Download MBA - ECONOMICS PAPER(1)

UNIVERSITY OF KELANIYA
FACULTY OF COMMERCE AND MANAGEMENT STUDIES
MASTER OF BUSINESS ADMINISTRATION DEGREE EXAMINATION
Academic year – 2013/2014 - Year 1 Semester I – March 2015
MBA 51023 - Business Economics/MBA 51023 – Economic analysis for Business - Repeat
No. of Questions: 08 Eight
There are two parts, Part-A and Part-B. Select.
Answer any 05 (Five) Questions including at least Two (02) Questions from each part.
Time: Three (03) Hours
PART – A - Microeconomics
Question 1
1. Unlike the Cardinal approach, Ordinal approach assumes that utility is measured by
consumer’s subjective evaluation, which expresses only the order of preference.
i.
Explain the Equi - Proportional Utility Rule of cardinal approach.
(02 marks)
ii.
What are the limitations to marginal utility analysis?
(04 marks)
iii.
Explicate the properties of an indifference curve.
(05 marks)
iv.
Illustrate the establishment of the Consumer’s equilibrium of the ordinal
analysis.
(03 marks)
v.
Under the Hicksian Compensation Approach of a Normal Good, explain how
Income & Substitution effect occurs of a decrease in price.
(06 marks)
(Total 20 marks)
Question 2
2. Generally the Production function describes the relationship of the inputs and output in
physical terms representing the prevailing technology of a firm, of an industry or in an
economy as a whole. Use graphs where necessary,
i.
Explain the relationship between the law of diminishing returns to scale and the
stages of production
(08 marks)
With two variable inputs describe how consumer equilibrium occur in the
production analysis in the long-run
(08 marks)
Illustrate the derivation of the Long Run Average Cost (LAC) curve.
(06 marks)
(Total 20 marks)
ii.
iii.
Question 3
a) Use the information in the table below to identify the income elasticity type of each of the
following products, A to E.
Percent change
Income
Percent change
in quantity
elasticity
Product
in income
demanded
type
A
9
12
__________
B
–6
6
__________
C
3
3
__________
D
6
–3
__________
E
2
1
__________
(05 marks)
(b) What is the practical significance of income elasticity coefficient?
(05 marks)
(c.) The manager of a toy company asks you for advice about whether the company should cut
the price of its best-selling doll this year based on the following information: last year the
company cut the price of its best-selling doll by 10% and the total revenues from doll sales
increased by 10%.
(05 marks)
(c) The owner of a health club asks you for advice about whether the company should raise
the price of its membership this year based on the following information: last year the club
raised the price of its membership by 5% and the number of members paying the same fee
fell by 7%.
(05 marks)
(Total 20 marks)
Question 4
The following figure represents the situation faced by a firm that is a monopoly. The monopoly's
marginal cost curve and average total cost curve are represented with MC and ATC below. The
monopoly's demand curve is denoted with a D.
a)
b)
c)
d)
What is the profit maximizing price and quantity for this monopoly?
Calculate this monopoly's economic profits in the short run.
What will happen to these economic profits in the long run?
A regulator who wished to ensure that this monopoly earns zero economic profits should
regulate what price?
e) Why monopolies are considered inefficient by economists?
(Total 20 marks)
Question 5
a) Consider the following information about bikes, where Q is output, TC is the total cost of
production, and p is the price.
Q
TC
MC
P
TR
MR
Profits
0
2000
600
1
2500
575
2
2800
550
3
3000
525
4
3160
500
5
3340
475
6
3540
450
7
3780
425
8
4080
400
9
4410
375
10
4770
350
11
5190
325
12
5760
300
a) Fill in the remaining columns in the chart.
b) Determine the profit maximizing price and quantity. At this price and quantity,
calculate this monopoly's economic profits.
(10 marks)
c) Suppose two competitors, Pepsi and Coke, each select its advertising expenditure. For
simplicity, assume there are only two sizes of advertising budgets: moderate and large. The
relationship between advertising and profits for each firm is presented in the following payoff
matrix which gives each firm’s profits under each of its own budgets as well as that of the
competitor’s. Note that there are four possible combinations of budgets in the market; these
are represented by the four cells in the diagram. Coke’s profits are presented on the left side
of each cell, while Pepsi’s are on the right side.
If Pepsi and Coke colluded on their choices of advertising budgets, which would they
select? Explain.
(10 marks)
(Total 20 marks)
PART – B - Macroeconomics
Question 6
“………….It seems the people who most need an economic recovery are the last to benefit.
Currently the U.S. is experiencing a slow recovery, and like the last two, a “jobless recovery.” The
unemployment rate peaked at 10.1 percent in October 2009, and remained at 9.6 percent or above
during all of 2010. In January 2009, the Chair of the Council of Economic Advisers forecasted that
the unemployment rate would not return to 5 percent until 2014! Employment only began to
increase in November 2009, from a recession that ended in June 2009, and the increases since
November have been small and inconsistent. The American Recovery and Reinvestment Act of
February 2009 and ongoing monetary policy have been large policy actions designed to end the
recession and promote a strong economic recovery. In fact, real GDP has increased since the third
quarter of 2009 at annualized rates between 1.6 and 5.0 percent, averaging 2.8 percent. Given the
growth of real GDP in 2009-2010, many people wonder why it takes so long to put people back to
work and lower the unemployment rate………”.
(i)
Use the IS/LM model, explain the effects of the monetary policy on output,
employment, and interest rates. In your analysis, start with an economy that is already
in recession.
(10 marks)
(ii)
Will monetary policy be effective in promoting economic recovery from the recession?
(10 marks)
(Total 20 marks)
Question 7
Using the IS-LM model explain the effects of
(i)
Increase in government expenditure
(ii)
Increase in taxes
on income and interest rates in the near future (short run) and in the long run.
(Total 20 marks)
Question 8
Macroeconomics deals with the economy as a whole as it examines the behavior of economic
aggregates such as aggregate income, consumption, investment, overall level of prices, foreign
trade, employment etc.
i) Explain the inter relationship of the various macroeconomic issues
(08 Marks)
ii) Clarify how far the current macroeconomic policies in Sri Lanka have been able to attain the
Millennium Development Goals.
(12 marks)
(Total 20 marks)