BSc (Hons) Management G/F/L/M. Cohort: BMANG/F/L/M/13/FT Aug & BMANM/G/13A/PT & BMANG/L/12A/12B/PT & BMAN/09/PT & BMAN/11B/PT

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1 BSc (Hons) Management G/F/L/M Cohort: BMANG/F/L/M/13/FT Aug & BMANM/G/13A/PT & BMANG/L/12A/12B/PT & BMAN/09/PT & BMAN/11B/PT Examinations for Semester I / / 2014 Semester II MODULE: MANAGERIAL ECONOMICS MODULE CODE: ECON2102 Duration: 2 Hours Reading Time: 10 Minutes Instructions to Candidates: 1. This question paper consists of Section A and Section B. 2. Answer any one question from section A. 3. Answer any two questions from Section B. 4. Always start a new question on a fresh page. 5. Total Marks: 100. This Question Paper is printed on BOTH SIDES. This Question Paper Contains 6 questions and 6 pages. Page 1 of 6

2 SECTION A: ANSWER ANY ONE QUESTION QUESTION 1: (40 MARKS) Big Jimmy ltd estimates its demand and supply conditions as follows: Qdx =200-5Px-2.5Y+10A+ 4Pz and Qsx=350+Px Where Qdx is the quantity demanded of the firm s product (x) (in tons), Qsx is the quantity supplied of the firm s product (x)(in tons). Px is the price of the firm s product (in Rs per ton), Y is per capita income (in Rs), A is the firm s advertising expenditure (in Rs) and Pz is the price (in Rs) of a related product (Z). (a) If Y =100 A= 50 and Pz = 50, write down the firm s demand function? (b) Calculate the equilibrium price and quantity. (c) Are goods X and Z substitutes or complements? Justify your answer (d) Is good X a normal or an inferior good? Justify your answer (e) Calculate the point price elasticity of demand at the equilibrium price. (4 marks) (f) Discuss how a manager can use the Price Elasticity of Demand (P.E.D) concept to maximize total revenue (8 marks) (g) Explain the three types of price discrimination used by business organisations. (10 marks) (h) Evaluate how the management of Big Jimmy ltd can use the five forces model to influence their profit making capabilities in the industry they are operating (10 marks) Page 2 of 6

3 QUESTION 2: (40 MARKS) (a) You have been asked to produce a forecast for your company s new product, bottled water. Discuss the kind of information/variables you would look for in order to make this forecast. Explain the likely relationship between the product and the variables. (15 marks) (b) A local supermarket lowers the price of its vanilla ice cream from $3.50 per half gallon to $3. Vanilla ice cream (unit) sales increase by 20%. The store manager notices that the (unit) sales of chocolate syrup increase by 10%. (i) Calculate and interpret the price elasticity coefficient of vanilla ice cream. (ii) Calculate the cross elasticity of demand for chocolate syrup with respect to the price of vanilla ice cream and interpret. (iii) Overall, do you think that the new pricing policy was beneficial for the supermarket? Justify your answer. (c) Critically evaluate any 2 demand estimating techniques. (10 marks) SECTION B: ANSWER ANY TWO QUESTIONS QUESTION 3: (30 MARKS) (a) The manager of waterpure is trying to come up with an optimal price for the product. The weekly demand for the firm s bottled water product was estimated as follows: Q d = P Where Q d = quantity of 12-ounce plastic bottles (in thousands) P = price per container Based on estimates provided by the bottling plant, the manager expressed the cost function as TC = Q Page 3 of 6

4 Where TC = total cost per week (in thousands of dollars) Q =output of 12-ounce plastic bottles (in thousands) (i) Find the optimal price for the product. (ii) Calculate the company s weekly profit. (11 marks) (4 marks) (b) Define economies of scale. Briefly discuss the main determinants of this phenomenon. (15 marks) QUESTION 4: (30 MARKS) Super Textiles and Fast Textiles have the following monthly costs schedules: Super Textiles (Rs) Fast Textiles (Rs) Rent 10,000 20,000 Raw materials 20, ,000 Electricity 10, ,000 Labour costs 80, ,000 Fixed interest on Loan 200, ,000 Units produced 1,000 10,000 (a) Calculate for Super textiles and Fast Textiles (i) Fixed cost (ii) Average Fixed Cost (iii) Unit Cost (b) Explain how Super Textiles can compete with Fast Textiles (4 marks) (c) Using an appropriate example, example the law of diminishing returns. (d) A firm has the following Total Revenue (TR) function TR = 5Q 2 + 4Q +25. Given that Marginal cost, MC= 104, calculate the profit maximizing output. Page 4 of 6

5 (e) The demand curve for a firm is given as follows: Q=50-2P, assuming MC=30, calculate the profit maximizing output. (f) Evaluate competitive strategies used by Oligopoly firms. QUESTION 5: (30 MARKS) a) Using appropriate examples, differentiate between the short run and long run production cycles b) Baltimore trading has the following production function Q=min (5L, 10K), where Q is output, L is labour and K is capital i) Given that L = 10 and K =2, calculate output. ii) Explain the three main production functions (3 marks) c) Super Computers ltd is planning to invest in a new technology costing Rs 300, 000 which will lead to increase in sales of Rs 50, 000 in year 1, Rs 50,000 in year 2, Rs 150, 000 in year 3 and Rs 150, 000 in year 4. The technology has a useful life of 4 years and given that the nominal rate of interest is 14 % and inflation rate is predicted to be an average of 7 % over the next four years, should the company buy the machine? Explain your answer. d) Samsung and LG both produce televisions and have reached an agreement not to advertise in the next financial year which will bring an increase in profit of Rs 50 m for both companies. If one company cheats and advertise, it will benefit from an increase of Rs 150 m in profits while the other suffers a loss of Rs 25 m. If both companies advertise, they will both suffer a loss of 10 m. i) Draw the pay-off matrix of Samsung and LG. (3 marks) ii) Would the two companies collaborate and not advertise? e) Explain the profit maximizing output MC=MR. Page 5 of 6

6 f) Adverse Selection and Moral Hazard arises from asymmetric information. Evaluate measures for reducing Adverse Selection and Moral Hazard problems. QUESTION 6: (30 MARKS) Using appropriate examples, write short notes on any 6 of the following: (a) Measures of market power (b) Opinion polls and Market research (c) Barriers to Entry and Switching costs (d) Steps in estimating a demand function (e) Porter s Generic Strategies (f) Accounting and Economics Profit (g) Principal Agent Problem and incentives (h) Barometric method of demand forecasting (6*5 marks = 30marks) ***END OF QUESTION PAPER*** Page 6 of 6