# managerial economics

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Question #6
The owner of Taco Joe’s has estimated that if he lowers the price of a burrito from \$2.00 to \$1.50, he will increase sales from 400 to 500 burritos per day. The demand for burritos is
A) elastic.
B) inelastic.
C) unitary elastic.
D) perfectly elastic.

Question #7
The demand curve for your product is P = 1000 - 2×Q and you have constant marginal cost equal to 400. According to the midpoint pricing rule, your profit maximizing price should be
A) \$1000.
B) \$400.
C) \$300.
D) \$700.
E) \$450.

Question #8
Suppose that elasticity of demand for your product is 3 and your marginal cost is 12. Then – according to the rule for markup pricing on cost – you should charge a price of
A) 36.
B) 4.
C) 18.
D) 24.
E) None of the above – more information is needed.

Question #9
A loss-making firm stands to gain rather than shutting down so long as
A) average variable cost is greater than marginal cost.
B) price is sufficient to cover average fixed cost.
C) average fixed cost is greater than average variable cost.
D) price is sufficient to cover average variable cost.

Question #10
Spreading the fixed costs of distribution over multiple products is known as __________, whereas the decrease in average variable cost due to the effect of cumulative production over time is known as _________.
A) economies of scope; learning effects.
B) economies of scale; learning effects.
C) economies of scope; economies of scale.
D) learning effects; economies of scale.

• managerial economics -

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• managerial economics -

6) Unitary elastic.

% change in price = (\$2.00-1.50)/2.00 = 25%

% change in qty demand = (500-400)/400 = 25%

elasticity = % qty / % price = 1

When elasticity is exactly 1, this is referred to as unit elasticity.

• managerial economics -

7)

P = 1000 - 2Q

One good visual method to figure out the quantities which will let us find the optimal quantity using the midpoint is to test each proposed quantity,

Given Formula = Qty Sold Revenue(PxQ) Profit
\$1000: 1000 = 1000 - 2Q. Q = 0 R = 0 Pr = 0 - 0 = \$0
\$700: 700 = 1000 - 2Q. Q = 150 R = 105000 Pr = 105000 - 150(400) = \$40500
\$450: 450 = 1000 - 2Q. Q = 275 R = 123750 Pr = 123750 - 275(400) = \$13750
\$400: 400 = 1000 - 2Q. Q = 300 R = 120000 Pr = 120000 - 300(400) = \$0
\$300: 300 = 1000 - 2Q. Q = 350 R = 105000 Pr = 105000 - 350(400) = \$-35000

Midpoint = (1000 + 400)/2 = \$700 (ignore hypothetical \$300 pricepoint because it results in a loss). We want the midpoint between the two zero profit points, which come from a price of \$1000 and a price of \$400.

We can confirm this method yields the highest profit in the table to the far right, where total profit for the \$700 pricepoint is \$40500, by far the highest of the multiple choice answers.

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