BEA683 Economics for Managers
Tutorial 1 Student’s Copy
1. John Kennedy once stated, “Some men look around and ask why? I dream of things that could never be, and ask why not?”

Why does the principle of constrained optimisation force economists to ask “why?” rather than “why not?”

It can reduce risk if you clearly know the investment environment if you want to get the return , we need invest , not just a dream.

2a. It is common knowledge now how a small handful of men were able to hijack four airplanes on September 11, 2001 and use them as bombs to kills thousands of people. Explain how a small number of hijackers used the principle of constrained optimisation to gain control over 40 to 60 passengers.

Marketing work would be not efficiently, if party has market power. This party can control the market.

2b. On the fourth plane hijacked that morning the passengers through the use of mobile telephones found out that the planes were being used as bombs. Explain why the information changed the situation for the hijackers on that fourth plane.

With full information, full contracting possibilities and rationality, a system should always be moving towards this point even if it never reaches

3. A classic scene in Old West movies has the old toothless prospector running into town yelling, “Gold! Gold! I’ve discovered Gold in them dar hills.” Given the principle of maximisation, what wrong with such a scene.

4. The utility-maximising bundle of goods is found at the point of tangency between the budget constraint and an indifference curve. In the diagram below, the utility maximising bundle is the one labelled point K. There are two different, but equally important, ways to interpret this point.

a. Of the three points on the consumer’s budget constraint (J, K and L ), what makes K special?

Interpret point between maximising bundle and budget constraint

b. Of the three points on the consumer’s indifference curve (M, K and N), what makes K special?

Incomplete property rights lead to the overuse of natural resources.

Question 5

One reason it’s hard for a manager to set up good incentives is because it’s easy for employees to lie about how they’ll respond to incentives. For example, Simple Books pays Mary Sue to proofread chapters of new books. After an author writes a draft of a book, Simple Books sends chapters out to proofreaders like Mary Sue to make sure that spelling, punctuation, and basic facts are correct.

As you can imagine, some books are easy to proofread (perhaps Westerns and romances), while others are hard to proofread (perhaps engineering textbooks). But what’s hard or easy is often in the eye of the beholder: Simple Books can’t tell which books are particularly easy for Mary Sue to proof, so they have to take her word for it. Let’s see how this fact influences the publishing industry.

In the figure below, Q* is the number of chapters in the new book, Burned: The Secret History of Toast. It’s a strange mix of chemistry and history, so Simple Books isn’t sure how Mary Sue will feel about proofing it. The marginal cost curve shows Mary Sue’s true willingness to work: The more chapters she has to read, the more you have to pay her at the margin. If Simple Books offers to pay her $50 per chapter, as shown, she’ll actually finish the job.

a. If Mary Sue wants to bluff, claiming that the book is actually painful to read, what is that equivalent to?
Supply curve shifting left
Supply curve shifting right
Demand