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Assignment 01 Managerial Economics - Saturday, 6:30-9:30: Due Date: April15, 2020

This document contains a two-part assignment on managerial economics due on April 15th. Part one involves analyzing a principal-agent problem where a business owner's manager is acting in their own self-interest rather than maximizing profits for the owner. This could be addressed by incentivizing the manager's compensation to be linked to business performance. Part two asks students to (a) explain how consumer expectations of future price increases could shift the demand curve for tomatoes and (b) construct the market demand curve and find the equilibrium using supply and demand schedules for two consumers of perfume. The market equilibrium price is calculated as the average of the individual equilibrium points and is determined to be 225 bottles of perfume

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Mahek Anwar Ali
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106 views3 pages

Assignment 01 Managerial Economics - Saturday, 6:30-9:30: Due Date: April15, 2020

This document contains a two-part assignment on managerial economics due on April 15th. Part one involves analyzing a principal-agent problem where a business owner's manager is acting in their own self-interest rather than maximizing profits for the owner. This could be addressed by incentivizing the manager's compensation to be linked to business performance. Part two asks students to (a) explain how consumer expectations of future price increases could shift the demand curve for tomatoes and (b) construct the market demand curve and find the equilibrium using supply and demand schedules for two consumers of perfume. The market equilibrium price is calculated as the average of the individual equilibrium points and is determined to be 225 bottles of perfume

Uploaded by

Mahek Anwar Ali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Assignment 01

Managerial Economics – Saturday, 6:30-9:30


Due date: April15, 2020
Total Marks: 05

Name: Muhammad Atique Hanif Campus: Airport Campus


Enrollment ID: 13900
Question 1 2.5 Marks
The shareholder of Al-Karam wants to maximize his profits by selling his goods in the
larger quantities. In order to achieve his target (s) he hired a manager to look after his business.
However, the manager instead of maximizing business profits started maximizing his own
interest by selling the designs in black to the competitor’s designers.

a. Analyze the above situation and explain the possible problem that might occur for Al-
Karam.

 After analyzing the above situation it is possible that the problem that might occur for Al-
Karam is a principal agent problem as in this case the agent i.e the manager is looking
and doing the things for his own self interest which is totally opposite to the interest of
the business.It is a moral hazard problem. The principal-agent problem occurs when there
is a conflict in priorities between the owner of a property and the person to whom control
of the property has been given.

b. If the wealth of the stockholder is decreasing ever since he hired the new manager, using
EVA rule of thumb explain what would be the value of EVA and what is its economic
interpretation.

 Al-Karam(principal) can solve this problem by increasing the salary of the


manager(agent) or by creating incentives which force the agent to work in the best
interest of the business .He can also link the performance of the business with the
manager's salary to overcome the moral hazard.In the worst case he can even replace the
manager.
Question 2 2.5 Marks
a. Keeping the present rate of inflation (increase in the general price level) in mind,
consumers living in Karachi are anticipating that the price of tomatoes will go up just like
it did last year in November. In your opinion explain if there would be any impact on the
current demand for tomatoes or not. Also, if there would be any change elucidate the
movement or shift in the demand curve graphically.
 The future expectation of increase in price of tomato just it did last year in November.
People are willing to buy more tomatoes and store it. So, the future expectation of
increase in price of tomato will lead to increase in demand and shifts the demand curve to
the rightward.
b. Suppose that Zimaland Zawaiyar are the only consumers of perfumes in a particular
market. The following table shows their annual demand schedules:

Zawaiyar’s
Price (Per Bottle of Zimal’s Quantity
Quantity Market Supply
Perfume) Demanded
Demanded
100 600 650 250
200 500 550 450
300 400 450 850
400 300 350 1050
500 200 250 1250
600 100 150 1450

Given the following information construct market demand curve and find the market
equilibrium.

The market equilibrium will be = (Zimal's equilibrium point + Zawaiyar's equilibrium point)/2
= (220 + 230)/2
= 450/2
=225
Therefore the market equilibrium will be at 225

The End

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