The document discusses managerial economics concepts including accounting profit vs economic profit, decision making models, game theory, and production functions. It provides examples and calculations to illustrate these concepts. For accounting profit, it gives a calculation showing the difference between accounting profit and economic profit. For decision making, it outlines the steps a company would take to make an optimal decision. For game theory, it analyzes a 2x2 game and determines the equilibrium strategies. For production functions, it analyzes data on fish catch to determine stages of production and optimal crew size.

1. BMME5103Managerial Economics P a g e | 1
BMME5103 Managerial Economics
Intake May 2014
Name: Abdulilah A. Sallam
OUM Metric.: CGYE00017068
UST ID: 201313089
Dr. Thabit Al-Shalali

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Answers of Question 1:
When computing the accounting profit, we must consider the following:
 It must be computing according to GAAP “generally accepted accounting principles”.
 Explicit costs only will be included in the formula.
 It is single entity – accounting period view.
 It is used for income tax and observing financial performance.
While the economic profit is considered as the following:
 It is determined by economic principles.
 Includes both explicit and opportunity costs
 Macro market.
 It is used to determine the market entry.
So, the accounting profit is the difference between total revenue and total cost excluding the
opportunity cost which will be calculated in the economic cost.
A: Accounting profit:
Accounting profit = 5,000,000 - 4,500,000 - 40,000 - 400,000 - 50,000 = $10,000
B: Economic profit:
Economic profit = 5,000,000 - 4,500,000 - 60,000 - 400,000 - 30,000 - 4,000,000*10% = -
$390,000.

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Answers of Question 2:
A: which alternative the management should select:
There are two options as listed in the following table.
Option
Fixed
Cost
Variable
Cost/unit
Production
Capacity/year
Current
Production
Rates
Total
Variable
Cost
1 900,000 250 18,000 13,500 3,375,000
2
475,000 225 8,000 6,000 1,350,000
425,000 225 6,000 4,500 1,012,500
400,000 225 4,000 3,000 675,000
When we look at the fixed cost and the total variable cost (fixed cost + total variable cost) as the
following table to determine which alternative the management should select:
Option
Fixed
Cost
Total Variable
Cost
Total Cost
1 900,000 3,375,000 4,275,000
2
475,000 1,350,000 1,825,000
425,000 1,012,500 1,437,500
400,000 675,000 1,075,000

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Total cost 4,337,500
So option # 1 is cheaper, and the management should select.
B: Increase production capacity:
Option # 1: One plant factory cost = 900,000 + 250 (18,000) = $ 5,400,000
Option # 2: Three plants cost = 1,300,000 + 225 (18,000) = $ 5,350,000
Then option # 2 is more attractive because it is cheaper.
C: Making the decision:
The management must apply the decision making model, so let me take Blair’s company as an
example to apply this model
Establish the objectives: Blair’s company must set a certain objective; to expand the factory by
establishing one mega factory, establish three separate plants in different areas or rent these
plants instead. Either maximizes the production capacity in less cost or keeps the same
production.
Identify the problem through close studying and analysis of demand and supply. Fixed costs
and variable costs can play a role in this model to identify the problem as a measure of how
feasible are the alternatives.
Examine possible alternative solutions where Blair’s company makes a choice depending on
relative costs and benefits.

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Blair’s company analyzes the alternatives and select the best; considering the societal
constraints; and organizational and input constraints that may make one alternative is preferable
to the others.
Performing sensitivity analysis, Blair’s company knows the limitations of the planned course
of action as the decision environment changes.
After applying all the above process, implementation of the decision comes as last step and
monitoring the outcomes of the decision taken.

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Answer of Question 3:
Player B strategy
1 2
Player A strategy
1 2000 1000 -1000 -2000
2 -2000 -1000 1000 2000
 It is an action rule that maximizes the decision maker’s welfare independent of the
actions of other players.
 When one player has a strategy that yields a higher payoff no matter which choice the
other player makes
A. Does Player A have a dominant strategy? Explain why or why not.
o If Player A assumes Player B choose Option (1), Player A will Choose Option (1 =
$2000).
o If Player A assumes Player B choose Option (2), Player A will Choose Option (2
=$1000).
Player A has not a dominant strategy.
Since Player A Choices are depending on Player B choice.
B. Does Player A have a dominant strategy? Explain why or why not.
o If Player B assumes Player A choose Option (1), Player B will Choose Option (1=
$1000).

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o If Player B assumes Player A choose Option (2), Player B will Choose Option (2=
$2000).
Since Player B Choices are depending on Player A choice
Here we have 2 potential equilibriums, the upper-left cell and the lower-right cell.
Neither player has any willing to change strategies.
If Player A choose option (2; $2000), then Player B will choose option (2; $1000). In this case
the equilibrium outcome is where both Player A and B will choose Option (2).

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Answer of Question 4:
A. Ethanol is again viewed as one part of a solution to the problem of shortages of
petroleum products. Ethanol is made from a blend of gasoline and alcohol
derived from corn or sugar cane. What would you expect the impact of this
program to be on the price of corn, soybeans and wheat? Discuss.
Corn prices will be affected by this program because the demand of corn will increase, so
the prices of corn will increase.
Soybeans and corn are grown in rotation with one another in many countries, and they
compete for agricultural lands, so when corn prices increase, the soybeans prices also will
increase.
Corn and Wheat can be used as substitutes in feed ingredients, so any increase in corn
prices will result in increase of wheat prices.
B. Why invest capita in purely competitive industries with equilibrium margins
that are razor thin and entrants that erode quasi profits? Suppose volume is not
exceptionally large, why then?
The purely competitive industries we can find advantages as follows:
- All competitors are price takers.
- Similar chances for all investors.
- New firms can compete in the market.
- Although profit rates are low in purely competitive markets, but companies can get
stable profits.

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Answer of Question 5:
A. Over what ranges of workers are there (i) increasing, (ii) constant, (iii)
decreasing, and, (iv) negative returns?
A:
Crew Size (Number of
Men)
Amount of Fish Caught per
Week (Hundreds of Pounds)
MP
2 3 -
3 6 3
4 11 5
5 19 8
6 24 6
7 28 4
8 31 3
9 33 2
10 34 1
11 34 0
12 33 -1
B. How large a crew should be used if the trawler owner is interested in
maximizing the total amount of fish caught?
Answer: 10 members.
C. How large a crew should be used if the trawler owner is interested in
maximizing the average amount of fish caught per man?
Answer: 7 members

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Crew Size
(Number
of Men)
Amount of
Fish Caught
per Week
(Hundreds of
Pounds)
Marginal
product
Average Product
Elasticity of
Production
MP AP
EP = MPL /
APL
Stage
2 3 - 1.5 -
3 6 3 2 1.5 Stage 1
4 11 5 2.75 1.81
5 19 8 3.16 2.53 Ep > 1
6 24 5 4 1.25
7 28 4 4 1
8 31 3 3.87 0.77
9 33 2 3.66 0.54 Stage 2
10 34 1 3.4 0.29 MP = 0
11 34 0 3.09 0 Ep= (0–1)
12 33 -1 2.75 -0.36
Stage 3
MP = 0
Ep = Less zero
Stage I: Average product (AP) rising. It starts from zero units of the variable Input (workers) = L
to where AP is maximized or when the production elasticity, EP = 1. In this stage, EP is greater
than 1. Hence: Increasing lab (workers from 2- 7) = Increasing of Q (Amount of Fish catch from
3 - 28 units per week).
Stage II: Average product (AP) declining (but marginal product (MPL = positive)). It starts from
maximum AP to where MP = 0. In this stage, EP is between (0 – 1). Hence: Increasing lab
(workers from 8 - 11) = Increasing of Q (Amount of Fish catch 31 – 34 units per week) until Q
= 34 units, it constant of worker 11 and constant output = 34 units.

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It is the best stage of selected workers to archiving optimum point outputs.
Any other workers added will be not affect positively (limit need).
Stage III: Marginal product (MPL = negative) or total product TP is declining. It starts from
where MP = 0. The EP is less than zero. Hence: any Increasing workers > 11 = declining
Amount of Fish catch, therefore L =12, The Q = 33, Impact negatively.
D. How large a crew should be used if the trawler owner is interested in
maximizing the average amount of fish caught per person?
Large a crew should be used if the trawler owner is interested in maximizing the average amount
of fish caught per person:
Total amount of fish caught / numbers of tries
= 223 / 11
= about 20 units per weeks.

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Answer of Question 6:
A. Calculate a marginal cost and an average cost schedule for the firm:
OUTPUT (UNITS) TOTAL COST ($) Marginal cost Average cost
Q TC MC = d TC/d Q AC = TC/Q
10 $110 - 11
15 150 8 10
20 180 6 9
25 225 9 9
30 300 15 10
35 385 17 11
40 480 19 12
Total = 175 Total = 1,830
B. If the prevailing market price is $17 per unit, how many units will be produced and
sold? What are profits per unit? What are total profits?
OUTPUT
(UNITS)
SELL PRICE
Total
Revenue
TOTAL TOTAL PROFIT =
Q P TR = Q * P COST ($) TR – TC
TC $
10 17 170 110 60
15 17 255 150 105
20 17 340 180 160
25 17 425 225 200
30 17 510 300 210
35 17 595 385 210
40 17 680 480 200
Total = 175 2,975 Total = 1,830 1,145

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 Many units will be produced = 175 units.
 Many units will be sold = 175 units.
 Profits per unit:
OUTPUT TOTAL COST ($) Cost per unit $
SELL
PRICE
Profits per
unit
Total Profit
(UNITS) TC C = TC / Q P P - C (P-C)*Q
Q $ $ $
10 110 11 17 6 60
15 150 10 17 7 105
20 180 9 17 8 160
25 225 9 17 8 200
30 300 10 17 7 210
35 385 11 17 6 210
40 480 12 17 5 200
Total = 175 Total = 1,830 1,145
Total Profit = 1,145 $
C. Is the industry in long-run equilibrium at this price? Explain.
Average profit is total profit divided by total units op production hence equaled
AP = (P-C)*Q / Q
= 1145/175 = 6.5.
Therefore, Percentage Average Profit.
Percentage AP = 6.5 / 17 = 38 %.

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This is 38 percent encouraging to invest industry in long-run equilibrium at this price to earn 38
% profit at this price.

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Answer of Question 7:
A. Determine the marginal product function (MPL).
Q = 6 L2 – 0.4L3
Marginal production of equal MPL = dQ/dL
= 18 L – 1.2 L 2.
B. Determine the average product function (APL ).
Average product function of L equal APL = Q/L.
= 6 L2 – 0.4 L3 / L.
= 6 L – 0.4 L2
C. Find the value of L that maximizes Q.
At maximized output position the MPL = 0
THEREFORE: 18 L – 1.2 L 2 = 0
1.2 L * (15 – L) = 0
1.2 L = 0, L = 0
OR
(15 – L) = 0
L = 15
Q will be maximized at L = 15

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D. Find the value of L at which the marginal product function
takes on its maximum value .
Marginal production of equal MPL = dQ/dL = 18 L – 1.2 L 2
d MP/dL 18 L – 1.2 L 2 = 0 .
18 L – 1.2 L2 = 0.
1.2 L * (15 – L) = 0
1.2 L = 0 => L = 0
15 – L = 0 => 15 = L
It means that MPL does not have any maximum value.
E. Find the value of L at which the average product function
takes on its maximum value.
Average product function of L equal APL = Q/L .
= 6 L2 – 0.4 L2 .
= 12 L – 0.8 L
d(APL)/Dl = 11.20 L .
It is again an increasing function for all values of L. It means average product of L does not have
any maximum value

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Answer of Question 8:
A. Write an equation for the total revenue (TR) function in terms of Q.
Total Revenue = TR = Sales = Price * Quantity
Q= (120,000 – 10,000 P) P = (120,000 – Q)/10,000
Then, by compensating P function in TR function:
TR = Q * (120,000 – Q) /10,000
𝑇𝑅 = Q (
120,000 − Q
10,000
)
B. Specify the marginal revenue function.
Marginal revenue is defined as the change in total revenue resulting from the sale of one
additional unit, or the derivative of total revenue with respect to Q.
In the purely competitive case, marginal revenue MR is equal to price P, because the sale of each
additional unit increases total revenue by the price of that unit.
𝑀𝑅 =
dTR
dQ
𝑀𝑅 =
120,000 − 2Q
10,000

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C. Write an equation for the total cost (TC) function in terms of Q.
The total cost in the short run is the sum of the fixed and variable costs:
TC = FC + VC
Total cost = Fixed Cost + Variable Cost
Total cost = 12,000 + 1.5* Q
D. Specify the marginal cost function.
Marginal Cost = ∆ TC / ∆Q,
And because fixed costs remain same,
Marginal Cost = ∆ VC / ∆Q
MC = 1.5
E. Write an equation for total profits (π) in terms of Q. At what level of output (Q) are
total profits maximized? What price will be charged? What are total profits at this
output level?
The profit-maximizing firm will produce at that level of output where marginal revenue equals
marginal cost. Beyond that point, the production and sale of one additional unit would add more
to total cost than to total revenue (MC > MR), and hence total profit (TR – TC) would decline.
Up to the point where MC = MR, the production and sale of one more unit would increase total
revenue more than total cost (MR > MC), and total profit would increase as an additional unit is
produced and sold. Producing at the point where marginal revenue MR equals marginal cost MC
is equivalent to maximizing the total profit function.

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π = Total Revenue – Total Cost
π = P rice * Quantity – Fixed Cost – Variable Cost
π = P * Q – 12,000 – 1.5 * Q
π = Q (P-1.5) – 12,000
π = 𝑄 ∗ [
120,000 − 𝑄
10,000
− 1.5 ] − 12,000
Marginal revenue MR equals marginal cost MC is equivalent to maximizing the total profit
function
MR = MC
MR = 1.5
𝑀𝑅 =
120,000 − 2Q
10,000
= 1.5
Q = 52,500 units
P = (120,000 – Q)/10,000
P= 6.75 $
Total Profit = Total Revenue – Total Cost
𝑇𝑅 = Q (
120,000 − Q
10,000
) = 354,375 $

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Total cost = 12,000 + 1.5* Q = 90,750 $
Total Profit = 263,625 $
F. Check your answer in Part (e) by equating the marginal revenue and marginal cost
functions, determined in Parts (b) and (d), and solving for Q.
𝑀𝑅 =
120,000 − 2Q
10,000
= 1.5
MC = 1.5