ECON 311

Managerial Economics
Practice Test for Exam 1

Question 1

A) During the late 1980s, wool prices increased considerably, due in part to increased
demand by China and the former Soviet Union. From 1977 to 1988, the price of
wool for worsted clothing rose from $3.67 to $5.81 per pound. Expecting that
wool prices would remain high, wool producers raised a lot more sheep. Did this
result in a shift to the right in the supply curve for wool? Why or why not?
B) At the same time, the Chinese and Russians cut back on their purchases of wool
because of lack of foreign currency (and in the case of China, because of
organizational problems). Did this shift the demand curve for wool to the left?
Why or why not?
C) Australia is the world’s largest producer of wool, and for a time the Australian
Wool Corporation propped up the price of wool by buying up any unsold
Australian wool. Why was this necessary to prevent the price from falling?
D) The Australian Wool Corporation had to buy up so much wool that it exhausted
its cash reserves and its credit. The firm turned for help to the Australian
government, but its parliament refused to guarantee further loans to by up even
more surplus wool. In March 1991, the actual price of wool fell to about $2.5 per
pound. Why?

Question 2

A) Based on the unofficial estimates by economists at the U.S. Department of

Agriculture, the market demand curve for wheat in the American market in the
early 1960s was (roughly) as follows:

Farm Price of wheat Quantity of wheat demanded

(dollar per bushel) (millions of bushels)
1.00 1,500
1.20 1,300
1.40 1,100
1.60 900
1.80 800
2.00 700

In the middle of 1970s, the market demand and supply curves for wheat in the
American market were (roughly) as follows:
Farm Price of wheat Quantity of wheat demanded Quantity of wheat supplied
(dollars per bushel) (millions of bushels) (millions of bushels)
3.00 1,850 1,600
3.50 1,750 1,750
 4.00 1,650 1,900
5.00 1,500 2,200

A) If the market demand curve in the middle of 1970s had remained as it was
in the early 1960s, can you tell whether the farm price of wheat in the
middle 1970s would have been greater or less than $2? EXPLAIN.
B) Did a shift occur between the early 1960s and the middle 1970s in the
market demand curve for wheat? If so, was it a shift to the right or to the
left, and what factors may have been responsible for this shift?
C) Suppose that the government had supported the price of wheat at $4 in the
middle 1970s. How big would have been the excess supply? What would
have been some of the objections to such a policy?

Question 3

Assume that the quarterly demand and supply functions for personal computers are

Qd = 340 – 6P
Qs = 100 + 2P

where price is in $100 of 2001 dollars and quantity is in thousands of units.

A) What is the equilibrium price for personal computers?

B) Assume that the United States found that foreign producers “dumped” personal
computers on the U.S. market and imposed a price of $3,250. Would this result in
an excess supply or demand or personal computers and how large would it be?

Question 4

How will a decline in airfares affect intercity bus fares and the price of hotel rooms in
resort communities?

Question 5

What will happen to the equilibrium price and quantity in the corn tortilla chip market if
both of the following events occur: (1) researchers discover that a vitamin found in corn
helps protect against cancer and heart disease; and (2) a swarm of locusts destroys part of
the corn crop? Show your answers with diagrams.
Question 6

Determine the first and second derivative of the following functions:

Y  3  10 X  5 X 2
Y  2 X (4  X 3 )
Y  3 X /( 4  X 3 )
Y  4 X /( X  3)

Question 7

A corporation’s chief executive officer believes that the relationship between its profit π
and its output Q is as follows:

  5  20Q  0.5Q 2

a. What is the profit maximizing level of output?

b. What is the maximum level of profit?
c. Is this a maximum or a minimum? How do you know?

Question 8

If total revenue and total cost functions are:

TR  50Q  5Q 2
TC  10  5Q  0.5Q 2

a. What is the marginal revenue function?

b. What is the marginal cost function?
c. What level of output maximizes profit?

Question 9

The Stock Corporation makes two products, paper and cardboard. The relationship
between π, the firm’s annual profit (in thousands of dollars), and its output of each good
is
  50  40Q1  30Q2  5Q12  4Q22  3Q1Q2

where Q1 is the firm’s annual output of paper (in tons), and Q2 is the firm’s annual output
of cardboard (in tons). Find the output of each good that the Stock Corporation should
produce if it wants to maximize profit.
Question 10

A firm produces two goods. Its total cost per day (in dollar) equals

TC  14 X 12  18 X 22  3 X 1 X 2
where X1 is the number of units of the first good and produced per day, and X2 is the
number of units of the second good produced per day. Because of commitment to
customers, the firm must produce a total of 20 units of the two goods per day. If the
firm’s managers want to minimize its costs (without violating the commitment to its
customers), how many units of each good should it produce per day?

Note: Solve this problem by first: converting the constrained problem into unconstrained;
and second by the Lagrangian multiplier.

Question 11

The Dolan Corporation, a maker of small engines, determines that in 1999 the demand
curve for its product is

P  2,000  50Q

where P is the price (in dollars) of an engine, and Q is the number of engines sold per
month.

a. To sell 20 engines per month, what price would Dolan have to charge?
b. If it sets a price of $500, how many engines will Dolan sell per month?
c. What is the price elasticity of demand if price equals $500?
d. At what price, if any, will the demand for Dolan’s engines be of unitary elasticity?
e. If the firm wants to maximize its dollar sales volume, what price should it charge?
f. Derive the marginal revenue curve for the firm.

Question 12

The marketing manager of the Summers Company must formulate a recommendation

concerning the price to be charged for a new product. According to the best available
estimates, the marginal cost of the new product will be $18, and the price elasticity of
demand for this product will be -3.0.

a. What recommendation should she make, if Summers wants to maximize profit?

b. If her recommendation is accepted, what will be the new product’s marginal
revenue?
Question 13

Market researchers at the Lawrance Corporation estimate that the demand function for
the firm’s product is

Q  50 P 1.5 I 0.5

where Q is the quantity demanded, P is the product’s price, and I is per capita disposable
income. The marginal cost of the firm’s product is estimated to be $10.

a. What is the price elasticity of demand?

b. What is income elasticity of demand?
c. Lawrence’s price for its product is $20. Is this the optimal price? Why or why
not?
d. If it is not the optimal price, write a brief memorandum indicating what price
might be better, and why.