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1 Exercises Introduction

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39 views1 page

1 Exercises Introduction

Uploaded by

Nazanin Nejati
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Managerial Economics Exercises Introduction

Exercises Introduction
1. Alan and Hilda are clerks at a department store. The store pays each clerk $10 per hour for a
basic eight-hour day, $15 per hour for overtime of up to four hours, and $20 for overtime
exceeding four hours a day.
a. Alan works 10 hours a day. What are his (i) marginal pay and (ii) average pay?
b. Hilda works 14 hours a day. What are her: (i) marginal pay and (ii) average pay?
c. Under what pay structure would the marginal pay less than the average pay?

2. Mercy Hospital provides healthcare at subsidized prices and is so popular that patients wait
in long queues. Revenue is $75 million a year, while the cost of providing service is $100
million a year. A government subsidy covers the difference. Some critics argue that, since
Mercy Hospital is losing money, it should be shut down. The management of Mercy Hospital
argues that the long waiting times justify a larger government subsidy to expand staff and
facilities.
a. What is Mercy Hospital's economic profit?
b. What is the minimum benefit that Mercy Hospital must provide to add value?
c. Do you agree that Mercy Hospital should be shut down?
d. What information do you need to decide whether Mercy Hospital should expand or
reduce service?

3. One supermarket sets a regular price of €5 for a six-pack of Coca Cola and discounts to €3.
Another supermarket sets a regular price of €4 for a six-pack of Coca Cola and discounts to
€3. Which of the two strategies would lead to the largest sales?

4. You have to decide whether or not to invest in a new energy saving technology at your
company or not. More precisely, you would buy Teflon coated filters for your production
machinery, allowing you to reduce energy use. In a given year total energy expenses are
expected to drop by 20 000 €, thanks to the Teflon coated filters. The new filters can be used
for three years (so this year, next year and the year afterwards). The costs of the filters is equal
to 50 000€, which has to be paid in the current period. The discount rate is equal to 8%. Which
of the following statements is true? (exam question 2015-2016)
a. The net present value of the investment is equal to -10 000€.
b. An increase in the interest rate will increase the net present value.
c. The net present value if the investment is equal to 5 665€.
d. The net present value of the investment is equal to -5 665€.

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