MBA MANAGERIAL ECONOMICS MIDTERM TEST PREP

1. Monthly demand and cost relations for Presto’s frozen dessert maker are as follows: P = $60 - $0.005Q; TC =
$100,000 + $5Q + $0.0005Q2
∂ TC 2−1
(a)Compute the marginal cost. MC= =5+0.0005( 2) Q =¿ MC=5+0.001 Q (b)Compute
∂Q
the profit-maximizing quantity. To find the profit-maximizing price, we need to find the price at which MR = MC.
∂TR 2−1
TR=PxQ= ( 60−0.005 Q ) Q=60 Q−0.005Q 2 = MR= =60−0.005( 2) Q =
∂Q
MR=60−0.01Q Profit maximization requires: MR = MC, that is,
55
60−0.01Q=5+0.001Q → 60−5=0.001 Q+ 0.01Q →55=0.011 Q →Q= →Q=5,000 (c
0.011
)Compute the profit-maximizing price. Plugging the value of Q from above result into the demand equation yields,
P=60−0.005 Q=60−0.005 ( 5,000 )=60−25=35 → P=$ 35
(d)Compute Presto’s total monthly profit. ( d ) Profit=TR−TC = P.Q - TC ¿ ( P .Q ¿−¿ ($100,000 +
100,000+5 ( 5,000 )+ 0.0005(5,000)2
$5Q + $0.0005Q2) ]= Profit=$ 37,500
¿ [ 35 ( 5,000 ) ]−¿

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2. The marketing and accounting departments of Pharmed Caplets, Inc. have provided you with the following

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monthly total revenue and total cost information: TR = $900Q - $0.1Q2; TC = $36,000 + $200Q + $0.4Q2 (a)

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∂ TC
MC= =200+0.4 (2)Q2−1=MC=200+ 0.8 Q

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Compute the profit maximizing quantity.
∂Q

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To find the profit-maximizing price, we need to find the price at which MR = MC.
MR=
∂TR
=900−0.1(2)Q2−1=¿rs e
MR=900−0.2Q . Profit maximization requires: MR = MC,
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∂Q
that is, 900−0.2Q=200+0.8 Q →900−200=0.8Q+ 0.2Q →700=→Q=700 (b) Compute the
profit-maximizing price. Plugging in the value of Q from above result into the TR equation yields,
TR 581,000
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TR=900Q−0.1 Q2=900 ( 700 )−0.1 ( 7002 ) =630,000−49,000=TR=581,000→ P= = =830 → P=$

Q 700
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( c ) Profit=TR −TC=¿ ( 581,000 ¿−¿ ($36,000 + $200Q +

(c) Compute its total monthly profit.
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36,000+200 ( 700 ) +0.4(700)2

$0.4Q2) ] = $209,000 Profit=$ 209,000
¿ [ 581,000 ] −¿
3. Price of the Indigent Care Center, Inc. is constant at $50. This means that P = MR = $50. Total cost relation for the
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company is as follows: TC = $78,000 + $18Q + $0.002Q2

Calculate the output level that will maximize the profit.
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2 2
( a ) MC= ∂ TC = ∂78,000 + ∂ 18Q + ∂ 0.002Q =0+18 ∂ Q +0.002 ∂Q =18+ 0.002(2) Q2−1=18+0.004 Q
∂Q ∂Q ∂Q ∂Q ∂Q ∂Q
MC=18+0.004 Q
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When price is stable (constant), price equals marginal revenue, therefore, MR = $50 MR=$ 50
Profit maximization requires: MR = MC, that is,
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32
50=18+ 0.004 Q→ 50−18=0.004 Q →32=0.004 Q →Q= =8,000 →Q=8,000
0.004
¿
Profit=TR−TC=P . Q−TC=¿ ( 50 ¿(8,000) ¿−¿ (78,000 +
(b) Calculate the maximum profit.
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78,000+18 ( 8,000 ) +0.002(8,000)2

18Q + 0.002Q2) ]=$ Profit=$ 50,000
¿ [ 400,000 ] −¿
4. Suppose the Indigent Care Center, Inc. in question (3) is a not-for-profit organization and wants to provide as
much patient care as possible with zero profit, then; Compute the company’s optimal quantity.
For a not-for-profit organization, Profit=0 →TR−TC=0 →TR=TC → P . Q=¿ 78,000 + 18Q +
0.002Q2

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 ¿ ( 50 ) . ( Q )=78,000+ 18Q+ 0.002Q2 → 50 Q=78,000+18 Q+0.00 2 Q 2 → 0=−50 Q+78,000+18 Q+0.002Q 2 → 0
0.002 Q 2 → 0.002Q 2−32Q+78,000 = 0
The above equation resembles the equation of a quadratic function: a X 2 +bX + c Where,
a=0.002, b=−32, c=78,000,∧X =Q Such an equation can be solved as,
−(−32 ) ± √ (−32 ) −4 ( 0.002 )( 78,000 ) 32± √ 1,024−624 32± √ 400 32 ±20
2
−b ± √ b2−4 ac
X= , that is , Q= = =
2a 2 ( 0.002 ) 0.004 0.004 0.004
32+20 52 32−20 12
Therefore ,Q1 = = =13,000 ; Q2= = =3,000
0.004 0.004 0.004 0.004
Since both of the quantities (13,000 and 3,000) yield zero profit, the organization can choose any of the quantities.
But, since the motive of a not-for-profit organization is to also provide maximum service, it will produce 13,000
instead of 3,000.
5. The revenue and cost relations of Commercial Recording, Inc. are; TR = $3,000Q - $0.5Q2; MR =
∂TR ∂TC
=$ 3,000−$ 1 Q ; TC = $100,000 + $1,500Q + $0.1Q2; MC = =$ 1,500+ $ 0.2 Q
∂Q ∂Q
Calculate output, marginal cost, average cost, price, and profit at the average cost-minimizing activity level.
TC 100,000+1,500 Q+ 0.1Q2

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AC = = =100,000 Q−1+ 1,500+0.1Q

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Q Q
Average cost minimization requires that MC = AC, that is,

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−1 −1 −1 2
1,500+0.2 Q=100,000 Q +1,500+ 0.1Q → 0.2Q−0.1Q=100,000Q → 0.1Q=100,000Q →0.1 Q =100,00
→Q1 =1,000; Q2=−1,000

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Since output (Q) cannot be negative, therefore, Q = 1,000.
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MC=1,500+0.2 Q=1,500+ 0.2 ( 1,000 ) =1,500+ 200=MC=$ 1,700
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Now,
100,000
AC =100,000 Q−1+ 1,500+0.1Q= +1,500+0.1 ( 1,000 ) → AC=100+ 1,500+100=$ 1,700
1,000
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TR 3,000Q−0.5 Q 2
P= = =3,000−0.5 Q=3,000−0.5 ( 1,000 )=3,000−500=$ 2,500
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Q Q
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Profit=( P− AC ) Q=( $ 2,500−$ 1,700 ) 1,000= ( $ 800 ) 1,000=$ 800,000

6. The revenue and cost relations of Better Buys, Inc. are TR = $4,500Q - $0.1Q2; MR =
∂TR
=$ 4,500−$ 0.2 Q ; TC = $2, 000,000 + $1,500Q + $0.5Q2 ;
∂Q
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∂TC
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MC = $ 1,500+$ 1 Q ; Calculate output, marginal cost, average cost, price, and profit at the average
∂Q
cost-minimizing activity level.
TC 2,000,000+1,500 Q+ 0.5 Q2
AC = = =2,000,000 Q−1 +1,500+0.5 Q
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Q Q
Average cost minimization requires that MC = AC, that is,
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1,500+1Q=2,000,000 Q−1+1,500+ 0.5Q → 1Q−0.5Q=2,000,000 Q−1 → 0.5Q=2,000,000 Q−1 → 0.5Q 2=2,00

Since output (Q) cannot be negative, therefore, Q = 2,000. MC=1,500+1 Q=1,500+2,000=$ 3,500
Now,
2,000,000
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AC =2,000,000 Q−1+ 1,500+0.5 Q= +1,500+ 0.5 ( 2,000 ) → AC=1,000+1,500+1,000=$ 3,500

2,000
TR 4,500 Q−0.1 Q 2
P= = =4,500−0.1 Q=4,500−0.1 ( 2,000 )=4,500−200=$ 4,300
Q Q
Profit=( P− AC ) Q=( $ 4,300−$ 3,500 ) 2,000=( $ 800 ) 2,000=$ 1,600,000

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 7. The demand curve and the marginal revenue relations of Restaurant Marketing Services, Inc. are: P = $130 -
∂TR
$0.000125Q; MR = =$ 130−$ 0.00025Q
∂Q
(a) Calculate output, price, and total revenue at the revenue-maximizing activity level.
(a) OUTPUT- Total revenue is maximized at the output level where MR = 0, that is,
130
MR=130−0.00025 Q=0 →130=0.00025Q → Q= =520,000 ;
0.00025
( B ) PRICE=P=130−0.000125 Q=130−0.000125 ( 520,000 )=130−65=$ 65 ;
( C ) Total revenue=TR=P. Q= ( $ 65 ) ( 520,000 )=$ 33,800,000
8. Coupon Promotions, Inc. has the following demand function for its coupon books: Q = 10,000 – 5,000P +
0.02Pop + 0.4I + 0.6A
Where Q is the quantity, P is the price, Pop is population, I is disposable income per capita, and A is advertising
expenditures.
(A)Determine the demand curve faced by CPI in a typical market where Pop = 1,000,000 person, I = $35,000 and A
= $10,000. Show the demand curve with quantity expressed as a function of price
? (a)
Q=10 , 000 – 5,000 P+0.02 Pop+ 0.4 I + 0.6 A → Q=10,000−5,000 P+ 0.02 ( 1,000,000 ) +0.4 (35,000 )+ 0.6(10,00

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(B)Show the above demand curve with price expressed as a function of quantity.

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b ¿ ¿ the above demand function :Q=50,000−5,000 P →5,000 P=50,000−Q →

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50,000 Q
→ P=10−0.0002Q

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¿ −
5,000 5,000

o.
(C)Calculate the quantity demanded at the price of $5. (c)

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Q=50,000−5,000 P → Q=50,000−5,000 ( 5 ) →Q=50,000−25,000 → Q=25,000
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(D)Calculate the price necessary for the buyers to buy 5,000 units d)
P=10−0.0002Q → P=10−0.0002(5,000)→ P=10−1→ P=$ 9
(E)Calculate the point price elasticity of demand at the price of $5. (e) At P=$5:
∂Q
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Q=50,000−5,000 (5 )=50,000−25,000=25,000 Also, =−5,000 ; Therefore, price

∂P
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∂Q P 5
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elasticity: ε p= . =−5,000. =−1 ;

∂P Q 25,000
(F)Given the point price elasticity of demand in (c), would a price reduction increase its total revenue? (f) Since the
absolute value of the price elasticity is 1, the demand is unitary elastic. Therefore, lowering or raising the price
does not change the total revenue.
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9. A review of industry-wide data for the domestic wine manufacturing industry suggests the following industry
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supply function: Q = -7,000,000 + 400,000P – 2,000,000PL – 1,500,000PK + 1,000,000W

Where Q is cases supplied per year, P is the wholesale price per case, PL is the average price paid for unskilled labor,
PK is the average price of capital and W is weather measured by the average seasonal rainfall in growing areas.
(A)Determine the industry supply curve for a recent year when PL = $10, PK = 12%, and W = 25 inches of rainfall.
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Show the industry supply curve with quantity expressed as a function of price.
(A) Q = -7,000,000 + 400,000P – 2,000,000PL – 1,500,000PK + 1,000,000W
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→Q=−7,000,000+ 400,000 P−2,000,000 ( 10 )−1,500,000 ( 12 )+ 1,000,000(25)

Q=−7,000,000+400,000 P−20,000,000−18,000,000+25,000,000
Q=−20,000,000+400,000 P : Industry Supply Curve
(B)Calculate the quantity supplied by the industry at price of $50.
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(B) Quantity supplied at P=$50: Q=−20,000,000+400,000 P=¿ −20,000,000+400,000(50) =-

20,000,000+20,000,000 = 0 That is, no quantity will be supplied at the price of $50.
(C)Calculate the price necessary to generate a supply of 10,000,000.

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 (C) Q=−20,000,000+400,000 P ; 10,000,000=−20,000,000+400,000 P ;
30,000,000
10,000,000+20,000,000=400,000 P ; 30,000,000=400,000 P ; P= =$ 75
400,000

10. Shake-n-Shing, Inc. has the following relation between its marginal costs and monthly output: MC = $50 +
$0.00005Q
(A)Calculate the marginal cost at Q = 500,000.
MC=$ 50+$ 0.00005Q=50+0.00005 ( 500,000 )=50+ 25=$ 75
(B)Calculate the profit-maximizing level of output if prices are stable in the industry at $100 per bundle, and,
therefore, P = MR = $100.
(B)Profit maximization requires: MR = MC, that is,
50
100=50+ 0.00005Q →100−50=0.00005Q → 50=0.00005 Q →Q= =1,000,000 : Profit−maximizing
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