Tutorial Session In Managerial Economics Part 1

DR. ABRAHAM C. CAMBA JR. Department of Economics, San Beda College, Mendiola, Manila and Polytechnic University of the Philippines, Sta. Mesa, Manila

Managerial Economics - ECO10 TUTORIAL SESSIONS Date of submission: August 26, 2009

PART ONE

ANSWER ALL QUESTIONS! Manuscript should be encoded in MS Word document, doublespaced and justified using 12-point Arial font with one-inch margin on all sides and printed on one side of an 8.5x11 bond paper.

SESSION 1: Profit vs. Revenue Maximization (15 points).

Kuryente Products, Inc., manufactures small electrical appliances and housewares, including pressure cookers, heaters, canners, fry pans, griddles, roster/dutch ovens, deep fryers, and so on. Due to extremely competitive conditions in its markets, Kuryente is finding it very difficult to show price or volume gains in many of its traditional product lines. Luckily, the company has recently introduced an innovative new dessert maker for frozen yogurt and tofu that has the clear potential to offset the weak pricing and sluggish volume growth experienced during recent periods. Monthly demand and cost relations for Kuryente’s frozen dessert maker are as follows:

P = P60 - P0.005Q

TC = P100,000 + P5Q + P0.0005Q2

MR = P60 - P0.01Q

MC = P5 + P0.001Q

A. Set up a table or spreadsheet for Kuryente output (Q), price (P), total revenue (TR), marginal revenue (MR), total cost (TC), marginal cost (MC), total profit (Π), and marginal profit (MΠ). Establish a range for Q from 0 to 10,000 in increments of 1,000 (i.e., 0, 1,000, 2,000,…,10,000).

DR. ABRAHAM C. CAMBA JR. Department of Economics, San Beda College, Mendiola, Manila and Polytechnic University of the Philippines, Sta. Mesa, Manila

B. Using the Kuryente table or spreadsheet, create a graph with TR, TC, and Π as dependent variables, and units of output (Q) as the independent variable. At what price/output combination is total profit maximized? Why? At what price/output combination is total revenue maximized? Why? C. Determine these profit-maximizing and revenue-maximizing price/output combinations analytically. In other words, use Kuryente’s profit and revenue equations to confirm your answers to Part B. D. Compare the profit-maximizing and revenue-maximizing price/output combinations, and discuss any differences. When will short-run revenue maximization lead to longrun profit maximization?

SESSION 2: Constrained Optimization (15 points). A monopolistic firm has the following demand functions for each of its products X and Y:

X = 72 - 0.5Px Y = 120 - Py

The combined cost function is C = X2 + XY + Y2 + 35, and maximum joint production is 40. Thus, X + Y = 40. Find the profit-maximizing level of a) output, b) price, and c) profit. (Hint: Π = PxX+PyY – C).

SESSION 3: Risk Analysis (15 points).

DR. ABRAHAM C. CAMBA JR. Department of Economics, San Beda College, Mendiola, Manila and Polytechnic University of the Philippines, Sta. Mesa, Manila

A manager must determine which of two projects to undertake. From market studies the manager constructed the following payoff matrix for Projects A and B below: State of the Economy Recession Normal Boom

Project A Profits Probability P40,000 0.25 50,000 0.50 60,000 0.25

Project B Profits Probability P35,000 0.25 50,000 0.50 120,000 0.25

Calculate the expected profit, standard deviation, and coefficient of variation. Which of the two projects should the manager recommend?

References:

1. Economics for Managers (2008) by James R. McGuigan, R. Charles Moyer, and Frederick H. deB. Harris. 2. Managerial Economics: Economic Tools for Today’s Decision Makers (2006) by Paul G. Keat and Philip K.Y. Young. 3. Managerial Economics (2008) by Christopher Thomas and Maurice S. Charles.