Mangerial Economics - Custom Scholars
Home » Flash Cards » Mangerial Economics

# Mangerial Economics

question
Successful operation requires manager to do what?
optimally choose the quantity and types of inputs to use in the production process
question
The Production Function
k = capital (machine)
L = labor (people)
Q = Level output produced in production

Q = F(k,L)
This is the max output produced with k units and L units
question
Short Run
Fixed factors (fixed factors can not be changed)
Variable factors (inputs managers can adjust to alter production)
Short Run = time frame in which factors are fixed
question
Long Run
Horizon over which the manager can adjust all factors of production
Example: Takes a company 3 years to acquire additional capital
(short run: under 3 years, long run: 3 years)
question
Total Product
Max level of output that can be produced with a given amount of inputs
question
Average Product
Measures of output produced per capital/labor
APκ = Q/K
APι = Q/L

(look at graph in notes)
question
Marginal Product
MPκ = δQ/δK
MPι = δQ/δK

(look at graph in notes)
question
Value Marginal Product
Value of the output produced by the last unit of an input

VMPι = P × MPι
VMPκ = P × MPκ
question
Cost Minimization
Producing output at the lowest cost possible
→ producers concerned with cost minimization because of economic scarcity
→ if no scarcity producers wouldn't care about production cost
→ to maximize profit, minimize production cost
question
Cost Minimizing Input Rule
To minimize cost of producing at a given level of output
*marginal product per dollar should be equal for all inputs

MPι/W = MPκ/r
or
MPι/MPκ = W/r
question
Cost Minimizing Input Rule Example
Lawn Service: 5 small mowers and 2 large mowers

Marginal Product:
Small → 3 lawns per day
Large → 6 lawns per day

Rental Price
Small = \$10/day
Large = \$25/day

MPs → marginal product small mower
MPι → marginal product large mower
Ps = small \$10/day (rental price)
Pι = large \$25/day (rental price)

MPs/Ps = MPι/Pι = 3/\$10 > 6/\$25

Firm NOT cost minimizing
SHOULD USE FEWER LARGE AND MORE SMALL
question
Optimal Input Substitution
To minimize cost of producing a given level of output, the firm should use less of an input and more of other inputs when that input price rises
question
Short Run
period of fixed inputs (some)
question
Total Cost
Sum of fixed and variable costs.
Total Costs in Short Run consists of
1. cost of fixed inputs (FC)
2. cost of variable inputs (VCQ)
→change when output changes
question
Average Fixed Costs
AFC = FC/Q
question
Average Variable Costs
Measure of variable costs per unit produced

AVC = VC(Q)/Q
question
Average Total Cost
measure of total costs on per unit basis

ATC = C(Q)/Q
or
TC/Q
or
ATC = AVC + AFC
question
Marginal (Incremental) Costs
the cost of producing an additional unit of output

MC = ∆C/∆Q
question
Sunk Costs
a cost forever lost after paid
→irrelevant to decision making
→nonrefundable
question
Irrelevance of Sunk Costs
Decision maker should ignore sunk costs to max profits or minimize losses
question
Cubic Cost Function
provides reasonable approximation to any cost function

C(Q) = ƒ +aQ + bQ² + cQ³

a, b, c → constants
ƒ → fixed costs
question
Marginal Cost for Cubic Costs
MC(Q) = a + 2bQ + 3cQ²

*MC(Q) = δC/δQ
question
Multiple Output Cost Functions Example
Toyota produced cars, vans, SUV's, and trucks
Dell produces many computers and printers
Cost function for muli-product firm = C(Q₁,Q₂)
Q₁ = product 1 output
question
Economies of Scope
If it is cheaper to produce two good together you have economies of scope (Pizza Hut and Taco Bell example)

Mathematically:
C(Q₁,0) + C(0,Q₂) > C(Q₁,Q₂)
question
Cost Complementarity
When the marginal cost of producing one good is decreased by producing more of another good
EXAMPLE: studying for one test and it helps with another

δMC₁/δQ₂ < 0

δMC₁ → Marginal cost of good 1
δQ₂ → output of second good
question
Summary of the properties of Quadratic Multi-Cost Function
1. complementarity when a < 0
2. economies of scope when ƒ - aQ₁Q₂ > 0
question
Perfect Competition
a) market characteristics
b) market demand vs. firm demand
c) profit max rule
i. economic profits
ii. operating loss
iii. shut down rule
d) long run competitive equilibrium
question
Perfect Competition Key Conditions
1. many buyers and sellers, each is "small" relative to market
2. each firm produced homogeneous product in market
3. buyers and sellers have perfect information
4. NO transaction costs
5. free entry/exit
→consumers view product of all forms in market as *perfect substitutes*
→perfect info: consumers know quality and price
→all firms charge same price and determined by buyers/sellers
question
Demand and Market and Firm level
(look at graph in notes)
question
Maximizing Profits:Perfect Competition
Demand for individual firms product = market price of output (P)
(Q) = output of firms, units
question
TOTAL REVENUE
R = P(Q)
question
Marginal Revenue
The change in revenue attributable to the last unit of output. For competitive firms MR = Market Price
question
Profits of perfectly competitive firm
π = PQ − C(Q)
question
Profit Max. Under Perfect Comp.
(look at graph in notes)
question
Competitive Output Rule:
To maximize profits a perfectly competitive firm produces the output at which price equals marginal cost in the range over which marginal cost increases
P = MC(Q)
question
Minimizing Losses
If losses are sustained in long run → firm should *exit*
question
Short Run Operating Loses
Short Run → continue to produce
*if firm shuts down, losses = fixed costs
(look at graph in notes)
question
The Decision to Shut Down
Shut down if AVC > Dƒ = Pι = MR
(look at graph in notes)
question
Short Run Out Decisions Under Perfect competition
SHUT DOWN
if P < AVC
the firm should shut down
question
Long Run Decisions
As more firms enter the industry, industry supply curve shifts→RIGHT
° lowers ↓ equilibrium price
°individual demand curve for a form shifts down ↓ LOWERS PROFIT
question
Entry and Exit: The Market and Firm's Demand
(look at graphs in notes)
question
Long Run Competitive Equilibrium
Perfectly competitive firms produce level of output such that
1. P = MC
2. P = min AC
(look at graph in notes)
question
Monopoly
A market structure, single firm serves an entire market for a good that has no close substitutes
question
Monopoly Power
Local Monopoly → Lubbock Power & Light

Market Demand for product = firm demand
Monopolists can change as much as they want (outside legal restrictions) BUT it is up to the consumer how much they purchase
*Monopolists are restricted by the consumers*
question
Patents and Other Legal Barriers
°Government may grant individual firm a monopoly right
°Patent System: gives inventor of new product the exclusive right to sell a certain product for a given period
question
A form of advertising where a firm attempts to increase the demand for its brand by differentiating its product from competing brands
question
Brand Equity
question
Niche Marketing
A marketing strategy where goods and services are tailored to meet the needs of a particular segment of the market
question
Green Marketing
A form of niche marketing where firms target products toward consumers who are concerned about environmental issues
question
Brand Myopic
A manager or company that rests on a brand's past laurels instead of focusing on emerging industry trends or changes in consumer preferences
question
One Shot Games, Simultaneous-move
(look at notes, table 4x4 graph)
question
Nash Equilibrium
NO player can improve his payoff by unilaterally changing his own strategy, given other players strategy
Put yourself in rivals shoes: if you don't have a dominant strategy look at the game and determine opponents dominant strategy and go off that
(best he/she can do given other players decision)
question
Multistage Games
Players makes sequential decisions rather simultaneously summarizes players, info, strategies, sequence of moves and payoffs
(example in notes, tree diagram)
question
Sub Game Perfect Equilibrium
1. Nash Equilibrium
2. Neither player can improve by changing his strategy
question
Cournot Oligopoly
Characteristics
1. Few firms in market serving many consumers
2. Forms produce either homo or differentiated products
3. Each firm believes rivals will hold their output constant if it changes its output
4. Barriers to entry EXIST
question
Reaction/Response Function
Suppose 2 firms→ π max for firm 1 depends on firms 2's output level
→greater output level by firm 2
→lower π max for firm 1

Definition: Function defining π max level of output for a firm for a given output levels of another firm

π max level output for:
Firm 1: Q₁ = r₁ (Q₂)
Firm 2: Q₂ = r₂ (Q₁)
question
Collusion
When a market is only dominate by a few firms, firms can benefit at cost of consumers by "agreeing" to restrict output and charge higher prices
question
Bertrand Oligopoly
Characteristics
1. Few firms in market serving many consumers
2. Firms produce identical products and constant MC
3. Firms engage in price competition and react optimally to prices charged by competitors
4. Consumers have perfect information and NO transaction costs
5. Barriers to entry EXISTS
1 of 58
question
Successful operation requires manager to do what?
optimally choose the quantity and types of inputs to use in the production process
question
The Production Function
k = capital (machine)
L = labor (people)
Q = Level output produced in production

Q = F(k,L)
This is the max output produced with k units and L units
question
Short Run
Fixed factors (fixed factors can not be changed)
Variable factors (inputs managers can adjust to alter production)
Short Run = time frame in which factors are fixed
question
Long Run
Horizon over which the manager can adjust all factors of production
Example: Takes a company 3 years to acquire additional capital
(short run: under 3 years, long run: 3 years)
question
Total Product
Max level of output that can be produced with a given amount of inputs
question
Average Product
Measures of output produced per capital/labor
APκ = Q/K
APι = Q/L

(look at graph in notes)
question
Marginal Product
MPκ = δQ/δK
MPι = δQ/δK

(look at graph in notes)
question
Value Marginal Product
Value of the output produced by the last unit of an input

VMPι = P × MPι
VMPκ = P × MPκ
question
Cost Minimization
Producing output at the lowest cost possible
→ producers concerned with cost minimization because of economic scarcity
→ if no scarcity producers wouldn't care about production cost
→ to maximize profit, minimize production cost
question
Cost Minimizing Input Rule
To minimize cost of producing at a given level of output
*marginal product per dollar should be equal for all inputs

MPι/W = MPκ/r
or
MPι/MPκ = W/r
question
Cost Minimizing Input Rule Example
Lawn Service: 5 small mowers and 2 large mowers

Marginal Product:
Small → 3 lawns per day
Large → 6 lawns per day

Rental Price
Small = \$10/day
Large = \$25/day

MPs → marginal product small mower
MPι → marginal product large mower
Ps = small \$10/day (rental price)
Pι = large \$25/day (rental price)

MPs/Ps = MPι/Pι = 3/\$10 > 6/\$25

Firm NOT cost minimizing
SHOULD USE FEWER LARGE AND MORE SMALL
question
Optimal Input Substitution
To minimize cost of producing a given level of output, the firm should use less of an input and more of other inputs when that input price rises
question
Short Run
period of fixed inputs (some)
question
Total Cost
Sum of fixed and variable costs.
Total Costs in Short Run consists of
1. cost of fixed inputs (FC)
2. cost of variable inputs (VCQ)
→change when output changes
question
Average Fixed Costs
AFC = FC/Q
question
Average Variable Costs
Measure of variable costs per unit produced

AVC = VC(Q)/Q
question
Average Total Cost
measure of total costs on per unit basis

ATC = C(Q)/Q
or
TC/Q
or
ATC = AVC + AFC
question
Marginal (Incremental) Costs
the cost of producing an additional unit of output

MC = ∆C/∆Q
question
Sunk Costs
a cost forever lost after paid
→irrelevant to decision making
→nonrefundable
question
Irrelevance of Sunk Costs
Decision maker should ignore sunk costs to max profits or minimize losses
question
Cubic Cost Function
provides reasonable approximation to any cost function

C(Q) = ƒ +aQ + bQ² + cQ³

a, b, c → constants
ƒ → fixed costs
question
Marginal Cost for Cubic Costs
MC(Q) = a + 2bQ + 3cQ²

*MC(Q) = δC/δQ
question
Multiple Output Cost Functions Example
Toyota produced cars, vans, SUV's, and trucks
Dell produces many computers and printers
Cost function for muli-product firm = C(Q₁,Q₂)
Q₁ = product 1 output
question
Economies of Scope
If it is cheaper to produce two good together you have economies of scope (Pizza Hut and Taco Bell example)

Mathematically:
C(Q₁,0) + C(0,Q₂) > C(Q₁,Q₂)
question
Cost Complementarity
When the marginal cost of producing one good is decreased by producing more of another good
EXAMPLE: studying for one test and it helps with another

δMC₁/δQ₂ < 0

δMC₁ → Marginal cost of good 1
δQ₂ → output of second good
question
Summary of the properties of Quadratic Multi-Cost Function
1. complementarity when a < 0
2. economies of scope when ƒ - aQ₁Q₂ > 0
question
Perfect Competition
a) market characteristics
b) market demand vs. firm demand
c) profit max rule
i. economic profits
ii. operating loss
iii. shut down rule
d) long run competitive equilibrium
question
Perfect Competition Key Conditions
1. many buyers and sellers, each is "small" relative to market
2. each firm produced homogeneous product in market
3. buyers and sellers have perfect information
4. NO transaction costs
5. free entry/exit
→consumers view product of all forms in market as *perfect substitutes*
→perfect info: consumers know quality and price
→all firms charge same price and determined by buyers/sellers
question
Demand and Market and Firm level
(look at graph in notes)
question
Maximizing Profits:Perfect Competition
Demand for individual firms product = market price of output (P)
(Q) = output of firms, units
question
TOTAL REVENUE
R = P(Q)
question
Marginal Revenue
The change in revenue attributable to the last unit of output. For competitive firms MR = Market Price
question
Profits of perfectly competitive firm
π = PQ − C(Q)
question
Profit Max. Under Perfect Comp.
(look at graph in notes)
question
Competitive Output Rule:
To maximize profits a perfectly competitive firm produces the output at which price equals marginal cost in the range over which marginal cost increases
P = MC(Q)
question
Minimizing Losses
If losses are sustained in long run → firm should *exit*
question
Short Run Operating Loses
Short Run → continue to produce
*if firm shuts down, losses = fixed costs
(look at graph in notes)
question
The Decision to Shut Down
Shut down if AVC > Dƒ = Pι = MR
(look at graph in notes)
question
Short Run Out Decisions Under Perfect competition
SHUT DOWN
if P < AVC
the firm should shut down
question
Long Run Decisions
As more firms enter the industry, industry supply curve shifts→RIGHT
° lowers ↓ equilibrium price
°individual demand curve for a form shifts down ↓ LOWERS PROFIT
question
Entry and Exit: The Market and Firm's Demand
(look at graphs in notes)
question
Long Run Competitive Equilibrium
Perfectly competitive firms produce level of output such that
1. P = MC
2. P = min AC
(look at graph in notes)
question
Monopoly
A market structure, single firm serves an entire market for a good that has no close substitutes
question
Monopoly Power
Local Monopoly → Lubbock Power & Light

Market Demand for product = firm demand
Monopolists can change as much as they want (outside legal restrictions) BUT it is up to the consumer how much they purchase
*Monopolists are restricted by the consumers*
question
Patents and Other Legal Barriers
°Government may grant individual firm a monopoly right
°Patent System: gives inventor of new product the exclusive right to sell a certain product for a given period
question
A form of advertising where a firm attempts to increase the demand for its brand by differentiating its product from competing brands
question
Brand Equity
question
Niche Marketing
A marketing strategy where goods and services are tailored to meet the needs of a particular segment of the market
question
Green Marketing
A form of niche marketing where firms target products toward consumers who are concerned about environmental issues
question
Brand Myopic
A manager or company that rests on a brand's past laurels instead of focusing on emerging industry trends or changes in consumer preferences
question
One Shot Games, Simultaneous-move
(look at notes, table 4x4 graph)
question
Nash Equilibrium
NO player can improve his payoff by unilaterally changing his own strategy, given other players strategy
Put yourself in rivals shoes: if you don't have a dominant strategy look at the game and determine opponents dominant strategy and go off that
(best he/she can do given other players decision)
question
Multistage Games
Players makes sequential decisions rather simultaneously summarizes players, info, strategies, sequence of moves and payoffs
(example in notes, tree diagram)
question
Sub Game Perfect Equilibrium
1. Nash Equilibrium
2. Neither player can improve by changing his strategy
question
Cournot Oligopoly
Characteristics
1. Few firms in market serving many consumers
2. Forms produce either homo or differentiated products
3. Each firm believes rivals will hold their output constant if it changes its output
4. Barriers to entry EXIST
question
Reaction/Response Function
Suppose 2 firms→ π max for firm 1 depends on firms 2's output level
→greater output level by firm 2
→lower π max for firm 1

Definition: Function defining π max level of output for a firm for a given output levels of another firm

π max level output for:
Firm 1: Q₁ = r₁ (Q₂)
Firm 2: Q₂ = r₂ (Q₁)
question
Collusion
When a market is only dominate by a few firms, firms can benefit at cost of consumers by "agreeing" to restrict output and charge higher prices
question
Bertrand Oligopoly
Characteristics
1. Few firms in market serving many consumers
2. Firms produce identical products and constant MC
3. Firms engage in price competition and react optimally to prices charged by competitors
4. Consumers have perfect information and NO transaction costs
5. Barriers to entry EXISTS

## Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
\$26
The price is based on these factors:
Number of pages
Urgency
Basic features
• Free title page and bibliography
• Unlimited revisions
• Plagiarism-free guarantee
• Money-back guarantee
On-demand options
• Writer’s samples
• Part-by-part delivery
• Overnight delivery
• Copies of used sources
Paper format
• 275 words per page
• 12 pt Arial/Times New Roman
• Double line spacing
• Any citation style (APA, MLA, Chicago/Turabian, Harvard)

## Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

### Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

### Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

### Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.