable is the
average variable cost. The relationship between the two variables is a positive relationship since
the y-axis tends to increase as the x-axis increase. The correlation between the quantity produced
per month and the total variable cost is very strong. These are because upon drawing line of best
fit; half the points are below the line while another half above the line. From the diagram, an
increase in quantity produced monthly cause an increase in average variable cost.
Functional form
Y=0.007x+28.398
Estimate a quadratic AVC function. Present the estimated equation and evaluate the
regression results (i.e., discuss the algebraic signs of the parameter estimates, the
significance levels, and the R2).

MANAGERIAL ECONOMICS 5
Quadratic AVC function
X=400)(x=600)
(x+400)(x+700)
(x²+700x+400x+240000)
x²+1100x+280000
Regression results
Y=0.007x+28.398
Suppose x=500
Y=(0.007*500+28.398)
Y=3.5+28.398
Y=31.898
From the equation, the value of y which is the average variable cost is dependent on the
importance of x. A decrease in x will result in a reduction of y.
R² value is 0.6700 when converted to the percentage it will be 67%.These suggest that 33 % of
variation has been determined by other factors while 67% is determined by regression line.
Evaluate the results of your regression equation in part a. Specifically discuss algebraic
signs of parameters, statistical significance, and goodness of fit
y = 41.122x - 4312.2

MANAGERIAL ECONOMICS 6
Suppose x=700
y= (41.122x*700)-4312.2
28785.4-4312.2
Y=24473.2
Dependent variable shows a strong correlation with the independent variable. Independent
variable influences the results of the dependent variable. An increase in quantity shows a
corresponding rise in Total variable cost. Based on R² 97% of variation is determined by the
regression line.
1. a. How many chips should be produced (monthly) if world chip prices are $58
per chip? Forecast the HSE’s profit at this output level.
Y=0.007x+28.39
58=0.007x+28.39
58-28.39=0.007x
29.61/0.007=4230
X=4230
4230 chips should be produced
b. How many chips should be produced (monthly) if world chip prices are $32
per chip? Forecast the profit at this output level.
Y=0.007x+28.39

MANAGERIAL ECONOMICS 7
32=0.007+28.39
32-28.39=0.007x
3.61/0.007=515.714
X=515.714
516 chips should be produced
2. At what price should Harding shut down and produce no chips in the short run?
Y=0.007x+28.39
28.39=0.007x+28.39
28.39-28.39=0.007x
0
When the market price per chip hits $28.39, the business will be running at a loss.
However, the company should consider closing if it cannot find an alternative to
overcome the loss.
Remox Corporation is a British firm
1. Answer the following questions:
a. Compute the expected profits for both options.
OPTION A:
(0.7*1,200,000)+ ( 0.3*800,000)=

MANAGERIAL ECONOMICS 8
840000+240000=
$1080000
Option B
(0.7*875,000)+ ( 0.3*1,000,000)=
612500+300000+
$912500
b. Based on the expected profit only, which option should Remox choose?
Running organization has its eyes on achieving its long-term or short-term goals. Among
the short-term goals of maximizing profit while reducing the cost of production. Remox
should decide on going for option A since it yields high returns in presence or absence of
tariffs.
c. Compute the probabilities that would make Remox indifferent between options A
and B using that rule.
Probability that will bring indifference between the options.
Suppose the probability is letter P
OPTION A
(1-P)* 1,200,000+P*800,000=
1200000-1200,000P+800000P=
1200000-20000000P=
1200000/400000=400000/400000P
3=P

MANAGERIAL ECONOMICS 9
OPTION B
(1-P)* $875,000+P*$1,000,000=
875000-875000P+1000,000P=
875000-125000P=
875000/125000=125000/125000P
7=P
Under same probability Remox would be indifferent.
d. Compute the standard deviations for options A and B facing Remox Corporation.
Standard deviation
Option A
√ ∑ ( x−Ẋ ) 2 /¿1)
Ẋ = (1200,000+800000)/2
¿ 1000,000
(2,000,000-100000)²/ (2-1)
=1000000
Option B
√ ∑ ( x−Ẋ ) 2 /¿1)
Ẋ =¿ (1875000)/2
¿ 937500
(1875000-937500)²/(2-1)
=937500

MANAGERIAL ECONOMICS 10
e. What decision would Remox make using the mean-variance rule?
Remox should select option A as it has lower risk but higher return.
f. What decision would Remox make using the coefficient of variation rule?
Option A
Coefficient variation =standard variation/expected return
Option A=1000000/1080000
=0.925
Option B
Coefficient variation =standard variation/expected return
Option B=937500/912500
=1.027
Option A has lower volatility risk as compared to option B. Remox should, therefore, opt
for option as if offers higher returns and lower risk.
2. Using the information above, what decision would Remox make using each of the following
rules if it had no idea of the probability of a tariff?
a. Maximax
Maximax criterion is majorly taken by great risk takers in business.they will invest or
conduct business in the particular region though the conditions might not be favorable but
as per their assessment, and weighted options, they believe the company will
survive.Remox should decide on option A as it offers higher profit as compared to option
B.

MANAGERIAL ECONOMICS 11
b. Maximin
Under this criterion, Remox would consider option B as it allows the business to have
minimum gains.
c. Minimax- regret
Under the minimax regret, the company assesses all the risk that the industry is exposed
to.in this circumstance, the external factors affect the business. Remox would select
option b since it offers higher profit under no tariffs imposed on the product.
d. Equal probability criterion
Under this criterion, the business asses the total earnings of both business options. It will
select option A since it has higher profit as compared to Option B.
REFRENCES

MANAGERIAL ECONOMICS 12
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Frost, J. (2017). Applied Regression Analysis: How to Present and Use the Results to Avoid
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