1. Long run real interest rates are expected to increase. An accountant and a MBA student(who just finished his course of Managerial Economics) were interviewed regarding the effect of this increase. Keeping all else constant, their answer would likely differ. How do you guess the interviewed will answer? Does the difference in response matter? Why or why not? HINT: real interest rates are adjusted for inflation where nominal interest rates are not adjusted for inflation. Consider explicit costs vs.implicit cost
2.Many cities have experienced a substantial decrease in the amount of garbage being collected after they changed from levying a flat tax on each household to a system where the homeowner is charged a fee for each bag or can picked up. Why would you think this have been a result of a change in the quantity demanded rather than a result of a change in demand? Why would you recommend a fee per bag rather than the flat fee?
3. Define three types of elasticity of demand. Indicate how you would use information from recent research paid by your company that the own price elasticity of your product is -1.2 and not -0.8 as previously thought. HINT: consider elastic demand(-1.2) vs inelastic demand (-0.8). Also consider price, cross price and income.
4. A magazine, in an article dealing with management, wrote, “when he took over the furniture factory three years ago…(the manager) realized almost immediately that it was throwing away at least $100,000 a year worth of wood scrap. Within a few weeks, he set up a task force of managers and workers to deal with the problem. And within a few months, they reduced the amount of scrap to $7000 worth (per year). ” Was this necessarily an economically efficient move? Explain your answer. HINT: marginal revenue > marginal cost
5.If all the assumptions of perfect competition hold, why would firms in such an industry have little incentive to carry out technologistal change or much research and development in any of the competetive industries? HINT: consider homogenous, perfect knowledge and the considering a patent.