Economics - Tutorial Answers

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Managerial Economics 2010 Answers to All Tutorial Questions

Topic 1 : What is managerial economics

Questions from Chapter 1 of the Text (McTaggart, Findlay & Parkin)

Review Question 1 (pp. 4) List some examples of scarcity in Australia today. An example of scarcity at the economy-wide level would be people with lower incomes being forced to choose between food and petrol due to high prices for both. An example of scarcity at an individual level would be a person unable to afford both life-saving (or life-enhancing) medicine and food. At a more student-oriented level, examples of scarcity include not enough income to afford both tuition and a nice car, and not enough learning capacity to study for both an Economics exam and a Chemistry exam in one night. Review Question 2 (pp. 4) Use the headlines in today’s news to provide some examples of scarcity around the world. A headline in National Post in July 2008 was “Last-Frontier Forest is at Risk from Boom.” This story discusses how the “global resource boom is threatening one of the world’s last tropical-forest frontiers: the Merauke region of Indonesia …”. The story points out the scarcity of tropical rainforests as well as the scarcity of mineral reserves and how the two are colliding. Review Question 2 (pp. 9) Use headlines from the recent news to illustrate the potential for conflict between self-interest and the social interest. Your students’ examples will vary according to the headlines. One example of an issue concerns import restrictions. Take the ethanol industry for an example and the February 4, 2008 headline from Reuters “Bush budget doesn't alter ethanol import tariff”. When U.S. ethanol producers convince the government to limit or eliminate imports of ethanol from

2 other nations such as Brazil, it helps the workers and businesses in the U.S. ethanol industry earn higher wages and profits, respectively. This outcome serves their self-interest. However, it hurts all companies that use ethanol in their products, as well as all consumers when they buy petrol with ethanol blended in. This decision does not serve the social interest. This is because consumers lose more than the combined gain of domestic ethanol producers (in higher wages and profits) and the government (in tariff revenue): real GDP falls. Review Question 1 (pp. 12) Provide three everyday examples of tradeoffs and describe the opportunity cost involved in each. Three examples are: a) When a student sleeps late rather than of going to his or her early morning class, the student trades off additional sleep for study time. The opportunity cost of the decision is a lower grade on the exam. b) When a student running late for class parks his or her car illegally, the student trades off saving time for the risk of a fine. The potential opportunity cost of the decision is the goods and services that cannot be purchased if the student receives the fine. c) A student trades off higher income by taking a part-time job for less leisure time and study time. The opportunity cost is less leisure and lower grades. Review Question 2 (pp. 12) Provide three everyday examples to illustrate what we mean by choosing at the margin. Three examples are: a) When a student faces both a Chemistry and an Economics exam in one day, the student must determine whether spending the last hour studying a little more chemistry or a little more economics will yield a better contribution (marginal benefit) to his or her aggregate marks. b) A university student who is buying a computer must decide whether the marginal benefit of adding 1 GB of additional memory is worth the marginal cost of the additional memory. c) A football fan with a choice of standing in the outer or a seat located under shelter with a better view of the game must determine whether the marginal benefit of watching the game from a seat is worth the marginal cost of the higher ticket price. Review Question 5 (pp. 14) What is the role of marginal...
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