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Managerial Economics Exercises

The document contains exercises related to managerial economics. It includes: 1) Questions about optimal solutions in managerial decision making and how managerial economics maximizes firm profit. 2) Parts on demand analysis including drawing scatterplots to analyze correlations, completing demand tables, and generating a demand function. 3) Questions on the law of diminishing marginal utility, properties of indifference curves, and capital budgeting using net present value and payback period analyses to evaluate investment projects. 4) A question calculating expected returns for different stocks based on probability forecasts for economic growth states.

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274 views6 pages

Managerial Economics Exercises

The document contains exercises related to managerial economics. It includes: 1) Questions about optimal solutions in managerial decision making and how managerial economics maximizes firm profit. 2) Parts on demand analysis including drawing scatterplots to analyze correlations, completing demand tables, and generating a demand function. 3) Questions on the law of diminishing marginal utility, properties of indifference curves, and capital budgeting using net present value and payback period analyses to evaluate investment projects. 4) A question calculating expected returns for different stocks based on probability forecasts for economic growth states.

Uploaded by

Zia Nuestro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 6

Zia Nicolette D.

Nuestro
BAC1

Managerial Economics Exercises

Exercise 1 – Fundamentals of Managerial Economics


Part 1 – Essay

1. Explain the difference of an optimal solution to managerial decision problem by using


managerial economics and not, by citing a simple example.
- Optimal solution a feasible solution is when the objective function reaches its
highest (or smallest) value. While managerial decision making is the process of
determining the best solution to a problem. There is no difficulty in making a
decision when there is only one option.

2. In your opinion, how does managerial economics maximize the profit of the firm?
- The firm should maximize wealth or value of the firm which is their general goal
or objective. Funds are invested in a business to earn sufficient return on
investment, it can be done through getting bonds or selling ownership through
stocks.

Chapter II: Elements of Demands

Part I: Do as Indicated

1. Draw Scatterplot
A.) Strong positive correlation
B.) Almost no correlation

C.) Strong negative correlation

2. What do you think is the expected sign of the correlation coefficient between the
following pairs of variables?

a) Negative Correlation
b) Positive Correlation
c) Positive Correlation
d) Negative Correlation
e) Positive Correlation
f) Negative Correlation
g) Negative Correlation
Suppose that you are working for a small branch of a major bookstore chain in the country. The
company has kept track of their monthly demand for their bestselling fantasy children’s book
over a ten-month period. You are tasked to generate a demand function that will help the
company forecast its sales.

MONTH JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT OCT.
.
SALES (IN UNITS) 120 90 100 75 110 50 60 75 180 175

Create a scatterplot. What is the correlation coefficient between time and sales? Use MS Excel to
generate your forecasting model. Is your model reliable for predicting demand? Why or why
not? Justify your answer.

The Correlation Coefficient between time and sales is negative since it increases and decreases at
first, then increases again, and vice versa.
Because demand is more on the usage of negative correlation, when the price of a good or
service rises, the amount of demand decreases, and vice versa, providing all other parameters
remain constant, my model is reliable to anticipate demand.

PART II:
A firm faces the demand function q=5000 – 100p, where p is the price per unit and q is the
quantity demanded. Complete the table below and answer the following:
a. 50
b. 62,500
c. 25
d. 2,500
e. 1 - Unitary
f. Sketch the demand curve and the total revenue curve. Identify the maximum revenue.
P Q TR eᵈᴘ={dQ/Q}{dP/P} │ eᵈᴘ│ Remarks
50 0 0 -∞ ∞ Perfectly Elastic
45 500 22,500 -9 9 Elastic
40 1000 40,000 -4 4 Elastic
35 1500 52,500 -2.33 2.33 Elastic
30 2000 60,000 -1.5 1.5 Elastic
25 2500 62,500 -1 1 Elastic
20 3000 60,000 -0.67 0.67 Elastic
15 3500 52,500 -0.43 0.43 Inelastic
10 4000 40,000 -0.25 0.25 Inelastic
5 4500 22,500 -0.11 0.11 Inelastic
0 5000 0 0 0 Perfectly
Inelastic

EXERCISE 3:
Part I:
Computation
Hypothetical Utility Schedule for Beef Sandwich
Quantity Purchased Total Utility Marginal Utility
0 11 11
8 23 12
11 28 5
15 42 14
20 50 8
23 59 9
31 48 -11
38 45 -3
47 67 22
52 73 6
Part I:
1. How does the Law of Diminishing Marginal Utility (LDMU) achieve?
The marginal utility of any product may fall to negative utility when it becomes
completely undesirable to consume another unit. As a result, the most valuable unit of
consumption for any product is frequently the first, with each succeeding unit holding
less and less value. Consumers get avoid the law of diminishing marginal utility by
purchasing a wide variety of goods.

2. Discuss the four (4) essential properties of indifference curve.


a. The curves of indifference are not able to cross. The reason for this is that the higher
curve will give the same amount of both commodities as the lower indifference curve
at the tangent line.
b. The farther away from the origin an indifference curve is, the higher the amount of
utility it suggests. The more away from the source an individual is, the more utility he
or she generates while consuming.
c. Indifference curves are always downward sloping. An individual can only increase
consumption of one good without earning utility by eating another item and
generating the same amount of utility. As a result, the slope is descending.
Indifference curves have a convex form.
d. The curves of indifference are convex. The graph is convex to the origin because the
marginal utility of each commodity consumed decreases with subsequent
consumption. The foundation for this convex relationship is the marginal rate of
substitution, which is given by the formula (Z = change in X / change in Y).

EXERCISE 6: CAPITAL BUDGETING & RISK ANALYSIS


Part I:
1. Using the net present value criterion, determine which project should XYZ corporation
embark in assuming they can borrow capital at 5%?
Relevant projected cash flow data are given below:
Year Project AQUA Project AERO Project TERRA
0 -5,000,000 -4,000,000 -3,500,000
1 8,000,000 7,000,000 5,000,000
2 2,000,000 1,000,000 2,500,000
3 1,000,000 1,000,000 1,500,000
4 1,000,000 500,000 1,000,000
(1+0.05) = 1.05
NPV Aqua = -5,000,000/1.05¹ + 8,000,000/1.05² + 2,000,000/1.05³ + 1,000,000/1.05⁴ +
1,000,000/1.05⁵
= -4,761,904.762 + 7,256,235.828 + 1,727,675.197 + 822,702.4748 + 783,526.1665 =
5,828,234.90
NPV Aero = -4,000,000/1.05¹ + 7,000,000/1.05² + 1,000,000/1.05³ + 1,000,000/1.05⁴ +
500,000/1.05⁵
= -3,809,523.81 + 6,349,206.349 + 863,837.5985 + 822,702.4748 + 391,763.0832 =
4,617,985.70
NPV Terra = -3,500,000/1.05¹ + 5,000,000/1.05² + 2,500,000/1.05³ + 1,500,000/1.05⁴ +
1,000,000/1.05⁵
= -3,333,333.333 + 4,535,147.392 + 2,159,593.996 + 1,234,053.712 + 783,526.1665 =
5,378,987.93
2. A production manager wishes to determine which equipment he should recommend to
management for purchasing. Equipment Stomp costs Php 75,000 which is expected to
generate an annual cash flow of Php 30,000 relevant to its purchase. However,
equipment Kick costs Php 90,000 and will generate a relevant annual cash flow of Php
27,000. Using the payback period criterion, which equipment should the manager
recommend to management?
Equipment Stomp = 2.5, Equipment Kick = 3.33
3. An investor is thinking of purchasing blue-chip stocks as part of his portfolio. At present,
he is considering three blue chip stocks: Apha, Bravo and Charlie. Based on the forecast
of economists there are three possible states of nature in the economy: growth,
stagnation, recession, depression. Economists predicted that their respective
probabilities are 0.25, 0.35, 0.30, and 0.10. Historical returns for the three blue chip
stocks are summarized below:
Stock Alpha Bravo Charlie
Growth 11% 20% 7%
Stagnation 3% -1% 2%
Recession -2% -5% 0%
Depression -20% -3% -5%
a. Determine the expected return for each stock.
EV Alpha = 0.25 (11%) + 0.35 (3%) + 0.30 (-2%) + 0.10 (-20%)
= 0.0275 + 0.0105 + -0.006 + -0.02 = 0.012 x 100 = 1.2%
EV Bravo = 0.25 (20%) + 0.35 (-1%) + 0.30 (-5%) + 0.10 (-3%)
= 0.05 + -0.0035 + -0.015 + -0.003 = 0.0285 x 100 = 2.85%
EV Charlie = 0.25 (7%) + 0.35 (2%) + 0.30 (0%) + 0.10 (-5%)
= 0.0175 + 0.007 + 0 + -0.005 = 0.0295 x 100 = 2.95%

b. Which stock is the riskiest using the standard deviation as a criterion?


For Alpha
SD = √0.25(11% - 1.2%)² + 0.35(3% - 1.2%)² + 0.30(-2% - 1.2%) + 0.10(-20% -
1.2%) = 8.55%
For Bravo
SD = √0.25(20% - 2.85%)² + 0.35(-1% - 2.85%)² + 0.30(-5% - 2.85%)² + 0.10(-3% -
2.85%)² = 10.03%
For Charlie
SD = √0.25(7% - 2.95%)² + 0.35(2% - 2.95%)² + 0.30(0% - 2.95%)² + 0.10(-5% -
2.95%)² = 3.65%

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