Download Review Questions Lecture 1 According to you, how would you

Review Questions
Lecture 1
1.
2.
3.
4.
According to you, how would you define ‘managerial economics’?
A fundamental assumption in the study of businesses is that CEOs maximise profit of their companies.
How far to you agree with this assumption and explain other objectives which a businessman might
have.
What are the theories explaining the existence of profits?
Why there may be a deviation of the purpose of a firm in theory and the objective of a firm in
practice?
Lecture 2
5. A firm has a production function Q=100K0.5L0.5. Cost of labour, w, and capital, r, are Rs30 and Rs40.
Determine the amount of labour and capital that the firm should use in order to produce an output of
1444 units. What is the minimum cost?
6.
A firm has a production function Q=100K 0.5L0.5 and has a cost outlay of Rs1000. Cost of labour, w, and
capital, r, are Rs30 and Rs40. Determine the amount of labour and capital that the firm should use in
order to maximise output. What is the level of output?
7.
Given the total cost function, TC = 1000 + 10Q - 0.9Q2 + 0.04Q3; Find the rate of output that results in
minimum average variable costs. Determine the lowest price for output that would allow the firm to
cover average variable cost.
8.
The profit function for a firm selling two products is
PF = 50Q1 - Q12 + 100Q2 - 4Q22
where Q1 and Q2 represent output rates of products 1 and 2, respectively.
The manager wishes to maximise output for the two products such that Q1+Q2=30. Recommend the
manager the necessary output.
9.
If X and Y are produced according to the following total cost function,
TC = X2 + 2Y2 – 3XY, using lagrange multiplier, find X and Y which minimises cost when the output level
should be 24.
10. The average cost function for a high school is
AC = 10.3 - 0.4Q + 0.00012Q2, where Q is the number of students in the school. What is the size of the
school results in the minimum average cost?
11. A businessman determines that its annual profits depend on the number of salespeople, S, it employs
and the amount spent on advertising, A. The relationship is given as follows:
PF = -10 + 60S + 10A - 2S2 - A2
Determine the number of salespeople and the amount of advertising expenditures that would
maximize the firm’s profit.
If the unit prices of S and A are Ps=2 and Pa=1, and the manager is constraint to spend Rs30 these two
factors Calculate S and A and profit.
Lecture 3, 4: Demand Analysis
1.
An economic consultant for X Corp. recently provided the firm’s marketing manager with this
estimate of the demand function for the firm’s product:
Qx = 12,000 – 3Px + 4Py – 1M +2Ax
where Qx represents the amount consumed of good X, Px is the price of good X, Py is the price of good
Y, M is income, and Ax represents the amount of advertising spent on good X. Suppose good X sells for Rs200
per unit, good Y sells for Rs15 per unit, the company utilises 2,000 units of advertising, and consumer income
is Rs10,000. How much of good X do
consumers purchase? Are goods X and Y substitutes or
complements? Is good X a normal or
an inferior good? Support your answer with evidence. Calculate
price elasticity of demand,
cross elasticity of demand and income elasticity of demand.
2.
3.
Distinguish between price, income, and cross elasticity of demand?
Explain the relationship between price elasticity of demand, marginal revenue and price.
Lecture 5: demand forecasting
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5.
What is the importance of forecasting for managers?
Distinguish between the quantitative method and qualitative method of forecasting.
What are the quantitative methods of demand forecasting?
What are the qualitative methods of demand forecasting?
The manager of a company assembles a panel of five experts to assist in formulating a sales
forecast. The intent is to use the Delphi technique, but after examining the projections of
the others, none of the experts are persuaded to make any changes in their initial forecasts.
What conclusions might the manager draw from the inability of the experts to agree on a
projection?
6. What is forecasting and why is it important in the management of business firms and other
enterprises.
7. What are qualitative forecasts? Explain the most important forms of qualitative forecast and
their rationale and usefulness.
8. What is trend projection? Why might a forecast obtained by projecting a past trend into the
future give poor results even if past patterns remain unchanged?
9. What are smoothing techniques? When are smoothing techniques useful in forecasting the
value of time-series? Which type of smoothing technique is generally better?
10. What is econometric forecasting? How is it conducted? What are the advantages of
econometric forecasting over other forecasting techniques?
Production and costs
1. Distinguish between short run and long run.
2. Explain the behaviour of production in the long run and short run.
3. Explain the behaviour of cost in the long run and short run.
4. Distinguish between the law of diminishing return to a factor and to scale.
5. Explain the learning curve and how management can make use of it for production decision.
6. Explain the relationship between average cost and marginal cots in the long run and short run and
briefly outline how it is a guide to management decision making.
Market structure
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2.
3.
4.
What are the sources of monopoly power?
Explain the how price is determined in a monopoly structure.
Explain how a firm in a monopolistic market operate.
a. Will the firm be able to maintain abnormal profit in the long run?
b. Is the firm efficiency in the long run
Suppose the inverse market demand curve is P=50-Q. Suppose there are two firms with constant
marginal cost of Rs20 and both firms are competing according to Cournot model, what will be the
price and total industry output.
Price discrimination
Game theory
5.
The following matrix shows the payoff for sticking to the cartel or cheating for the above industry.
Firm 2
Firm 1
Stick to cartel
Cheat
Stick to cartel
(96, 60)
(96,69)
Cheat
(119, 60)
(46, 34)
(i) Use the payoff matrix, explain the Prisoners’ Dilemma, showing clearly the Nash equilibrium.
(4 marks)
(ii) What is meant by the term ‘credible threat’ and show how the concept can be used to prevent
cheating?
(4 marks)
Information asymmetry
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8.
Distinguish between moral hazard and adverse selection.
Explain how information asymmetry affects the market of product.
What are the solutions to adverse selection.
Apply in the labour market, product market and finance market.
Risk analysis
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What is a risk averse individual?
Do you think a risk averse individual will always take insurance?
What is a risk loving individual?
Do you think a risk loving individual will always avoid risk.
Jamie uses a bicycle to get around. He is worried about having his bike stolen and considers taking out
insurance against theft. If her bike gets stolen, she would have to replace it which cost her $200. She
finds that 10% of bicycles are stolen every year. His savings are $400 and her utility of money function is
given by
U(X) = X1/2
(i)Suppose she is offered a premium of $26 for the insurance that she will receive a bike if case of theft,
will she take the gamble?
(ii) Calculate the premium such that she is indifferent between the two choices.
(iii) Calculate (i) and (ii) If the utility function is U(X) =ln(X).
Externalities
Explain how government may solve the problem of externalities which are caused by companies.