Week 3 Managerial Economics
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Week 3
Managerial Economics
Order of Business
• Homework
• Assigned Lectures
• Other Material
• Lectures for Next Week
Homework
Question 1. ( 20 points)
(20%) Pashigian, p 41, Exercise 1-4
Question 2. ( 20 points)
(20%) Pashigian, p 41, Exercise 1-5
Question 3. ( 10 points)(10%) A commodity has a demand function Q = 50 - 2 p. Compute the point price elasticity when the Q = 20.
Q
PSlope)(
Point Elasticity of Demand
• The point elasticity of demand is defined by
Where Slope is the slope of the demand function
Quantity
iceSlope
Pr
Question 4. ( 10 points)(10%) A commodity has a demand function Q = 50 - 2 p. Compute the arc price elasticity over the range Q = 20 to Q = 25.
)(5.0
)(5.0
21
21
PPPQQ
Q
Q = 100 – 2PP
Q
50
100
20
60 64
18
Arc Elasticity
))((
))((
121
1
121
1
o
o
o
PP
PoPQQ
Question 5. ( 10 points) (10%) A government study has concluded that the demand for a commodity isPrice Quantity10 2512 1916 12Compute the arc price elasticity when p changes from 12 to 16; when p changes from 16 to 12.
Question 5. ( 10 points) (10%) A government study has concluded that the demand for a commodity isPrice Quantity10 2512 1916 12Compute the arc price elasticity when p changes from 12 to 16; when p changes from 16 to 12.
)(5.0
)(5.0
21
21
PPPQQ
Q
Question 6. ( 15 points)(15%) What would be the shape of indifference curves between Cours and Budweiser Beers for someone who is believes "A beer is a beer is a beer"
Question 6. ( 15 points)(15%) What would be the shape of indifference curves between Cours and Budweiser Beers for someone who is believes "A beer is a beer is a beer"
C
B
First Example
• We are going to do some special cases to illustrate how some special indifference curves look.
• I don’t care whether you have Coke® or Pepsi®, as long as it is cola.
• This is a case we talked about earlier, corresponding to perfect substitutes.
Coke and Pepsi
\
Coke
Pepsi
1
5
7
2
4
3
8
6
Coke and Pepsi
\
Coke
Pepsi
1
5
7
2
4
3
8
6
Coke and Pepsi
\
Coke
Pepsi
1
5
7
2
4
3
8
6
I1
Coke and Pepsi
\
Coke
Pepsi
1
5
7
2
4
3
8
6
I1
I2
Coke and Pepsi
\
Coke
Pepsi
1
5
7
2
4
3
8
6
I1
I2
I3
Question 7. ( 15 points)
(15%) Explain why different people can have different indifference curves; why one individuals indifference curves can never cross".
Theory of Choice
• Assumption of Completeness
• Assumption of Transitivity
• More is Better than Less– If Basket A contains more than Basket B, then
A is preferred to B
Assigned Lectures
• Elasticity
• The Theory of Choice
• More on the Theory of Choice
• More Applications of Indifference Curves
Elasticity
The Theory of Choice
More on the Theory of Choice
More Applications of Indifference Curves
Lectures for Next Week
• The Economics of Bads
• The Value of Time
• Consumer Surplus
• Applying Consumer Surplus
• Consumer Surplus and Deadweight Loss
• More on Consumer Surplus
The Economics of Bads
The Value of Time
Consumer Surplus
Applying Consumer
Surplus
Consumer Surplus and Deadweight
Loss
More on Consumer
Surplus
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