Busn 6120 Final Exam

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Michael Lioy
Final Exam
Managerial Economics

1.
a. If consumers suddenly have more disposable income, they will be willing to spend more on an apartment. Prices will rise (outward shift of the demand curve) and there will be a higher equilibrium point with supply. b. Taxes have a negative effect on consumer spending and the demand of apartments (inward demand shift). There will also be a lower equilibrium price with the apartment supply. c. Assuming that we are using real world prices, $200 is extremely cheap. This fact will create a high demand for apartments and under market equilibrium; there will be a shortage of supply. d. Lower costs (cost efficiency) will translate into more apartments being built (outward shift of supply curve). The new equilibrium with demand will create a lower price and higher quantity. c. Construction companies will try to translate this increase to the price, this will drive the supply curve slightly up, now the equilibrium point with the demand curve will be reached at a slightly higher price and lower quantities.

2.

“Technically”, yes, these firms are in fact violating the optimality rule – but only for the time it takes for that employee to cover the costs of his salary during the training program. I will illustrate an example:

John Smith is hired at a salary of 100K/year and expected to have a marginal revenue product (to the company) of 150K. He is to enter a management training program lasting 12 months in which time he will generate no revenue for the company.

Year Cost Benefit
1100K0
2200K150K
3300K300K
4400K450K

As you can see, it is not until after the third year that the company breaks even and not until after the fourth they see any revenue form John Smith. I believe the optimality rule can be useful when applied to labor. However, there are circumstances (such as this example) where it may be broken. Perhaps a 4 year contract should be signed or some other type of...
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