Managerial Econ Problem Set 1

Managerial Economics 320 – Spring 2013

Problem Set #1

1. The demand for MICHTEC’s products is related to the state of the economy. If the economy is expanding next year (above normal GDP growth), the company expects sales to be $100 million. If a recession occurs next year (a decline in GDP), sales are expected to be $75 million. If next year is normal (moderate growth in GDP), sales are expected to be $80 million. MICHTEC’s economists estimate the chances (probabilities) that the economy will be expanding, in recession, or normal next year at 0.1, 0.45, and 0.45, respectively.

a. Compute expected annual sales.

b. Compute the standard deviation of annual sales.

c. Compute the coefficient of variation of annual sales.

2. Two investments have the following expected returns (net present values) and standard deviation of returns.

Project Expected Returns Standard Deviation

A $50 $20

B $250 $125

Which one is riskier? Why?

3. An investment project has expected annual net cash flows of $100,000 with a standard deviation of $70,000. The distribution of annual net cash flows is approximately normal.

a. Determine the probability that the annual net cash flows will be negative.

b. Determine the probability that the annual net cash flows will be less than $50,000.

4. The Olde Yogurt Factory reduced the price of its popular Strawberry Sundae from $2.25 to $1.75. As a result, the firm’s daily sales of these sundaes have increased from 1600 per day to 1900 per day. Compute the arc price elasticity of demand over this price and consumption quantity range and provide an economic interpretation of the coefficient.

5. The demand function for bicycles in Holland has been estimated to be:

Q = 2,000 + 22Y – 7.5P

Where Y is income in thousands of euros, Q is quantity demanded in units, and P is the price per unit. When P=150 euros...