1. 1 Welcome to EC 209: Managerial Economics- Group A By: Dr. Jacqueline Khorassani Week Six

2. 2 Managerial Economics Week Six- Class 1 Monday, October 8 11:10-12:00 Fottrell (AM) 11:10-12:00 Fottrell (AM)

3. 3 This week’s Aplia Assignment IS DUE BEFORE 5:00 PM tomorrow

4. 4 I received a question I don't fully understand a question on pure price effect and bandwagon effect. The question for example says there is a fall in price from $70 to $30 and you are told to get the change in quantity demanded and then you are asked what is the pure price effect and the bandwagon effect. I can't do that bit. I did the practice assignment first but i still can't answer this question. I don't fully understand a question on pure price effect and bandwagon effect. The question for example says there is a fall in price from $70 to $30 and you are told to get the change in quantity demanded and then you are asked what is the pure price effect and the bandwagon effect. I can't do that bit. I did the practice assignment first but i still can't answer this question.

5. 5 My answer The price effect refers to buying more because price goes down. The price effect refers to buying more because price goes down. The bandwagon effect refers to buying more because others buy more. The bandwagon effect refers to buying more because others buy more. The initial demand curve in the question shows the combined effect. The initial demand curve in the question shows the combined effect. Then they tell you how much of the increase in quantity demand is because of price. Then they tell you how much of the increase in quantity demand is because of price. So what is left over is because of the bandwagon effect. So what is left over is because of the bandwagon effect.

6. 6 Framing: the importance of how choices are presented to individuals Suppose there is a rare fatal disease that will kill 600 people. Individuals are asked to choose between 2 options for reducing the death rate. Group 1 is asked to choose between A and B. Suppose there is a rare fatal disease that will kill 600 people. Individuals are asked to choose between 2 options for reducing the death rate. Group 1 is asked to choose between A and B. A: Save 200 people with certainty A: Save 200 people with certainty B: Save 600 people with a probability of 0.333 and save nobody with a probability of.666 B: Save 600 people with a probability of 0.333 and save nobody with a probability of.666 72% of people would choose A 72% of people would choose A Yet there is no statistical difference between A & B Yet there is no statistical difference between A & B

7. 7 Framing: the importance of how choices are presented to individuals Suppose there is a rare fatal disease that will kill 600 people. Individuals are asked to choose between 2 options for reducing the death rate. Group 2 is asked to choose between options C and D Suppose there is a rare fatal disease that will kill 600 people. Individuals are asked to choose between 2 options for reducing the death rate. Group 2 is asked to choose between options C and D C: 400 people will die C: 400 people will die D: 0.333 chance that nobody will die while there is a 0.666 chance that all 600 people will die. D: 0.333 chance that nobody will die while there is a 0.666 chance that all 600 people will die. 78% of people would choose D. 78% of people would choose D. Yet there is no statistical difference between C & D Yet there is no statistical difference between C & D

8. 8 How can predict people’s behaviour? Are they any rules? Yes, Rules of Thumb 1. Availability or Accessibility –If I remember it then it must have happened a lot –I remember most recent things better –People tend to assign too much weight to recent information when making decisions.

9. 9 Rules of Thumb 2. Representative Bias. –If Kathleen is a shy person, what is the likelihood that she is a librarian rather than a sales person? –Very high –Most librarians are shy

10. 10 But look, there are more shy salespersons around.

11. 11 Rules of Thumb 3. Valuations of familiar products are strongly influenced by arbitrary anchors such as the last two digits of one’s social security number.

12. 12 Choosing between Two Apartments: which one?

13. 13 Adding an Irrelevant Alternative C: Now which one? Studies show when you add C to the package, most people choose B

14. 14 Chapter 5 of Baye: Production Analysis What is a production function? What is a production function? –It is a function that show the maximum amount of output that can be produced with K units of capital and L units of labor. –Q = F(K,L)

15. 15 How is short-run different from long run? In short run there is at least one fixed factor of production (assumed to be K) In short run there is at least one fixed factor of production (assumed to be K) Example of Short run production function: Example of Short run production function: Q = (16).5 L.5 = 4 L.5 How much is output when 100 units of labor are used? How much is output when 100 units of labor are used? Q = 4 (100).5 = 4(10) = 40 units

16. 16 In long run all inputs (factors of production) are variable In long run all inputs (factors of production) are variable Q = (16).5 L.5 K 0.5

17. 17 What is the difference between fixed /variable factors of production? The amount of fixed factor of production can not be change quickly The amount of fixed factor of production can not be change quickly The amount of variable factor of production can be changed quickly The amount of variable factor of production can be changed quickly

18. 18 What is a Cobb- Douglas production function? What is a Cobb- Douglas production function? Capital and labor are imperfect substitutes Capital and labor are imperfect substitutes Example: in production of wheat K and L are imperfect substitutes Example: in production of wheat K and L are imperfect substitutes Q = K a L b Q = K a L b

19. 19 What is a Leontief production function? Capital and labor are perfect complements. Capital and labor are perfect complements. Example: in production of taxi service K and L are perfect complements Example: in production of taxi service K and L are perfect complements Q = min {bK, cL} Q = min {bK, cL}

20. 20 Managerial Economics- Group A Week Six, Class 2 Week Six, Class 2 –Tuesday, October 9 –15:10-16:00 –Cairnes Aplia Assignment is due before 5PM today Aplia Assignment is due before 5PM today

21. 21 Let’s produce widgets Production in short run Production in short run –Fixed input = stapler= K –Variable input = labor=L –Production per minute –I need one labor –Now let’s hire one more labor –And more

22. 22 Let’s produce widgets DayKLQ 1116 21216 31317 41414 5 6 7

23. 23 Managerial Economics Week Six- Class 3 Week Six- Class 3 –Thursday, October 11 –15:10-16:00 –Tyndall Next Aplia Assignment is due before Wednesday, October 17 at 5 PM Next Aplia Assignment is due before Wednesday, October 17 at 5 PM

24. 24 We produced widgets in our last class. Take your papers out and let’s check our numbers Take your papers out and let’s check our numbers We will go through everything but Part 3. We will go through everything but Part 3. –Go over part 3 on your own and ask me questions

25. 25 Labor Productivity Figures KLQAPMP 100---- 1166/1=66/1=6 121616/2=810/1=10 13175.71 14143.5-3 AP L = Q/L MP L = ΔQ/ΔL

26. 26 Q L Increasing Marginal Returns Diminishing Marginal Returns Negative Marginal Returns MP AP Productivity Graphs 1 6 2 8 10 5.7 1 3 4 3.5 Q

27. 27 Total Cost Figures KLQFCVCTC 100200 20+0 = 20 116205 20+5 =25 1216201030 1317201535 1414202040 Price of K = $20 Wage = $5/worker

28. 28 Cost Graphs FC: Costs that do not change as output changes. Sunk Cost: A cost that is forever lost after it has been paid. $ Q FC TC = VC + FC VC(Q) 20 16 10 30

29. 29 Average and Marginal Cost Figures QFCVCTCMCAFCAVCATC 020020-------- 6205255/6=0.8 20/6 =3.3 5/6=0. 8 4.1 162010300.51.30.61.9 1720153551.20.92.1 14202040---1.41.42.8 MC = ΔTC/ΔQ= cost of additional unit of output AFC = FC/Q, AVC=VC/Q, ATC = TC/Q

30. 30 Cost Graphs $ Q ATC AVC AFC MC 16 0.5

31. 31 Note: FC = AFC * Q $ Q ATC AVC 1.9 0.6 16 AFC Fixed Cost FC= $20

32. 32 Note: VC= AVC * Q $ Q ATC AVC 0.6 Variable Cost 16 VC = $10

33. 33 Revenue and Profit QTRTCProfit 0020-20 62425 16643034 17683533 14564016 P widget = $4 Profits are maximized at Q = 16

34. 34 How many workers should the manager hire? In our example 2 In our example 2 In general In general The answer relies on the value of the marginal product of labor (VMP) The answer relies on the value of the marginal product of labor (VMP) –VMP = MP L * P widgets The rule: hire labor until the value of marginal product of labor equals the wage: The rule: hire labor until the value of marginal product of labor equals the wage:

35. 35 In our example When L = 2 When L = 2 –VMP = $4 * 10 = $40 –W = $5 –VMP> W When L = 3 When L = 3 –VMP = $4 * 1 = $4 –W = $5 –VMP <W Need to hire somewhere between 2 to 3 workers