# Managerial economics questions and answers

Wheat and oats are used to make different types of breakfast cereal and both are grown
on the prairies. Using appropriate diagrams, what would happen to the supply and
demand of oats if the price of wheat were to rise? What happens to the equilibrium
price and quantity?
2. Consider the market for ice cream in Paris. Using appropriate diagrams, explain how
each of the following events will impact the equilibrium price and quantity of ice cream.
a. The population of Paris increases.
b. The cost of milk (an input in production) decreases.
c. Both the population of Paris increases and the cost of milk decreases at the same
time.
3. For lunch, Wendy eats only salads or fruit & yogurt smoothies. Her weekly food budget
is \$48. Each salad costs \$6 and each smoothie costs \$3.
a. Draw Wendy’s budget constraint.
b. What is the opportunity cost of purchasing one more smoothie? What is the
c. If the price of smoothies doubles to \$6, what happens to Wendy’s opportunity
set?
d. Describe intuitively how Wendy should make the optimal consumption
decision.
4. Kate’s 24-Hour Breakfast Diner menu offers one item, a \$5.00 breakfast special. Kate’s
costs for servers, cooks, electricity, food, etc. average out to \$3.95 per meal. Her costs
for rent, insurance and business license average out to \$1.25 per meal. This is a highly
competitive market. Should Kate stay in business in the short run? In the long run?
Explain.
5. The table below sets out cost information for the production of volleyballs. Some values
are missing. Fill in these missing values.

## What is managerial economics with examples?

– 2021 4
Q P Total Cost Total
Revenue
Marginal
Revenue
Marginal
Cost
Profit
0 \$5 \$9
1 \$5 \$10
2 \$5 \$12
3 \$5 \$15
4 \$5 \$19
5 \$5 \$24
6 \$5 \$30
7 \$5 \$45
6. The following figure shows the average cost curve, demand curve, and marginal
revenue curve for a monopolist. After maximizing profits, what does the firm’s revenue
equal? Indicate the area of the rectangle (e.g., ABGH, BDEG, etc.…)
7. Explain intuitively why the demand curve facing a perfectly competitive firm is
horizontal whereas the demand curve facing a monopolist or a monopolistically
competitive firm is downward sloping.
8. Briefly state the basic characteristics of perfect competition, monopoly, monopolistic
competition, and oligopoly. Into which of these market classifications does each of the
following most accurately fit? (a) a supermarket in your hometown; (b) the steel
industry; (c) a Kansas wheat farm; (d) the commercial bank in which you have an
account; (e) the automobile industry. In each case, justify your classification.
Quantity
P,
MR,
AC,
MC
Demand
MR
MC
AC
A
B
C
D E
F
G
H
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– 2021 5
Part B- Each question carries 6 marks.
These following questions are fairly open-ended. We have discussed various market structures
in this module, and we are looking for you to apply what you have learned to real-world data.
9. Select one market to focus on. Clearly indicate the market and describe the market
structure. For example, is it perfectly competitive? Is an oligopoly market? And so
on.
• You are free to select any market of your choosing. For example, the global market for
copper, the market for housing in London, the market for cheese in the United States,
etc… You will have more to talk about for some markets than for others, and you must
ensure you can find the appropriate price data.
10. Present data which shows the evolution of prices in that market over time. Try to
describe any interesting movements or trends using the concepts covered in the course.
• For example, can you describe a sudden price jump by a cartel breaking apart, or by a
demand shock? Or can you describe a gradual decline in prices by a gradual change in
consumer tastes?
• A good source of price data is the St Louis Fed: Link. There are many other sources
online.
11. Describe how much government regulation is present in the market. What are these
regulations in place? If there are not many regulations, should there be?
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