Managerial Economics Midterm Exam Fall 2020 Answers PDF

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Managerial Economics German Jordanian University Amjad Toukan Midterm Exam December 3, 2020Student Name:____________Student ID#:You have 2 hours and 15 minutes for this examination. It is a closed note/book exam. You may use a non-programmable calculator only. Explain all of your answers and show al...

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Managerial Economics German Jordanian University Amjad Toukan Midterm Exam December 3, 2020 Student Name:______________________________Student ID#:__________________ You have 2 hours and 15 minutes for this examination. It is a closed note/book exam. You may use a non-programmable calculator only. Explain all of your answers and show all of your work. A complete answer illustrates how you arrived at that answer. Label all graphs and axes. The points for each question are listed in parentheses. Good luck!

Pr ice Elasticity of Demand =

% change in quantity demanded % change in price

Income Elasticity of Demand =

Cost minimization rule:

Profit maximization rule:

𝑀𝑃𝐿

% change in quantity demanded % change in income

𝑀𝑃𝐾

=

𝑟

𝑤 𝑀𝑅𝑃𝐿

=

𝑀𝑅𝑃𝐾

𝑤

=1

𝑟

Marginal Revenue Product of Capital: 𝑀𝑅𝑃𝐾 = 𝑃𝑥𝑀𝑃𝐾 Marginal Revenue Product of Labor: 𝑀𝑅𝑃𝐿 = 𝑃𝑥𝑀𝑃𝐿

TC = FC +VC

ATC = AFC + AVC ATC =

TC , Q

AVC =

VC , Q

AFC =

FC Q

1) (5) A strong snowstorm has damaged a good number of olive trees in Jordan. Discuss the impact of the snowstorm on the demand for workers that pick olives. The demand for labor is equal to the Marginal Revenue Product of Labor:

𝑀𝑅𝑃𝐿 = 𝑃𝑥𝑀𝑃𝐿 From the above information we know that the price of olives will increase since the supply of olives has decreased due to the storm damaging a good number of olive trees. At the same time, we know that the marginal product of labor of Labor, 𝑀𝑃 𝐿 , will decrease since there are less trees for the workers to work with. Since the price of olives will increase and the marginal product of labor will decrease, we cannot tell for certain what will happen to the demand for workers that pick olives. The demand for workers that pick olives could increase or it could decrease, it all depends on the magnitude of change in the price of olives and the magnitude of change in the marginal product of labor. 2) The following table presents data on sales (S), Advertising (A), and Price (P): Observation 1 2 3 4 5 6 7 8 9 10

Sales (S) 495 555 465 675 360 405 735 435 570 600

Advertising (A) 900 1200 750 1350 600 600 1500 750 1050 1200

Price (P) 150 180 135 135 120 120 150 150 165 150

The demand model was estimated based on: LINEAR EQUATION: S= a+ b1A+ b2P (a) (2) Determine the estimated regression line. S = 247.644 + 0.393A - 0.734P (b) (2) Give an economic interpretation of each of the estimated regression coefficients. An increase of $1 spending on advertising increases sales by $0.393, all other things remaining constant.

An increase of $1 in price decreases sales by $0.734, all other things remaining constant. (c) (2) Which of the independent variables (if any) are statistically significant (at the 0.05 level) in explaining sales? From the computer output, only Advertising (A) is significant in explaining sales at the 5% significance level or better. (d) (2) What proportion of the total variation in sales is explained by the regression model? Adjusted R-Square = 0.960. The regression model explains about 96% of the variation in selling price. (e) (2) Determine the best estimate, based on the regression model, of the amount of sales whose advertising expenses is 700 and Price 130. Construct an approximate 95 percent prediction interval. S' = 247.644 + 0.393(700) - 0.734(130) = 427.324 se = 23.842 (Std. Error of the Estimate from computer output) S' ± 2 se = 427.324 ± 2(23.842) = 379.64 to 475.008, or $379.64 to $475.008

Regression

Model Summary

Model R .984a

1

Adjusted R R Square Square

Std. Error of the Estimate

.969

23.842

.960

a. Predictors: (Constant), P, A ANOVAb Sum of Squares

Model 1

df

Mean Square F

Sig.

Regression 125193.471

2

62596.735

.000a

Residual

3979.029

7

568.433

Total

129172.500

9

110.122

a. Predictors: (Constant), P, A b. Dependent Variable: S Coefficientsa

Model 1

Unstandardized Coefficients

Standardized Coefficients

B

Beta

Std. Error

t

Sig.

3.942

.006

(Constant) 247.644

62.818

A

.393

.030

1.041

13.250

.000

P

-.734

.502

-.115

-1.463

.187

a. Dependent Variable: S

3) Suppose you notice that the market quantity consumed of smart phones increases at the same time its price increases. - (2.5) What must have happened in the market for smart phones? Explain. It must be that some of the other factors that affect the quantity demanded of smartphones have changed and shifted the demand curve to the right.

-

(2.5) Is the observation that the price increased, and the quantity increased consistent with the law of demand? Why or why not? Explain. Yes it is since some of the other factors that affect the quantity demanded of smartphones have changed like income, preferences, the number of buyers and that is what lead the market quantity consumed of smart phones to increase at the same time its price increased.

4) (10) The Jordanian government is contemplating to adopt the following policies: i) Raise the minimum wage An important example of a price floor is the minimum wage. To examine the effects of a minimum wage, we must consider the market for labor. Panel (a) of the Figure below shows the labor market, which, like all markets, is subject to the forces of supply and demand. Workers determine the supply of labor, and firms determine the demand. If the government doesn’t intervene, the wage normally adjusts to balance labor supply and labor demand. Panel (b) of the Figure below shows the labor market with a minimum wage. If the minimum wage is above the equilibrium level, as it is here, the quantity of labor supplied exceeds the quantity demanded. The result is unemployment. Thus, the minimum wage raises the incomes of those workers who have jobs, but it lowers the incomes of workers who cannot find jobs.

Workers with high skills and much experience are not affected by the minimum wage laws because their equilibrium wages are well above the minimum. The minimum wage has its greatest impact on the least skilled and least experienced members of the labor force. In addition to altering the quantity of labor demanded, the minimum wage alters the quantity supplied. Because the minimum

wage raises the wage that unskilled workers can earn, it increases the number of unskilled workers who choose to look for jobs. Advocates of the minimum wage view the policy as one way to raise the income of the working poor. Many advocates of the minimum wage admit that it has some adverse effects, including unemployment. Opponents of the minimum wage note that a high minimum wage causes unemployment and encourages teenagers to drop out of school. ii)

Raise taxes on gasoline

Positive economic impact: -

Higher government revenue. Less pollution and better overall health which reduces the cost of healthcare. The economy will become less dependent on oil in the long run which makes it less affected by fluctuations in the price of oil.

Negative economic impact -

An increase in the cost of transportation which will negatively impact both households and businesses in the short run. A reduction in the demand for oil which will contract the oil industry. This effect is limited to non-existent in Jordan since Jordan imports most of its oil needs.

Raising taxes on gasoline will affect people’s incentives: -

Higher demand for more fuel-efficient cars Higher demand for public transportation Higher demand for city center housing

The office of the prime minister has hired you to advise the prime minister regarding the economic impact of the above policies. You need to consider both the positive and negative economic impacts of the above policies as well as how the above policies might affect people’s incentives. Prepare a Memo to the prime minister in which you discuss the issues raised above. 5) It takes a Jordanian worker 10 hours to produce a ton of tomatoes and 5 hours to produce a ton of corn while it takes a Lebanese worker 8 hours to produce a ton of tomatoes and 16 hours to produce a ton of corn. Assume that Jordan has 200 labor hours per year and Lebanon has 160 labor hours per year. a) (2) What is the opportunity cost of a ton of corn for both Jordan and Lebanon? What is the opportunity cost of a ton of tomatoes for both Jordan and Lebanon?

The opportunity cost for a ton of corn in Jordan is 0.5 ton of tomatoes The opportunity cost for a ton of corn in Lebanon is 2 ton of tomatoes The opportunity cost for a ton of tomatoes in Jordan is 2 tons of corn The opportunity cost for a ton of tomatoes in Lebanon is 0.5 ton of corn

b) (2) Which country has an absolute advantage in producing corn? Which country has an absolute advantage in producing tomatoes? Jordan has absolute advantage in the production of corn (5 hours is less than 16 hours). Lebanon has absolute advantage in the production of tomatoes (8 hours is less than 10 hours). c) (2) Which country has a comparative advantage in producing corn? Which country has a comparative advantage in producing tomatoes? The country that has the lower opportunity cost in producing a good has a comparative advantage in producing that good. Jordan has the comparative advantage producing corn and Lebanon has the comparative advantage in producing tomatoes. d) (2) Without trade, 100 workers produce corn and 100 workers produce tomatoes in Jordan and 80 workers produce corn and 80 workers produce tomatoes in Lebanon. How many tons of corn and tons of tomatoes does each country produce? Jordan will produce 20 tons of tomatoes and 40 tons of corn while Lebanon will produce 20 tons of tomatoes and 10 tons of corn e) (2) Suppose that the price of a ton of corn can be expressed in terms of tons of tomatoes. What is the highest price at which a ton of corn can be traded that would make both countries better off? What is the lowest price? The highest price is 2 tons of tomatoes and the lowest price is 0.5 tons of tomatoes. 6) (5) We observe that both the equilibrium price of hamburger patties and the equilibrium quantity of hamburger buns have increased. Which of the following is responsible for this change? Explain. a) An increase in the price of flour. An increase in the price of flour, an input in the production of hamburger buns, will decrease the supply of hamburger buns which will increase the equlibrium price and decrease the equilibrium quantity of hamburger buns. Since hamburger patties and hamburger buns are complements, the demand for hamburger patties will decrease which will decrease the equilibrium quantity and decrease the equilibrium price of hamburger patties.

b) A fall in the price of beef. A fall in the price of beef, an input in the production of hamburger patties, will increase the supply of hamburger patties which will decrease the equilibrium price and increase the equilibrium quantity of hamburger patties. Since hamburger patties and hamburger buns are complements, the demand for hamburger buns will increase which will increase the equilibrium quantity and increase the equilibrium price of hamburger buns. c) An increase in the price of beef. An increase in the price of beef, an input in the production of hamburger patties, will decrease the supply of hamburger patties which will increase the equilibrium price and decrease the equilibrium quantity of hamburger patties. Since hamburger patties and hamburger buns are complements, the demand for hamburger buns will decrease which will decrease the equilibrium quantity and decrease the equilibrium price of hamburger buns. d) A fall in the price of flour. (Correct Answer) A decrease in the price of flour, an input in the production of hamburger buns, will increase the supply of hamburger buns which will decrease the equlibrium price and increase the equilibrium quantity of hamburger buns. Since hamburger patties and hamburger buns are complements, the demand for hamburger patties will increase which will increase the equilibrium quantity and increase the equilibrium price of hamburger patties. e) A decrease in the price of Shawerma sandwiches, a close substitute for Hamburgers. A decrease in the price of Shawerma sandwiches, a close substitute for Hamburgers will decrease the demand for Hamburgers which will decrease the demand for Hamburger patties and the demand for Hamburger buns. The equilibrium price and the equilibrium quantity will decrease for both Hamburger buns and Hamburger patties. 7) Suppose that each of the following events occur one at a time: (i) The price of crude oil increases. If the price of crude oil rises, the cost of producing gasoline will rise. So the supply of gasoline decreases. The quantity demanded of gasoline decreases. (ii) The price of an automobile increases. If the price of an automobile rises, the quantity of cars bought decrease. So the demand for gasoline decreases. (iii) The government removes all speed limits on all roads and highways.

If all speed limits on highways are removed, people will drive faster and use more gasoline. The demand for gasoline increases. (iv) A new production technology reduces the cost of producing a car. If the new production technology will lower the cost of producing a car, the supply of cars will increase. With no change in the demand for cars, the price of a car will fall and more cars will be bought. The demand for gasoline increases. a) (2.5) Which of the above-mentioned events will increase or decrease the demand for gasoline? Explain. b) (2.5) Which of the above-mentioned events will increase or decrease the quantity of gasoline demanded? Explain. 8) The table below shows the number of units of capital, the marginal product of capital, the number of units of labor, and the marginal product of labor used in producing computers. Assume that computers sell in a competitive market for $1 per computer. The market for computers is competitive whereby you are a price taker and you can only sell at the market price of $1 per computer. The cost of capital is $3 per unit and the cost of labor is $1 per unit. Both the capital market and the labor market are competitive so that you can hire as many units of capital and as many units of labor at the same cost per unit.

Units of Capital

MP of capital

MPc/r

MRPc/r

Units of labor

MP of labor

MPL/w

MRPL/w

1 2 3 4 5 6 7 8

24 21 18 15 9 6 3 1

8 7 6 5 3 2 1 1/3

8 7 6 5 3 2 1 1/3

1 2 3 4 5 6 7 8

11 9 8 7 6 4 1 1/2

11 9 8 7 6 4 1 1/2

11 9 8 7 6 4 1 1/2

a. (2.5) What quantity of labor and quantity of capital you should employ to produce 80 units of output at minimum cost? Explain. Cost minimization occurs when (MPc/r)=( MPL/w) and total output is equal to 80. That will occur when we use 2 units of capital and 4 units of labor. 2 units of capital that produce 45 units of output (24 +21) plus 4 units of labor that produce 35 units of output (11+9+8+7). b. (2.5) What quantity of labor and quantity of capital should you employ to maximize profit?

Profit maximization occurs when (MRPc/r)=( MRPL/w)=1. That will occur when we use 7 units of capital and 7 units of labor. 7 units of capital that produce 96 units of output (24 +21+18+15+9+6+3) plus 7 units of labor that produce 46 units of output (11+9+8+7+6+4+1) for a total of 142 units of output. .

c. (2.5) From part b. above, what is the level of output that maximize profit? 142 units of output d. (2.5) What is the maximum economic profit? Profit = Total Revenue – Total Cost Profit = Total Revenue – Cost of Labor – Cost of Capital Profit = $1 x 142 - $1 x 7 - $3 x 7...