The document contains questions for a managerial economics assessment. It asks the student to analyze scenarios related to the laptop market, income elasticity of demand, the impact of minimum wage on employment, cost and revenue concepts, elasticity of demand for inferior goods, price discrimination, cartel formation, natural monopoly regulation, game theory payoffs, and long-run profits for firms in monopolistic competition. The student is asked to answer each question, providing diagrams and explanations to support their responses where indicated.

1. 1
Managerial Economics
Assessment – 1
Name:
Student ID

2. 2
Managerial Economics: Assessment 1
Note: This is individual assessment. Group work is not allowed. In mentioned cases provide a
neat diagram to explain your answer. Make sure to label axes properly. Else points will be
deducted. The maximum possible points is 50.
1) In the world of electronics overtime people realized the immense use of having a
personal laptop. And at the same time the technology has improved significantly in
last decade. In fact the technological improvement has surpassed the increase in
willingness and ability to purchase a laptop. Given this piece of information, what in
your opinion happened to the equilibrium price and quantity in market for personal
laptop. Draw a diagram and explain your answer. (10 points)
In my opinion what happened to the equilibrium price and quantity in market for
personal laptop will face the equilibrium at the varying supply and demand as the supply
of personal laptop is more and more compare to demand it shows the technological
improvement has surpassed the increase in willingness and ability to purchase a laptop.
so the prize remain unchanged the demand will be slightly increasing but the supply for
the new laptops will give and equilibrium like this take the example of the prize of the
laptop is p1 is the equilibrium and the demand is d1 and supply is s1 now the new
products entered into the market and that may attract few new customers and this lead to
increases in demand to d2 and supply s2 but as the new products are coming in a huge
rate with compare to demand and ability to buy them so demand may stuck at d2 but the
supply will tend to increase s3 and that lead to increase the equilibrium prize and lead to
p3.

3. 3

4. 4
2) If income elasticity of demand of good X is 0.89, what will happen to equilibrium
price if there is an increase in income of consumers. Draw a diagram to support
your answer. (5 points)
the income elasticity is defined as %change in demand due to change in % in income so
if X=.89 then it is under 0 to +1 means the demand for the good type is Normal
necessities. if X=.89 then X= 89/100 then we can say due to income change to 100 the
demand for the goods changed to 89 now if income increase if example income increase
4% then demand for the good will also increase and become 92.56. As the demand will
rise the supply will also fall accordingly supply will also fall down to 4%.

5. 5
3) If Ministry of labor sets up a minimum wage in the labor market, what can be the
potential effect on the employment? Explain your answer with help of relevant diagram.
(10 points)
Imposition of a minimum wage above the equilibrium wage, minimum wage laws should
cause unemployment. This is because a greater number of people are willing to work at
the higher wage while a smaller number of jobs will be available at the higher wage.
Companies can be more selective in those whom they employ thus the least skilled and
least experienced will typically be excluded. An imposition or increase of a minimum
wage will generally only affect employment in the low-skill labor market, as the
equilibrium wage is already at or below the minimum wage, whereas in higher skill labor
markets the equilibrium wage is too high for a change in minimum wage to affect
employment.
If a higher minimum wage increases the wage rates of unskilled workers above
the level that would be established by market forces, the quantity of unskilled
workers employed will fall. The minimum wage will price the services of the
least productive (and therefore lowest-wage) workers out of the market.
If a higher minimum wage increases , the wage rates of unskilled workers above
the level that would be established by market forces, the quantity of unskilled
workers employed will fall. The minimum wage will price the services of the
least productive (and therefore lowest-wage) workers out of the market. …The
direct results of minimum wage legislation are clearly mixed. Some workers,
most likely those whose previous wages were closest to the minimum, will enjoy
higher wages. This is known as the "ripple effect". The ripple effect shows that
when you increase the minimum wage the wages of all others will consequently
increase due the need for relativity.[38]
Others, particularly those with the lowest
wage rates, will be unable to find work. They will be pushed into the ranks of the
unemployed or out of the labor force. Some argue that by increasing the federal
minimum wage, however, the economy will be adversely affected due to small

6. 6
businesses not being able to keep up with the need to subsequently increase all
workers wages.

7. 7
4) A manager in a firm has been assigned a job to find costs at different levels of
output He is provided with the following table and asked to fill up the missing values
since there was no information available.
Output Total cost Fixed cost Variable cost Average
variable cost
Average
total cost
1 2000 500
2 2500
3 2800
4 3300
5 4000
6 4800
7 6000
He was also asked to find the marginal cost at output level of 5 units. (7+3=10
points)
Output Total cost Fixed cost Variable cost Average
variable cost
Average
total cost
1 2000 500 1500 1500 2000
2 2500 500 2000 1000 1250
3 2800 500 2300 767 933
4 3300 500 2800 700 825
5 4000 500 3500 700 800
6 4800 500 4300 716 800
7 6000 500 5500 785 857

8. 8
Marginal cost refers to the increase in the total cost of the company, when one additional
product is produced. The total cost of producing 4 units is 3300 units, and the total cost of
producing 5 units is 4000. Therefore the marginal cost at output level of 5 units is 700
units.

9. 9
5) According to posting from last fall, sales for products such as Spam, pancake
mixes, instant potatoes, rice and beans have been booming during the recession; a
spokesperson from a grocery chain is quoted as saying “They’re real belly fillers.”
Comment on this, using concept related to any one of the elasticity's discussed in
class. (5 points)
Inferior goods have negative income elasticity. That is ,as the consumers income falls, the
demand for inferior goods rises, Since, sales of inferior goods moves in opposite
direction of the consumers income. Thus , the sales of groceries spoken about rises even
in times of recession.

10. 10
6) If RTA increases the bus-fare from Abu Dhabi to Dubai, then what will happen to their
revenue? [Hint: the demand curve is inelastic] Explain your answer with help of a
diagram. (10 points)

11. 11
Managerial Economics: Assessment 2
Note: This is individual assignment. Group work is not allowed. In mentioned cases provide a
neat diagram to explain your answer. Make sure to label axes properly. Else points will be
deducted. The maximum possible points is 50.
1) A local firm in Abu Dhabi is operating under a perfectly competitive environment.
If price in market is 4 AED and their total cost is 500 AED (including the fixed cost
of 200 AED) for output of 30 units, then should they continue to produce or shut
down in short run? Provide your answer with a relevant diagram and explain your
answer in few words. (10 points)
Revenue = 120 and Total cost = 500
In a market for a firm to function in the short run the firm must get the revenue equal to the
variable cost which means that the variable cost incurred by the firm must equal to the revenue
earned by the firm. If this doesn’t happen then the firm won’t be able to recover in the long run
at all and thus incur heavy losses. Thus if a firm does not cover its variable cost in the short run,
it will have to shut down
Where in,
Fixed cost is the minimum amount of cost the firm has to pay to function like rent
Variable cost is the basic cost of production
Total cost = Total variable cost + Total fixed cost
In the above case the revenue is 120 AED and the variable cost is 300 AED
Thus the revenue earned is lesser than the variable costs. The shut down situation is temporary. It
can reopen once the market improves which means that it can reopen once the prices increase or
the cost of production decreases.

12. 12
p, ATC, AVC, AFC
ATC AVC

13. 13
2) Recent research has documented the fact that Coke is something different compared
to other soft drinks. In fact related literature states that Coke has already attained
the monopoly status. If we assume the research is correct and coke is a monopolist,
then a) Do you think that coke actively engages itself in price discrimination? B) If
so, what type of price discrimination they are engaged in? Discuss your answer with
a relevant diagram. (10 points)
Yes , Coke does practice price discrimination. Selling the same product to different
groups of buyers at different prices is a form of price discrimination by Coke. By selling
the bottles at a higher price at a hot day as compared to cold days, raises the revenue of
the firm.

14. 14
3) Etisalat and Du are duopolists. If they form a cartel between themselves, then what
will happen to price and output in the market? Discuss your answer with a relevant
diagram. (10 points)
Duopoly is the form of market organization in which there are only two sellers.
A cartel is a market sharing and price fixing arrangement between groups of firms, in
case of duopoly it is 2 firms, where the objective of the firm is to limit competitive forces
within the market. The forms of cartels may differ. It can be an explicit collusive
agreement where the member firms come together and may reach a consensus regarding
the price and market sharing or implicit cartel where the collusion is secretive in nature.
The cartel profit maximizing theory can be explained using figure below:

15. 15
The market demand for all members of the cartel is given by DD and marginal
revenue (represented by dotted line) as MR. The cartels marginal cost curve given
by MCc is the horizontal sum of the marginal cost curves of the member firms. In
this the basic problem is to determine the price, which maximizes cartel profit.
This is done by considering the individual members of the cartel as one firm i.e. a
monopoly. In the figure this is at the point where MR= MCc, setting price = P.
The problem is regarding the allocation of output within the member firms.
Normally a quota system is quite popular, whereby each firm produces a quantity
such that its MC = MCc. One serious problem that arises from this analysis is that
while the joint profits of the cartel as a whole are maximised, each individual
member of the cartel has an incentive to cheat on its quota. This is because the

16. 16
price for the product is greater than the members marginal cost of production.
This implies that an individual member can increase its profit by increasing
production.

17. 17
4). In a recent conversation a policy maker argued that since DEWA is monopolist, they
are charging higher price and lower output is produced. He further mentioned that
government should split the entire unit into small pieces so that competition can drive
down prices. Do you agree with this statement? Explain your answer in few words. Provide
a relevant diagram. (10 points)
If monopolist is pricing high and producing low, then it would be better for government to
regulate the firm at first best solution. If it is not possible then second best solution will make
the firm efficient. The second best solution means forcing the firm to charge price at lowest
average cost, so that it able to cover the cost of production.
By bifurcating the firms into small competitive firms, the cost of production will increase,
and as a result, price of the goods will also increase. Instead of increasing the welfare, the
aggregate welfare will decline.

18. 18
5) Consider the following pay-off matrix (Numbers in the matrix reflect their respective
profit levels) for two gas stations.
Gas station A
Gas Station B High price Low price
High price 200,000 AED; 200, 000 AED 50,000 AED; 400,000 AED;
Low price 400,000 AED; 50,000 AED 80,000 AED; 80,000 AED;
If each firm follows their dominant strategy, then what will be their respective profit levels? And
if they collude then what is their new profit level? (5 points)
If each firm follows their dominant strategy of keeping price high then their pay off is 200,000
AED each. It remains the same after collusion also.
The reason for the same being:
If firm A keeps prices high the possible returns are 200,000 or 400,000AED
If firm A cuts prices then the possible returns are 50,000 or 80,000 AED
If firm B keeps prices high the possible returns are 200,000 or 400,000AED
If firm B cuts prices then the possible returns are 50,000 or 80,000 AED
Thus both firms follow their dominant strategy of keeping prices high. This strategy stays same
even after collusion because after collusion the profit level that will benefit both the firms
equally will be to keep prices high (Myerson 1999).

19. 19
6) A cosmetic firm operating in a monopolistically competitive market environment spends
a lot of money in advertisement and ends up with super-normal profit even in long run. Is
it possible? Explain your answer in few words. (5 points)
Monopolistic firm differentiate the product with respect to design, ingredients, advertisement,
and etc. Because of that they have some degree of control over the price. If the monopolist gains
significant brand loyalty by advertisement, it will earn super normal profit even in the long-run.
Hence, it is possible for a firm to earn abnormal profit in imperfect competition.