Answer Sheet Managerial Economics Essay

3052 Words May 5th, 2015 13 Pages
Managerial Economics

Section A

1) a. Macroeconomics
2) c. Demand function
3) b. Arc elasticity
4) b. Consumer goods
5) c. The Indifference Curve
6) a. Future costs
7) c. Equilibrium
8) b. Gross national product
9) b. Product approach
10) c. GDP


1) The elasticity of one variable with respect to another between two given points. It is used when there is no general function to define the relationship of the two variables. Arc elasticity is also defined as the elasticity between two points on a curve.
The P arc elasticity of Q is calculated as

The percentage is calculated differently from the normal manner of percent change. This percent change uses the average (or midpoint) of the points, in lieu of the original point as
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Consider the case of an illicit commodity such as marijuana. The consumption of marijuana involves risks of fines, in some cases imprisonment and, possibly, other costs associated with the shame of being caught. Consequently, the price of marijuana in its demand function ( p ) m should be interpreted as being made up of the conventional money cost ( p ) mplus the expected “other costs” per unit:

2) Legalization of marijuana would eliminate the criminal sanctions and penalties associated with its consumption. As this would decrease the “full” price, consumption would be expected to rise. Marijuana consumption is significantly higher amongst males than females – 60 percent of all males have consumed it, compared to 46 percent of all females. Consumption of marijuana is estimated to increase by about 4 percent if it were legalised; and by about 11 percent following both legalisation and a 50-percentfall in its price. Price is a significant determinant of marijuana consumption. Whilst marijuana consumption is estimated to be price inelastic, estimates of most of the price elasticities are significantly different from zero.
Two types of price elasticities of demand for marijuana were estimated, gross and net. The gross price elasticity includes the effects of both legalisation and a price change, while the net version excludes the legalisation effect. The price elasticity of demand for

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