Managerial Economics – HW 1
Name:_____________________ Must Show Work for Full or Partial Credit
Section 1: Use present value or net present value to answer the following questions in Section 1.
Part A: You are debating between signing to play with the Pittsburgh Steelers or the Detroit Lions. The
Steelers guarantee if you sign with them they will pay you 1 million dollars in ten years. The Lions
offer will pay you $350,000 today. The annual interests rate is 10%. All you care about is making the
most money, use the present value to determine where you should sign?
Part B: You are asked to make a recommendation to your supervise if your company, Standard Oil,
should start selling gasoline rather than dump it into the Cuylohoga River. The company would need to
invest in $20,000 in new equipment to store and sell the gasoline that is a byproduct of making
kersione. The projected revenue is $4,000 a year for the next 6 years. You predict the interest rate for
the first 2 years will equal 12% and for the remaining 4 years be 8%. Use net present value to explain
why the company should or should not make the investment.
Part C: The city council is building a new football stadium. The stadium will take five years to build
and cost 2 million dollars to build, due at the start of construction. The NFL football team offers to
provide 1 million dollars towards construction at the start of the project or will provide 3 million
dollars after the stadium has been built. The interest rate is 8%. Use net present value to figure out
which contribution from the NFL team the town should accept
Section 2: Use the following demand and supply equations to answer the questions in section 2.
Demand for Provost Lane Posters = Q = 600-8Pposter-25Pbo
le head+5Pblanket-10Y
Supply for Provost Lane Posters = Q=10+12Pposter-4Pink
Where Pposter = Price of Provost Lane Poster; Pbo
le head = Price of Prof. Csaplar bo
le head;
Pblanket = Price of Prof. Straub Blanket; Pink = Price of ink; Y=Income
Part A: Mathematically prove if beer and cookies are a compliment or a substitute. What changes
would you expect in demand for juice if each were to increase in price?
Part B: Assume the following: Pbo
le head = 4 Pblanket = 5 Pink = 16 Y=20
Graph supply and demand. Identify where each curve intercepts the x and y axis. What is the
equili
ium price and quantity supplied? Mark and label the equili
ium point in your graph.
Part C: Add to your graph from part B a new demand curve using the same demand equation except
now income equals to 50. Calculate the new price and the new quantity consumed. Indicate if
price and quantity increase or decrease and by how much.
Part D: Using the assumptions from Part B, calculate and graph below the new equili
ium price and
quantity when the government imposes a 40 dollar per unit tax upon the supplier. (Extra Credit:
How much did the tax increase or decrease consumer and producer welfare?)
Section 3: Elasticities
Part A: What is the elasticity when a 62% decrease in price results in a 31% decrease in sales?
Is that an elastic, inelastic, or a unit elastic point? How/will total revenue change if the price
decreased.
Part B: What is the elasticity when a 16% increase in price results in a 48% decrease in sales?
Is the good elastic, inelastic, unit elastic, substitute, compliment, normal or inferior? How/will
total revenue change if the price increased.
Part C: What is the cross-elasticity when a 22% increase in price of a related good results in a 2%
increase in sales? Is the good elastic, inelastic, unit elastic, substitute, compliment, normal or
inferior?
Part D: What is the equili
ium price elasticity coefficient of Provost Lane Posters from section 2 part
B? Is the elasticity of the at equili
ium point elastic, inelastic, unit elastic, substitute,
compliment, normal or inferior??
Part E: What is the equili
ium cross price elasticity coefficient of Prof. Csaplar bo
le head from
section 2 part B? What is the income coefficient elasticity from section 2 part B?