Managerial Economics

Question 1:

X-Corporation produces a normal good.  Y corporation produces a good (an inferior one)- under the name Y.

  1. If consumer income increases, demand for good x will increase: this is the definition of a normal good- when consumer incomes increase, demand for a normal good will increase as well.
  2. If consumer income decreases, demand for good y will also decrease. That is, the definition of an inferior good is: an increase in income will not lead to an increase in consumption of inferior good.  The opposite is true for a decrease in income. Thus, a decrease in income will lead to an increase in consumption.
  3. If the price of good y decreases, as a substitute good, that should lead, all things equal, to a decrease in the consumption for x. That is because  a decrease in the price of substitute goods will lead to a decrease in the demand for the good whose price does not decrease.


  1. In theory, one might posit that y is a lower-quality good because individuals purchase it less frequently when their income increases. But in reality, this not need be the case.  For example, white bread might be an inferior good (although in Alfred Marshall’s time he posited differently) . If an individual has an increase in income, they might consume such things as rolls and croissants rather than bread.  However, that does not mean that white bread is lower in quality, it just fits a different set of preferences.


  1. Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations:
  2. price of input a increase, supply of good x decreases
  3. an excise tax of $1 is imposed on x- supply of good x decreases
  4. an ad valorem tax of 5 percent is imposed on good X- supply of good x decreases
  5. a technological change reduces the cost of producing additional units of x- supply of good x increases


  1. Good y is a substitute to good x- we know this because the coefficient for good y is positive indicating that if the price for good y increases, the quantity for x increases. This means consumers will switch from good Y to good X if the price increases.

Good z is a complement to Good x because an increase in price z leads to a decrease in the quantity of x purchased.  That is, these goods are purchased together resulting in an increase in price Z leading to a reduced consumption of good X.

  1. Good X is a normal good- we know this because the coefficient related to income is positive. That is, an increase in income will lead to an even greater consumption of good X.
  1. 1,200-.5(4,910)+ .25(5900)- 8(90)+.10(55,000)

= 5000 units of good X

  1. It is difficult to tell with precise accuracy what will happen, but let’s each event one at a time:

– A congress $.50 per pound tariff on all raw imported sugar- the primary input on the product will -ead to a price increase for cola (although the level of the price increase might be different across different producers) due to an increase in production costs.

– a new advertisement campaign by coke and pepsi to distinguish their products from others will further push up the price of their products without a clear distinction on their

Overall, the equilibrium price will increase and the quantity will decrease for the cola market.

There are numerous ways to approach this question. The first observation is: a price increase in cigarettes may be different than an increase in the price of the taxes on cigarettes- that achieves a similar effect.  That is, in the first scenario the cigarette company is arguably in control or raising (and lowering) prices that leads to the (re) establishment of an equilibrium.  In a tax example, however, not only does the government control the rate of taxation (which could be adjusted if cigarette companies decrease their prices), but prices would arguably remain more “sticky.”  That is, what is unclear from the example is: what is the time frame from which a resstablishment of the equilibrium is: this is important because even though equilibrium is established, it still might lead to a lower in smoking over a period of time.

175-P= 2p-200



The price of a decontaminated pint of blood increased from $80 to $125, likely due to the extra processes involved in processing the blood.

2(125)- 200

250-200= 50

50 pints of blood will be produced in the US

  1. With oil production down on a daily basis, the price for gasoline will increase leading to a decrease in supply. The market for small cars will likely benefit in that they are more gas efficient (an assumption); if the shock to gas prices is prolonged, one could imagine that it would lead to an increase of demand for smaller cars.