Fundamental concepts of managerial economics Assignment - 1

Fundamental concepts of managerial economics - Assignment Example Changes in the price (P) of the good or service will result only in movement along the demand curve, whereas changes in any of the other demand determinants in the demand function (PS, PC, Y, A, AC, N, CP, PE, and so on) shift the demand curve. When two goods are substitutes, such as Chevy-volt and Toyota Prius, an increase in the price of Chevy-volt, results in an increase in the quantity demanded of Toyota Prius, holding other factors constant, such as the price of Toyota Prius, other prices, income, and so on, or vice versa. The price of a gallon of regular octane gasoline skyrocketed from $3.00 per gallon to $4.10. The previous summer, when gas prices had hovered around $3 per gallon, Americans had cut back only slightly on non-essential driving. In the summer of 2008, with regular gasoline at $4.10 per gallon, not only summer driving vacations but urban commuting itself changed in extraordinary ways. Overall, customer demand by the typical two-person urban household shrank from 16 gallons per week to 11.5 gallons. Faced with $4.10 per gallon gasoline, as ExxonMobil and Shell sought to recover their extraordinary input costs for crude, American consumers decided to vacate their SUVs, join carpools, and ride the buses and trains to work. Urban mass transit system ridership shot up 20 percent in a matter of months. Other Americans purchased fuel efficient hybrids like the Toyota Prius. Several determinants of demand and supply were identified as possible explanations for the spike in gasoline’s equilibrium market price. This therefore lead to the decreases in the demand for SUVs to a point that the Enterprise Rental Car Co. charged various models of rental cars such as SUVs at $37 on one-day return while the subcompacts were charged at $41 on one-day return. This therefore led to the decline in the equilibrium price of SUVs. Cash flows of Investment A have a larger coefficient of variation (0.80) than do cash flows of Investment B (0.50); therefore,