# Managerial Economics MGCR 293 Practice Questions for Final Examination 2010-11, Part 3

Practice Questions for the Final Examination

2010 - 2011

(Part 3)

Please note that these sample questions are chosen from mass tutorial notes in previous years. Solutions are checked by my Teaching Assistant. Please e-mail me if any errors, calculations or otherwise, are detected.

Regards,

Dr. Salmasi

1) The Lamour Manufacturing Company’s short-run average cost function in 2001 is: AC = 5+6Q, Where Ac is the firm’s average cost (in dollars per unit of the product), and Q is its output rate.

a. Obtain an equation for the firm’s short-run total cost function. b. Does the firm have any fixed costs? Explain.

c. If the price of the Lamour Manufacturing Company’s product (per pound) is $2, is the firm making profits or losses? Explain.

a. Because the total cost equals the average cost times the output, the firm’s total cost function is: C=AC Q= 5Q + 6Q2

b. No, since total cost equals to zero when Q=0

c. If price is $2 then total revenue (R) equals 2Q. Thus, the firm’s profit equals: = R-C=2Q-(5Q+6Q2)=-3Q-6Q2

If Q is greater than zero, must be negative, and therefore means the firm is incurring losses. If the firm is producing nothing, it is incurring neither profits nor losses. Thus, the firm is better off producing nothing.

2) Jacob’s total variable cost function has been calculated to be TVC = 100Q + 30Q² - Q³, where Q is the number of units of output.

a. When marginal cost is a minimum, what is the output level? Marginal cost = dTVC/dQ

= 100 + 60Q -3Q² , dMC/dQ= 60 - 6Q = 0, 6Q = 60, Q = 10

Therefore, the output level is 10 units.

b. When average variable cost is a minimum, what is the output level? Average variable cost = TVC/Q = 100 + 30Q - Q²

It is a minimum when dAVC/dQ = 30 - 2Q = 0, Q = 15, Therefore, the output level is 15 units.

Practice questions for the final exam, Part Three (Dr. Salmasi’s sections)

1

c. What is the average variable cost and marginal cost at output level found in part b?

a. Marginal cost = 100 + (60×15) - (3×225)

= 100 +900 - 675 = $325

b. Average Variable Cost = 100 + (30×15) – (225)

= 100 + 450 - 225

= $325

d. If Jacobs’s produces 3000 shirts and 2000 pants a year, the total cost is $100,000. If it produced only 3000 shirts, the cost would be $80,000. If it produced only the pants, it would $30,000. What is the degree of economies of scope? S = C(Q1) + C(Q2) – C(Q1 + Q2)

C(Q1 + Q2)

= 80,000 + 30,000 – (100,000)

100,000

= 0.1

3) Vogue Inc, an international fashion Magazine is developing a special edition for pregnant women interested in buying maternity clothing. The cost of developing the special edition is $100 000. Vogue receives $150 000 from clothing sponsors in return for advertising in the catalogue. The cost (excluding developing costs) of printing and advertising each magazine is $2.50.

The demand schedule for the magazines is as follows:

Price per Magazine (in can$)

6.00

6.50

7.00

7.50

8.00

8.50

Magazines Sold (in thousands)

30

28

24

21

18

15

a) What price should Vogue Inc. charge for a magazine?

b) What is the maximum amount that Vogue should pay (excluding what it receives from sponsors) in order to develop the special edition?

c) Given the money it receives from its sponsors, how much profit does Vogue effectively make by selling the special edition?

Practice questions for the final exam, Part Three (Dr. Salmasi’s sections)

2

(a) :

Magazines Sold

( in Thousand)

30

28

24

21

18

15

Price

(Can. $)

6.0

6.5

7.0

7.5

8.0

8.5

Total Revenues

(000 Can$)

180

182

175

165

152

127.5

Total Cost (000)

(Excluding Dvl’t cost)

75

70

62.5

55

47.5

37.5

Total Profits

(000 Can$)

105

112

112.5

110

104.5

90

Vogue Inc. will therefore maximize profit if it sets a price of $7.00. b) The maximum Vogue could pay, excluding what it receives from sponsors is $112 500 since this is the maximum it could make given the demand schedule of the magazine. c) Given the...

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