Economics of Enterprise Answers

53. For each of the following production functions, determine whether returns to scale are decreasing, constant, or increasing.

i) Q = 2k + 3L + KL

ii) Q = 20 K0.6 L0.5

iii) Q = 100 + 3K + 2L

iv) Q = 5Ka Lb, Where a+ b = 1

v) Q = K/L

62. Explain the relationship between the average product and average cost functions and between the marginal product and marginal cost functions

71. A new pizza place, Fredrico’s opens in New York City. The average price of a medium pizza in New York is $10 and, because of large number of pizza sellers, this price will not be affected by the new entrant in the market. The owner of the Fredrico’s estimates that monthly total costs, including a normal profit will be

TC = 1000 + 2Q + 0.01Q2

To maximize total profit, how many pizzas should be produced each month? In the short run, how much economic profit the business will earn each month?

35. Demand for a managerial economics text is given by Q = 20,000 – 300P. The book is initially priced at $30:

i) Compute the point price elasticity of demand at P= $30.

ii) If the objective is to increase total revenue, should the price be increased or decreased? Explain.

iii) Compute the arc price elasticity for a price decrease from $30 to $20.

iv) Compute the arc price elasticity for a price decrease from $20 to $15.

26. Which of the following pairs of goods are substitutes and which are complements?

Insulation and heating oil

Hot dogs and mustard

Television and videocassette recorder

Rice and potatoes

has a monthly income of $200 that she allocates among two goods: meat and potatoes.
a. Suppose meat costs $4 per pound and potatoes $2 per pound. Draw her budget constraint.
b. Suppose also that her utility functio

Khurram Ali is negotiating his employment contract. His opportunity cost is 15%. He has been offered two possible 4-year contracts. Payments are in Pakistani rupees and are guaranteed, and they would be made at the end of each year. Terms of each contract are as follows:

Contract Year 1 Year 2 Year 3 Year 4
Contract 1 4 Million 4 Million 4 Million 4 Million
Contract 2 10 Million 1 Million 1 Million 1 Million

As his financial adviser, which contract would you recommend that he accept?

The market price for tomatoes is $4.00 per kg. However, there are many buyers are willing
to pay more than the market price. At the market price of $4.00, the quantity of tomatoes
demanded is 1,500 kg per month, and quantity demanded does not reach zero until the price
reaches $30.00 per pound. Draw a figure showing this data, calculate the total consumer
surplus in the market for tomatoes, and show the consumer surplus on the graph.

2014 Restructuring that eliminated 10,000 jobs and cut more than $1 billion from annual costs.
2015 New CEO took over reigns of the firm. To raise money, begins selling patent of select
portfolio and concentrates on narrow product line.
2018 Entered new markets by pushing aggressively into China, an important growth market.
2020 Share price improves/increases.

a. Explain the fundamental factors considered when making decisions to achieve various goals of a firm?
b. State the six steps in managerial decision making that lead to competitive advantage?
c. Using the ‘Four Stage Model’, describe your observations of the Firm’s changing ‘Economics of Business’.

Explain the fundamental factors considered when making decisions to achieve various goals of a firm?