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I need help understanding and applying concepts of managerial economics.

1. The manager of American Box Company conducts a study and notes his 10 workers produce approximately 2,000 boxes per week. He assumes that if he can employ 20 workers, the number of boxes will increase to 4,000 per week, and if he can employ 30 workers, the number of boxes per week will reach 6,000. Explain why the manager's assumption is correct or incorrect.

2. ElectraCorp has been earning zero economic profit for the past six months. Would it be wise for ElectraCorp to cease operations? Why or why not?

3. What is economic profit?

4. The best price and cost scenario occurs when the price of the company's product equals marginal cost. Explain why this is so.

5. Why wouldn't it be better for the price of a product to exceed its marginal cost?

6. Describe the four market structures of pure competition, pure monopoly, monopolistic competition, and oligopoly.

7. Under the monopolistic competition model where the vast majority of firms operate, what role is played by product differentiation?

8. Why are entrepreneurs the most important people in the successful operation of many firms?

9. Describe the Coase theorem and its approach to solving the externality problem.

10. Some people believe that the minimum wage should be raised to $10.00 per hour "to help poor people escape from poverty." How would raising the minimum wage to $10.00 per hour actually harm poor people, businesses, and consumers in general?

11. As manager of Centrix Diagnostics Services, you receive exciting news from the R & D division that a new technological breakthrough (that will very soon be discovered by all other diagnostics service companies) will cut your firm's costs of providing services by 15%. Should you recommend the current price for the services be maintained after implementing the new technology in the hopes of earning a substantial profit, or will it be wiser to lower the price for the services? Explain.

12. How do tariffs imposed by the U.S. government on foreign-made steel impact the domestic price of U.S.-made steel?

13. Who gains and who loses from a tariff?

14. How will a quota imposed by the U.S. government on foreign-made machinery impact the domestic price of the same kind of machinery made by U.S. companies?

15. Who gains and who loses from a quota?

16. "We need all kinds of trade restrictions against foreign competition to protect American jobs!" Explain why this argument is seriously flawed.

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Solution Summary

Raising the minimum wage and other economic inquiries are considered.

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1. The manager of American Box Company conducts a study and notes his 10 workers produce approximately 2,000 boxes per week. He assumes that if he can employ 20 workers, the number of boxes will increase to 4,000 per week, and if he can employ 30 workers, the number of boxes per week will reach 6,000. Explain why the manager's assumption is correct or incorrect.

Let's make the calculation first. If 10 workers produce 2,000 boxes per week than 1 worker can produce 2,000/10 =200 boxes per week. So if the production function is directly proportional with the number of employees 20 employees can produce 20*200= 4,000 boxes and 30 workers can produce 30*200= 6,000 boxes per week. I think this assumption is correct.

2. Electra Corp has been earning zero economic profit for the past six months. Would it be wise for Electra Corp to cease operations? Why or why not?

No it wouldn't be wise. Zero economic profit means being at the breakeven point. It is the volume level at which net income equals zero or the level at which a corporation covers its fixed costs and the firm does not have to cease its operations. However if the price of the product is just sufficient to cover the business's average variable costs, it would be wise for the firm to cease operations. Briefly as long as it can cover the variable costs, Electra Corp should continue to produce.

3. What is economic profit?

A firm is said to be making an economic profit when its average total cost is less than the price of the product or service at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price.

4. The best price and cost scenario occurs when the price of the company's product equals marginal cost. Explain why this is so.

Because the price represents the marginal revenue where it cuts the marginal cost curve (which is also the supply curve for the firm) and if marginal revenue equals marginal cost, then the firm produces the profit-maximizing ...

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Umut Oltulu, MBA
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  • BSc, Dokuz Eylul University
  • MBA, Texas A&M University-Kingsville
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