Managerial Economics

Indian School of Business

DHM 1, 2020-21

HOMEWORK 1
Due: Saturday, June 20 at 1 pm

Please write the names of ALL group members, their ID numbers, group name and section clearly
on your answer script.
You must adhere to the honor code while doing this assignment. This is a CODE 2N-b
assignment.

Show all intermediate steps (for full and partial grades).

Problem 1
A computer products retailer purchases laser printers from a manufacturer at a price of
Rs. 25,000 per printer. During the year, the retailer will try to sell the printers at a price
greater than Rs. 25,000, but may not be able to sell all the printers. At the end of the year,
the manufacturer will buy back any unsold inventory at 40 percent of the original price.
No one other than the manufacturer would be willing to buy these unsold printers at the
end of the year.
a. At the beginning of the year, before the retailer has purchased any printers, what
is the economic cost of a laser printer?
b. After the retailer has purchased the laser printers, what is the economic cost
associated with selling a laser printer to a customer? (Assume that if this customer
does not buy the printer, it will be unsold at the end of the year.)
c. Suppose that on December 1 of that year, the retailer still has a large inventory of
unsold printers. The retailer has set a retail price of Rs. 30,000 per printer. The
manager of the store proposes that they should cut the price by half and sell the
printers at Rs. 15,000 each. The owner of the store disagrees, pointing out that
at Rs. 15,000 each, they would lose Rs. 10,000 on each printer sold. Is the
owner’s argument correct?

Problem 2
Consider the demand curve for the latest wearable fitness device, QD = 40,000 - 4P.
a. Plot the demand curve
b. Find the price and quantity at which the demand is unit elastic
c. Compute the elasticity of demand when the staring price is
i. Rs. 2,000
ii. Rs. 1,000

Problem 3
The demand for beer in Gachibowli is given by: QD = 700 - 20P – 10Pc + 0.1I, where P is
the price of beer, Pc is the price of chips, and I is the average consumer income.
a. Please provide an expression for the elasticity of demand for beer with respect to
the price of chips. Based on your answer, are beer and chips complements or
substitutes?
 b. Calculate the own price elasticity, the cross price elasticity and the income elasticity
of the demand for beer when P = 50, Pc = 15, and I = 14,000
c. Graph the demand curve for beer when Pc = 15, and I = 14,000

Problem 4
The demand curve for pedicures is given by: QD = 20 - 4P + 0.2I, where P is the price of a
pedicure, and I is the average consumer income. Assume that I is 400.
a. What is the consumer surplus when P is 15? By how much does the consumer
surplus change if P falls to 10?
b. At a market price of 20, what is the pedicurist’s income? Suppose the pedicurist
wants to increase her revenue. Should she increase or decrease the price of a
pedicure?
c. Assume now that consumer income increases to 500. What is the consumer surplus
at P = 15?

Problem 5
Suppose you are analyzing the demand for buttermilk at the Goel dining hall at ISB’s
Hyderabad campus. Consider each of the following scenarios and explain whether it
would lead to an increase, decrease, or no change in demand:
a. Term break
b. A thunderstorm that brings down the temperature by several degrees
c. A decrease in the price of buttermilk
d. A decrease in the price of watermelon juice
e. A decrease in the price of photo copying
f. The latest campus fad – “veganism”

Problem 6
Suppose there are 2 countries, X and Y, capable of producing 2 goods: sense and
nonsense. The output per worker in Country X is 8 units if the worker produces sense
and 4 units if he/she produces nonsense. In Country B, the output per worker is 6
units of sense or 2 units of nonsense. What is the pattern of absolute and comparative
advantage?