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Assignment 1 Due March 6 Managerial Economics 1.

Distinguish between the economic profit and the accounting profit Economic Profit is the difference between Total Revenue and Total Economic Cost where Total Revenue = Sales Receipt x Quantity Sold. The Economic Cost is the highest alternative opportunity that is forgone. Accounting Profit is a company's total earnings, calculated according to General ly Accepted Accounting Principles, and includes the explicit costs of doing busi ness, such as depreciation, interest and taxes. Accounting Profit do not take in to account the Economic Opportunity Cost of Capital Invested, so tend to be high er than Economic Cost. 2. Define the Agent dilemma, what are the most essential application to sol ve it Shareholders may want profits, but Managers (or agents) may want to relax. Managers usually have much less to lose than the owners. The agents often seek a cceptable levels (not the maximum) of profit and shareholders wealth while pursu ing their own self-interest. To try to solve the problem the following measures can be implemented: a) Payroll expenditure to managers structured in a way that aligns incentives fo r managers with shareholders interest. Example: Grants of restricted stocks, or deferred stock options. b) Internal audits and accounting oversight boards to monitor managements actions . In addition, large creditors monitor financial ratios and investments decision s of large debtors on monthly or weekly basis. c) Bonding expenditures and fraud liability insurance to protect the shareholder s from managerial dishonesty. d) Complex organizations structures designed to limit managerial discretion, but which prevent timely response to opportunities. 3. If the interest rate is 6 percent, then what are the present values for the followings future values: a. 1000 after 5 years b. 1200 after 3 years c. 2000 after 8 years a) 1000 (1+0.06)5 b) 1200 (1+0.06)3 c) 2000 (1+0.06)8 = 747.26 = 1007.54 = 1254.82

4. As a manger what you should do to increase your firm value, discuss by s howing the appropriate formula. pt = REVENUE COST = TRt TCt = PtQt VtQt - Ft Value of the Firm = the present value of discounted cash flows N S( pt ) / (1+ke)t = t=1 N S(PtQt VtQt Ft) / (1+ke)t t =1

Whatever lowers the perceived risk of the firm (ke) will also raise firm value. Whatever raises the price of the product (Pt) or the quantity sold (Qt ) will ra ise firm value. Whatever raises variable cost (Vt )or fixed cost ( Ft ) will reduce firm value.

5. What would happen to the demand curve for the following situations? Show graphically a. Increase the price of luxury cars, everything else is constant b. The effect of decreasing income in luxury car c. The demand curve of product Y when the price of product X increases and the relation between X and Y is complement d. The demand curve of product Y when the price of product X decreases and the relation between X and Y is substitute Figure 1 a and b will have same graph Figure 2 c- when price of X increases then the demand of Y decreases Figure 3 d- when price of X decreases then the demand of Y decreases

6. If Q1 = 100 when P1 = 10 and Q2 = 80 when P2= 15 a. Calculate the price elasticity of demand by using the average formula b. Calculate the price elasticity of demand be using the percentage formula Price Elasticity of Demand using Average Formula

Price Elasticity of Demand using Percentage Formula ED = %DQ %DP P1=10 P2=15 DP=5 %50 Q1=100 Q2=80 DQ=-20 %-20 ,ceteris paribus

%-20 %50

=-0.4

7. For the following price elasticity for different products. Is the produc t elastic, inelastic, or unit elastic. Then draw all the demand curves by showin g the different between them with respect of their price elasticity a. The price elasticity of X = -12 Elastic b. The price elasticity of Y = -3 Elastic c. The price elasticity of Z = 0 Perfect Inelastic d. The price elasticity of L = -0.1 Inelastic e. The Price elasticity of S = -0.8 Inelastic f. The price elasticity of F = -1 Unit Elastic g. The price elasticity of N = infinity Perfect Elastic

8. Define the cross price elasticity. If the price of product X has increas ed from BD10 to BD15 and therefore the quantity of product Y has increased from 100 to 160, what is the relation between the two products X P1 = 10 X P2 = 15 Y Q1 = 100 Y Q2 = 160 Product Y is substitute of product X The cross price elasticity of demand Ex is a measure of the responsiveness of ch anges in the quantity demanded (Qdy) of product Y to price changes for product X (Px) Ex = %DQdy %DPx ,ceteris paribus Ex= %60 = 1.2 %50 Substitutes have positive cross price elasticity 9. If your income has increased from BD 1500 to BD 1700 and as a consequenc es your purchase of the quantity of product X has increased from Q1=100 to Q2= 1 60. Calculate the income elasticity of product X. What is the type of product X I1 = 1500 to I2 = 1700 Q1=100 to Q2= 160 EY = %DQ/ %DY EY = %60 / %13.33 = 4.50 X good is Luxury: EY > 1 with a high income elasticity

10. Show graphically with adequate explanation what is the relation between the price elasticity of the product and the total revenue. As a manger when you should be more aware of increasing your product price.

As a manager, I have to be aware of the curve of revenue, when it is coming down