Managerial Economics Homework

Managerial Economics

Chapters 6 and 7 Homework

Problem 6-3

MC Price Demand Total Rev MR Profit

.5 $ 2.00 1000 $ 2000 $ 2000 $ 1500

.5 $ 1.75 1500 $ 2625 $ 625/500=1.25 $ 1875

.5 $ 1.50 2000 $ 3000 $ 375/500=.75 $ 2000

.5 $ 1.25 2500 $ 3125 $ 125/500=.25 $ 1875

.5 $ 1.00 3000 $ 3000 $-125 $ 1500

The ATM should charge $1.50

Problem 7-4

Units MC TC Avg Cost

1 $64 $64 $64

2 $58 (64-6=58) $122 (64+58) $61 (64+58)/2=61

3 $52 (58-6=52) $174 (64+58+52) $58 (64+58+52)/3=58

4 $46 (52-6=46) $220 $55 (64+58+52+46)/4=55

5 $40 $260 $52

6 $34 $294 $49

The question asks what the break-even price is for four units. The break-even price for a number of products is equal to the average cost of the products. Average cost is the total cost divided by the number of units produced. The break-even price for four units is $55 and the break-even price for two extra units is $49.

Problem 7-5

This illustrates the concept of economies of scope. We could say that scope of economies exist if an economic benefit exists because these two restaurants share some of the same resources and facilities. The decision of whether to open a shared facility or two separate facilities depends on the fixed costs involved in running the facility versus the revenue taken in. In this problem, a combined facility decreases fixed costs by a bigger proportion than the decrease in sales, this does not mean it is always more profitable to open a shared facility. By way of example, the fixed cost of opening a one-restaurant facility is $10,000. A shared facility would reduce the cost to $7,000 (30% less= $3,000 less). However, a single restaurant facility would take in 100,000 in revenue, whereas a shared facility would take in only $80,000 (20% less = $20,000 less). Here, a single restaurant facility would still make more money despite having higher fixed costs. Perhaps if fixed costs are higher, maybe in an urban area like New York where rent is very high, it would be more...