## Managerial Economics Applications, Strategy, and Tactics

1) A study of grocery stores in Northern England yielded the following cost function: C = 2.51 – 0.0195 Q – 0.000726 Q2 + 0.000262 Q3 (2.84) (3.72) (2.55) (3.02)

Where C is the total cost per year (in millions of Euro) and Q is the quantity of sales (measured in millions of Euro).

Note: the number in parenthesis below each coefficient is its respective t-statistic)

a. Which variable(s) is (are) statistically significant in explaining variations in the total costs of running a grocery store? Explain why

b. What type of cost-output relationship (e.g. linear, quadratic, or cubic) is suggested by these statistical results? Explain why.

c. If the cost function was instead C = 2.51 – 0.0195 Q + 0.000726 Q2 , with all the coefficients statistically significant, what can you say about the existence of economies or diseconomies of scale in grocery stores in Northern England?

2) The restaurant industry is known as a difficult industry to obtain long-term success. Use the

Porter’s Five Forces Framework to analyze a typical firm in the restaurant industry.

1) What factors are in the restaurant’s favor for high profitability?

2) What factors are against the restaurant?

3) Why would the factors against high profitability overwhelm the factors for high profitability?

3) Assume that a firm in a perfectly competitive industry has the following total cost schedule,

and can only produce in increments of 50 units, as illustrated below:

Output (units)              Total Cost (\$)

100                              1000

150                              1500

200                              1800

250                              2200

300                              2800

350                              3800

400                              5200

a. Calculate a marginal cost and an average cost schedule for this firm

b. If the prevailing market price is \$12 per unit, how many units should be produced and sold if the firm is

trying to maximize profits? What are the profits per unit? What is the total profit?

c. Is the industry in long-run equilibrium at this price?

4) Information Asymmetry.

a. Adverse Selection: In the market for used airplanes,

explain how adverse selection might arise. What might the buyer or seller do to eliminate adverse selection?

b. Moral Hazard and the Principle-Agent problem. Suppose you own a real estate office that represents buyers and sellers of residential homes. You hire someone to manage the office for you.

What moral hazard issues might you encounter?

How does this illustrate the Principle-agent problem?

and what could you do to partially eliminate the principle-agent problem?

5) Oligopoly.

Suppose you own a gas station and the only other gas station in town is across the street from your gas station.

Explain in general terms the two outcomes that you might expect to happen—in

other words, if the gas stations collude, how would that differ from the gas stations competing? How would the profit of your station compare between the two outcomes and how would the prices charged to the consumers compare?

Give several reasons why collusion would be more likely in the above gas station case as compared with a farmer’s market that meets monthly and attracts approximately ten to twenty farmers. Explain each reason.