University Economics: Principles of Managerial Economics Homework

This managerial economics assignment delves into various core concepts, including price elasticity of demand, cross-price elasticity (examining substitute and complementary goods), and the impact of supply and demand shifts. The assignment explores real-world scenarios, such as Uber's discount strategies and changes in the automotive market, to illustrate these principles. It further analyzes consumer welfare, the effects of decreasing production costs, and the implications of moral hazard in business practices, particularly concerning salesperson compensation. The student provides diagrams to support their analysis of market dynamics and demonstrates an understanding of how various economic factors influence consumer behavior and market outcomes. The assignment provides a detailed analysis of the concepts.

Running head: PRINCIPLES OF MANAGERIAL ECONOMICS
Principles of the managerial economics
Name of the student
Name of the university
Author Note

1PRINCIPLES OF MANAGERIAL ECONOMICS
Table of Contents
Answer 1:.........................................................................................................................................2
Answer 2:.........................................................................................................................................4
Answer 3:.........................................................................................................................................5
Answer 4:.........................................................................................................................................5
Answer 6:.........................................................................................................................................5
Answer 7:.........................................................................................................................................7
Answer 8:.........................................................................................................................................8
References:......................................................................................................................................9

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Answer 1:
With the help of own price and price of relative commodities, it is possible to measure
the price elasticity of demand of a product, in the light of microeconomics concept. In this
context, the required concept of price elasticity is cross price elasticity, which is applicable to
measure the same, when the concept of substitute goods and complementary goods are present.
a) The cross price elasticity of substitute goods is intended to establish the relation between
changes in quantity demanded of a product due to a change in price of its substitute goods
(Colchero et al., 2015). As beef and mutton are substitute goods, decreasing price of beef has
increased the quantity demanded for mutton.
Figure 1: Cross price elasticity between two substitute goods
Source: (created by author)

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The above diagram has depicted a cross elasticity of demand with its positive slope
between beef and mutton. An increase in price of beef by P0 P1 has decreased the quantity
demanded for mutton by Q0 Q1 unit.
b) The impact of cross price elasticity for complementary goods has an opposite outcome.
Increasing price of petrol has influenced the demand for cars to decrease (He & Yin, 2015).
Hence, in this context, the economy is faced a cross elasticity of demand with negative slope.
Figure 2: Cross price elasticity between two complementary goods
Source: (created by author)
The above diagram has represented the negative cross price elasticity demand, where the
quantity demanded for cars has decreased by Q1 Q0 unit when the petrol price has increased by P0
P1 unit.
c) As wheat, McDonald coffee and Sports car do not have any relation, that is, they are not
substitute or complementary goods, changing price of one good does not influence the demand

4PRINCIPLES OF MANAGERIAL ECONOMICS
of another goods (Aalami, Moghaddam & Yousefi, 2015). The value of cross-price elasticity, in
this context, is zero.
Answer 2:
In UAE, the supply of beef has decreased at first, which, in turn, has increased the price
of that product in the market with lower supply. The demand for beef has increased in the next
month. Due to this, increasing price of beef has influenced suppliers to supply of that product
more (Staffell & Pfenninger, 2018). Consequently, the market price of beef has increased more
while the amount of quantity supplied of the same product has reached to its initial position.
Figure 3: Shifting of demand and supply curve of beef
Source: (created by author)
In figure 3, the initial demand curve and supply curve of beef has shown by D0 and S0,
respectively, while the new demand and supply curve is represented by D1 and S1. After the

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entire variation of demand and supply curve, the new price level becomes P1 while the
equilibrium amount of beef has remained at Q0.
Answer 3:
To expand the market, Uber has been providing 50% discount on their each ride, for last
three weeks. Hence, to travel from home to office, a person is paying almost half the actual fair,
which is increasing consumer welfare (Cohen et al., 2016). Hence, a person is travelling the
same distance by giving $ 50 while the actual fair is $ 100.
During peak season, the local retail shop is offering 60% for their daily customers. Thus,
the budget of one customer has decreased to a large extend. A person is actually paying $ 500
while the amount of willing to pay is $ 1200 for daily shopping.
Answer 4:
Due to the fall in quantity supplied of U.S made cars, the price has decreased, while the
demand curve has remained at the same level. On the contrary, the supply of Japanese made cars
has increases and consequently, the price of those cars have decreased (Taleizadeh, Babaei,
Niaki & Noori-daryan, 2017). As Japanese made cars and U.S made cars are close substitute, this
variation of supply has influenced customers to buy more Japanese made cars.
Answer 6:
i)
Due to the decreasing prices of several car components, the production cost of a car has
also decreased. As a result, the car manufacture has charged comparatively lower prices in the

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market for that product, which in turn, has helped the demand for that product to increase
(Bastos, Silva & Verhoogen, 2018). Thus, decreasing prices of the car components has helped
the market price of that to decrease and consequently the demand for that product to increase.
Figure 4: Shifting of supply curve of cars
Source: (created by author)
In figure 4, the initial supply curve and demand curve are represented by S0 and D,
respectively. After decreasing the prices of car components, the supply has shifted to the right to
indicate the increasing supply of that product while the demand of that product has remained
same as before. The initial market price for Q0 amount of cars is P0. However, after increasing the
supply of that product, the market price has become P1, which in turn has increased the demand
for cars by Q0 Q1 amount.

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ii) As car and petrol are complementary products, the demand for petrol has changed positively
due to the increasing demand for cars in market. This increasing demand petrol has increased the
market price of the same in the country while the demand for that product has remained same as
before.
Figure 5: Shifting of demand curve of petrol
Source: (created by author)
In the above figure, the increasing amount of demand for petrol has shown by an upward
shifting demand curve, that is, from D0 to D1, which in turn, has increased the price of petrol
from P0 to P1.
Answer 7:
The problem associated with moral hazard has occurred when one party under business
procedure, has assumed some extra risks that might affect other party negatively.

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Moral hazard can influence from various aspects where salesperson compensation can be
taken as an example (Wagner, Mylovanov & Tröger, 2015). The concept is stated the situation,
where the fixed salary received by a salesperson, does not provide any incentives influence to
perform efficiently. Here, the salesperson is facing the situation of moral hazard associate with
the person’s bad faith.
Answer 8:
The value of cross price elasticity of the product is 1.5, which is positive. Hence, the
situation is depicted the elasticity between two substitute goods, that implies, increasing the price
of on product can increase the demand for its substitute product (Colchero et al., 2015). The
opposite situation is also true under this condition, which implies decrease in price a product can
decrease he demand for substitute one. Hence, to promote sales, it is essential to decrease the
price of the original product.

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References:
Aalami, H. A., Moghaddam, M. P., & Yousefi, G. R. (2015). Evaluation of nonlinear models for
time-based rates demand response programs. International Journal of Electrical Power &
Energy Systems, 65, 282-290.
Bastos, P., Silva, J., & Verhoogen, E. (2018). Export destinations and input prices. American
Economic Review, 108(2), 353-92.
Cohen, P., Hahn, R., Hall, J., Levitt, S., & Metcalfe, R. (2016). Using big data to estimate
consumer surplus: The case of uber (No. w22627). National Bureau of Economic
Research.
Colchero, M. A., Salgado, J. C., Unar-Munguia, M., Hernandez-Avila, M., & Rivera-Dommarco,
J. A. (2015). Price elasticity of the demand for sugar sweetened beverages and soft drinks
in Mexico. Economics & Human Biology, 19, 129-137.
He, Y., & Yin, S. (2015). Joint selling of complementary components under brand and retail
competition. Manufacturing & Service Operations Management, 17(4), 470-479.
Staffell, I., & Pfenninger, S. (2018). The increasing impact of weather on electricity supply and
demand. Energy, 145, 65-78.
Taleizadeh, A. A., Babaei, M. S., Niaki, S. T. A., & Noori-daryan, M. (2017). Bundle pricing
and inventory decisions on complementary products. Operational Research, 1-25.

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Wagner, C., Mylovanov, T., & Tröger, T. (2015). Informed-principal problem with moral
hazard, risk neutrality, and no limited liability. Journal of Economic Theory, 159, 280-
289.