Answer Sheet Managerial Economics

Topics: Supply and demand, Elasticity, Price elasticity of demand Pages: 11 (3041 words) Published: April 24, 2015

Managerial Economics

Section A

1) a. Macroeconomics
2) c. Demand function
3) b. Arc elasticity
4) b. Consumer goods
5) c. The Indifference Curve
6) a. Future costs
7) c. Equilibrium
8) b. Gross national product
9) b. Product approach
10) c. GDP


1) The elasticity of one variable with respect to another between two given points. It is used when there is no general function to define the relationship of the two variables. Arc elasticity is also defined as the elasticity between two points on a curve. The P arc elasticity of Q is calculated as

The percentage is calculated differently from the normal manner of percent change. This percent change uses the average (or midpoint) of the points, in lieu of the original point as the base.

2) Definition of 'Law of Diminishing Marginal Returns'
A law of economics stating that, as the number of new employees increases, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee.

The law of diminishing marginal returns means that the productivity of a variable input declines as more is used in short-run production, holding one or more inputs fixed. This law has a direct bearing on market supply, the supply price, and the law of supply. If the productivity of a variable input declines, then more is needed to produce a given quantity of output, which means the cost of production increases, and a higher supply price is needed. The direct relation between price and quantity produced is the essence of the law of supply.

An economic theory that states as additional inputs are put into production, the additional return will be in successively smaller increments. This can be due to crowding, adding less appropriate resources or increasing inputs of lower quality.

In More Laymen Terms
As the saying goes, "Too Many Cooks Spoil the Broth," in any production there is a point of diminishing returns where just adding more inputs will not give the same income as it once did. Although many industrial firms strive to reach 'scale,' where their size gives them a cost advantage at higher production levels, no matter what industry a firm finds itself there will always be a point where the additional gain from added input is reduced.

3) The prisoner's dilemma is a canonical example of a game analyzed in game theory that shows why two individuals might not cooperate, even if it appears that it is in their best interest to do so. It was originally framed by Merrill Flood and Melvin Dresher working at RAND in 1950. Albert W. Tucker formalized the game with prison sentence payoffs and gave it the "prisoner's dilemma" name (Poundstone, 1992). A classic example of the prisoner's dilemma (PD) is presented as follows:

Two men are arrested, but the police do not possess enough information for a conviction. Following the separation of the two men, the police offer both a similar deal—if one testifies against his partner (defects/betrays), and the other remains silent (cooperates/assists), the betrayer goes free and the cooperator receives the full one-year sentence. If both remain silent, both are sentenced to only one month in jail for a minor charge. If each 'rats out' the other, each receives a three-month sentence. Each prisoner must choose either to betray or remain silent; the decision of each is kept quiet. What should they do?

If it is supposed here that each player is only concerned with lessening his time in jail, the game becomes a non-zero sum game where the two players may either assist or betray the other. In the game, the sole worry of the prisoners seems to be increasing his own reward. The interesting symmetry of this problem is that the logical decision leads both to betray the other, even though their individual ‘prize’ would be greater if they cooperated.

In the regular version of this game, collaboration is dominated by betraying, and as a result, the only...
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