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# Managerial Economics 7 questions

• A firm owns a warehouse that it originally purchased for \$150,000 using a loan that it currently is paying at \$600 per month.The firm is considering a project in which it needs the use of a warehouse and is considering using this warehouse for the project.The firm has determined that the project is acceptable if warehouse costs are \$500 per month.The firm also knows that similar warehouses rent for \$450 per month (though none are available at the current time to rent).Should the firm undertake the project?Explain why or why not.
• Ford motor company has four vehicle manufacturing plants in various parts of the country.It is considering producing its own batteries for the vehicles that it builds instead of purchasing them from outside vendors.It could build one centralized location with a cost of \$1,500,000 and each battery would cost \$100, including shipping.If it builds four battery manufacturing plants near the vehicle manufacturing plants, each battery plant would cost \$500,000 each, but the battery cost would be \$80. Show your work/Explain for parts a-c.
• A study of grocery stores in Northern England yielded the following cost function:

4.

C = 2.51 – 0.0195 Q – 0.000726 Q2 + 0.000262 Q3

(2.84)(3.72)(2.55)(3.02)

Where C is the total cost per year (in millions of Euro) and Q is the quantity of sales (measured in millions of Euro).Note: the number in parenthesis below each coefficient is its respective t-statistic)

• Information Asymmetry.
• The demand schedule facing Ballreich’s for their potato chips is given by the below table (on the left) and the variable cost schedule is below on the right:
 Price (per bag) Quantity (bags/week) \$5 0 \$4.50 100 \$4 200 \$3.50 300 \$3 400 \$2.50 500 \$2 600 \$1.50 700 \$1 800
 Quantity (bags/week) Variable cost (per bag) 0 0 100 100 200 175 300 225 400 275 500 375 600 525 700 775 800 1175
• Find the total revenue and marginal revenue schedules for the firm
• Determine the marginal cost schedule for the firm
• What are Ballreich’s profit maximizing price and output levels for the production and sale of potato chips?
• What is Ballreich’s profit (or loss) at the solution determined in Part (c)?(assume no fixed costs)
• Extra credit: Suppose that the school district of Irvine announces that it will purchase as many bags of chips as possible from Ballreich’s at a price of \$4 per bag, in order to include them in school lunches.How does this affect the solution determined in part (c)?What is Ballreich’s profit in this case?

7. Oligopoly.Suppose you own a gas station and the only other gas station in town is across the street from your gas station.Explain in general terms the two outcomes that you might expect to happen— in other words, if the gas stations collude, how would that differ from the gas stations competing?How would the profit of your station compare between the two outcomes and how would the prices charged to the consumers compare?

Give several reasons why collusion would be more likely in the above gas station case as compared with a farmer’s market that meets monthly and attracts approximately ten to twenty farmers.Explain each reason.

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