University Singapore University of Social Science (SUSS) Subject ECO201e: Managerial Economics

## Question 1

In the past, tofu was considered a low-quality food and its production is mainly from small household businesses using simple tools. Today tofu has become popular as it is considered a high-protein healthy food. At the same time, tofu production has evolved to become factory-based using modern large scale food processing technologies.

Diagram with demand and supply curves to examine and illustrate the market equilibrium for tofu over time. What does the demand-supply model predict about changes in the quantity of tofu sold and the prices of tofu over time?

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## Question 2

The schedule below shows the number of packs of candy bought in a candy shop at a variety of prices.

(a) Determine the price elasticity of demand for candy when the price of candy increases from \$2 to \$3 using the midpoint method. Classify the product based on the price elasticity of demand for candy and explain the effect on the total revenue when the price of candy increases.

(b) Determine the price elasticity of demand for candy when the price of candy increases from \$4 to \$5 using the midpoint method. Classify the product based on the price elasticity of demand for candy and explain the effect on the total revenue when the price of candy increases.

(c) Based on your answer in (a) and (b), explain the relationship between the total revenue and the price elasticity of demand for candy.

(d) A consultant suggests to the shop owner to set the price of candy at \$3 in order to maximize profit. Do you agree? Explain.

## Question 3

Tom has a weekly allowance of \$24 and all of which he spends on pizza and movie rentals. Prices of pizza and movie rentals are \$6 per slice of pizza and \$3 per movie rental, respectively. Assume that slices of pizza and movie rentals are available only in whole-number amounts.

(a) Identify all the possible combinations of slices of pizza and movie rentals for Tom.

(b) Tom’s total utility from the amounts of slices of pizza and movie rentals consumed per week is shown in the table below. Apply the rational spending rule to determine the quantities of slices of pizza and movie rentals that are consistent with this rule. Hence or otherwise, determine and explain the amount of pizzas and movie rental that Tom should consume each week in order to maximize his total utility.

## Question 4

Alpha is the only company that produces smartphones in a city. The diagram below depicts the demand and the cost function of producing smartphones by Alpha.

(a) Compute the demand equation for Alpha.

(b) Identify the optimal output and the price for Alpha. Calculate the profit or loss for Alpha at this output.

(c) Suppose that the CEO of Alpha decides that maximizing social welfare is more important than maximizing profits. Calculate the price, output, and profit or loss when Alpha produces smartphones at the social welfare-maximizing output level.

(d) Compare the welfare between Alpha as a profit maximizer and welfare maximizer. Is the society better off with Alpha as a social welfare-maximizing firm or as a profit-maximizing firm? You need to consider both the short-run and the long-run situation and explain.

(e) How would Alpha sustain the output level that maximizes the social welfare for the society? Explain.

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