Download part a (for mm students only)

BMME5103JAN07/SI
PART A (FOR MM STUDENTS ONLY)
TRUE OR FALSE QUESTIONS
INSTRUCTIONS: ANSWER TRUE OR FALSE TO THE FOLLOWING STATEMENTS,
AND CORRECT THE PART THAT IS ERRONEOUS.
1.
An example of an agency problem is a store manager who avoids taking a risk, so
that he cannot be ‘blamed’ for making a bad decision.
2.
The amount of profits is entirely under the control of a manager.
3.
If the marginal cost of an action exceeds its marginal benefit, then we should not do
it.
4.
If the first derivative of a function of one variable is zero at a point, and the second
derivative at that point is positive, then we have found a local minimum.
5.
If income rises and if the product is a normal good, then the demand curve shifts out
and to the right.
6.
A moving average can be a better forecasting technique than a linear trend when the
random fluctuations are quite pronounced.
7.
A linear functional form for demand functions assumes that price elasticities are
constant.
8.
The effect of the price of related goods or services could be positive or negative. If
the effect is positive, it indicates a complementary good. If the effect is negative, it
depicts substitute goods.
9.
A linear trend can only go up, whereas a constant growth rate forecasting model
allows growth and decline.
10.
The value of a coefficient in a multiplicative exponential demand function provides an
estimate of elasticity.
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BMME5103JAN07/SI
11.
A t-test is used to indicate whether the independent variables as a group explain a
significant share of demand variation.
12.
The coefficient of determination (R2) shows the share of total variation in demand
that cannot be explained by the regression model.
13.
The law of diminishing marginal returns is applicable primarily to the long run
production function where all inputs are variable.
14.
We should use relatively more labour if we learn that the marginal product per dollar
of labour expenditures is less than a marginal product per dollar of capital
expenditures.
15.
If you have two options, either A or B, other things remaining the same, the
opportunity cost of choosing A is B.
16.
When free entry exists, the atomistic or pure competitive model suggests that
economic profit will always be equal to zero.
17.
The notion of being a price taker competitive firm is that there is no pricing strategy
because you cannot charge more than your competitors without losing all your
customers.
18.
Monopolies tend to waste resources more, at least historically, than in competitive
industries.
19.
Collusion is harder to achieve if the costs of the firms in the group are similar.
20.
Charging a different price for tickets to movies before 5 pm twilight and after 5 pm is
an example of second-degree price discrimination.
[TOTAL: 20 MARKS]
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BMME5103JAN07/SI
PART B (FOR MM STUDENTS ONLY)
INSTRUCTIONS: ANSWER ALL QUESTIONS
Question 1
a.
Economic profit is the difference between Total Revenue and Total Economic Cost.
Explain how it differs with Accounting Profit.
[5 marks]
b.
Discuss the FOUR (4) theories why profit may vary across industries.
[5 marks]
[TOTAL: 10 MARKS]
Question 2
You are given the following:
i.
Production = quantity of output (tonnes);
ii.
Labour = amount of labour used to produce the output (man-days);
iii.
Capital = value of capital used to produce output (RM);
iv.
lnprod = natural log of production;
v.
lnlab = natural log of labour; and
vi.
lncap = natural log of capital.
Based on the results of the regression analysis as shown in the following tables, answer the
following questions:
a.
What is the dependent variable in this production study?
b.
What are the independent variables?
c.
What does the R2 mean? Use the result.
d.
What does the F-statistics mean? Use the result.
e.
What do the t-statistics mean? Use the results.
f.
Using MODEL A, provide an economic interpretation for each of the coefficients.
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BMME5103JAN07/SI
g.
Using MODEL A, calculate the relevant elasticities when capital = RM20000 and
labour = 800 mandays.
h.
Which is the better model: MODEL A OR MODEL B? Why?
i.
Using MODEL B, determine the relevant elasticities.
j.
Does the production function in MODEL B reflect increasing, constant or decreasing
return to scale? Explain.
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MODEL A
Variables Entered/Removed(b)
Variables
Variables
Model
Entered
Removed
Method
1
Labor,
.
Enter
Capital(a)
a.
All requested variables entered.
b.
Dependent Variable: Production
Model Summary
Adjusted
R
Std. Error of the
Model
R
R Square
Square
Estimate
1
.954(a)
.910
.896
73.73431
a.
Predictors: (Constant), Labor, Capital
ANOVA(b)
Model
Sum of Squares
Df
Mean Square
F
Sig.
1 Regression
664188.769
2
331810.976
61.031
.000(a)
Residual
65051.395
12
5436.748
Total
729240.164
14
a.
Predictors: (Constant), Labour, Capital
b.
Dependent Variable: Production
Coefficients(a)
Standardized
Unstandardized Coefficients
Coefficients
Model
B
Std. Error
Beta
1 (Constant)
a.
t
Sig.
-349.8682
123.266
-2.838
.015
Labor
1.022
.314
.646
3.253
.007
Capital
.013
.008
.330
1.661
.123
Dependent Variable: Production
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BMME5103JAN07/SI
MODEL B
Variables Entered/Removed(b)
Variables
Variables
Model
Entered
Removed
Method
1
Lnlab,
.
Enter
Lncap(a)
a.
All requested variables entered.
b.
Dependent Variable: Lnprod.
Model Summary
Adjusted
R
Std.
Error
Model
R
R Square
Square
the Estimate
1
.974(a)
.948
.939
.08998
a.
of
Predictors: (Constant), Lnlab, Lncap
ANOVA(b)
Model
Sum of Squares
df
Mean Square
F
Sig.
1 Regression
1.763
2
.881
108.856
.000(a)
Residual
.097
12
.008
Total
1.860
14
t
Sig.
-5.901
.000
a.
Predictors: (Constant), Lnlab, Lncap
b.
Dependent Variable: Lnprod
Coefficients(a)
Standardized
Unstandardized Coefficients
Coefficients
Model
B
Std. Error
1 (Constant)
-4.749
.809
Lnlab
1.078
.250
.586
4.303
.001
Lncap
.415
.135
.418
3.070
.010
a.
Beta
Dependent Variable: Lnprod
[TOTAL: 25 MARKS]
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BMME5103JAN07/SI
Question 3
a.
What is price discrimination?
b.
To maximize profit, discriminating monopolists must allocate their capacity. Complete
the graph below and describe how the discriminating monopolists determine the
optimal output level and price.
School contract
milk
Price and cost ($/unit)
D1
Grocery store
milk
Total
D2
MC
MR1
0
MR2
D1
D2
0
0
Output (units)
[TOTAL: 15 MARKS]
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BMME5103JAN01/SI
PART C (FOR MM STUDENTS ONLY)
INSTRUCTIONS: ANSWER THREE (3) QUESTIONS ONLY.
Question 1
A linear demand regression model based on Ordinary Least Squares Estimates found
the following:
Dependent Variable: QUANTITY
Independent Variable(s):
Beta
t-statistic
Constant Included
10
2.5
PRICE
-2
1.3
INCOME
3
4.0
Summary of '
Goodness of fit'statistics:
Degrees of Freedom = 35
R-square: 0.6510,
Adj R-Sqr: 0.6320
Estimated F = 7.960
Durbin-Watson statistic = 0.89
a.
Write the demand function as an equation.
b.
Do the signs of the coefficients make economic sense?
c.
If PRICE = 5 and INCOME = 12, what is the predicted QUANTITY sold?
d.
Find the point price elasticity at PRICE = 5 and INCOME = 12.
[TOTAL: 10 MARKS]
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BMME5103JAN01/SI
Question 2
Consider the following variable cost function (Q = output):
VC = 200Q - 9Q2 + .25Q3
Fixed costs are equal to RM150.
a.
Determine the total cost function.
b.
Determine the
(i) average fixed;
(ii) average variable;
(iii) average total; and
(iv) marginal cost functions.
c.
Determine the value of Q where the average variable cost function takes on its
minimum value. (Hint: Take the first derivative of the AVC function, set the
derivative equal to 0, and solve for Q. Also use the second derivative to check for
a maximum or minimum).
d.
Determine the value of Q where the marginal cost function takes on its minimum
value.
[TOTAL: 10 MARKS]
Question 3
Many governments have imposed price ceilings on certain commodities to keep prices
from rising to the natural level that would prevail under supply-demand equilibrium. The
result is that the quantities that sellers are willing to supply at the ceiling price often falls
short of the quantity demanded at that price. To bring supply and demand more into
equilibrium, ration coupons are sometimes issued.
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BMME5103JAN01/SI
a.
Show graphically the effects of a ceiling price.
b.
On the black market, how much would you be willing to pay for a ration coupon
good for the purchase of one unit of the rationed commodity?
c.
If the aggregate demand for Commodity X is P = 100 – 5Q, and the industry
supply curve for that product P = 10 + 10Q, calculate the following:
i.
The equilibrium price and quantity for Commodity X.
ii.
The quantity that will be sold if a ceiling price of RM60 is established.
iii.
The black market price of a ration coupon good for the purchase of one
unit of X.
[TOTAL: 10 MARKS]
Question 4
One and Only, Inc., is a monopolist. The demand function for its product is estimated to
be:
Q = 60 – 0.4P + 6Y + 2A
Where Q = quantity of units sold
P = price per unit
Y = per capita disposable personal income (thousands of dollars)
A = hundreds of dollars of advertising expenditures
Y is equal to 3 (thousand) and A is equal to 3 (hundred) for the period being
analyzed.
a.
If fixed costs are equal to RM1,000, derive the firm’s total cost function and
marginal cost function.
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BMME5103JAN01/SI
b.
Derive a total revenue function and marginal revenue function for the firm.
c.
Calculate the profit-maximizing level of price and output for One and Only Inc..
d.
What profit or loss will One and Only Inc. earn?
e.
If fixed costs were RM1,200, how would your answers change for (a) through
(d)?
[TOTAL: 10 MARKS]
Question 5
The ability of oligopolistic firms to engage successfully in collusion depends on a
number of factors. Identify and examine at least FIVE (5) of these factors.
[TOTAL: 10 MARKS]
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BMME5103JAN01/SI
PART D (FOR MBA STUDENTS ONLY)
INSTRUCTIONS: QUESTIONS 1, 2 AND 3 ARE COMPULSORY.
CHOOSE EITHER QUESTION 4 OR 5
Question 1
“A certain car manufacturer regards his business as highly competitive because he is
keenly aware of his rivalry with the other car manufacturers. Like the other
manufacturers, he undertakes vigorous advertising campaigns seeking to convince
potential buyers of the superior quality and better style of his automobiles and reacts
very quickly to claims of superiority by rivals”.
Discuss whether the above statement is the meaning of perfect competition from an
economic point of view. If yes, why? If not, why and what is the possible market
structure? Explain.
[10 marks]
Question 2
The estimated demand equations in linear and multiplicative functional forms for the
sales of paint by the CAT Sdn. Bhd. in major towns of Peninsular Malaysia are
presented in Figure 1, where:
SALES
=
sales of paint (thousand gallons)
PRICE
=
selling price per gallon of the CAT Sdn. Bhd. (RM)
CPRICE
=
competitor price (RM)
ADVERT
=
promotional expenditure (thousand RM)
INCOME
=
per capita income (thousand RM)
LSALES
=
ln of sales of paint
LPRICE
=
ln of selling price of the CAT Sdn. Bhd.
LCPRICE
=
ln of competitor price
LADVERT
=
ln of promotional expenditure
LINCOME
=
ln of per capita income
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BMME5103JAN01/SI
a.
Evaluate the estimated equations and which functional form is better to represent
the sales of paint by the CAT Sdn. Bhd.
[10 marks]
b.
Based on the linear functional form, calculate own-price, cross-price, and income
elasticities using the average values of the variables and Interpret.
[5 marks]
c.
Based on the multiplicative functional form, calculate own-price, cross-price, and
income elasticities.
[5 marks]
d.
Based on the estimated elasticity, if you are hired as a consultant, what is your
advice to the company in order to increase the total revenue?
[5 marks]
e.
If income is estimated to increase by 5% and the promotional expenditure were
to reduce by 10% in Johor Bharu in 2007, and the own and competitor prices
were to remain the same:
i.
forecast the demand for paint in Johor in 2007; and
ii.
estimate 95% confidence interval of the forecast in (i).
[10 marks]
Figure 1: Estimated demand equation for the sales of paint
Linear Functional Form
Dependent Variable: SALES
Method: Least Squares
Date: 06/23/06 Time: 23:13
Sample: 1 10
Included observations: 10
Variable
Coefficient Std. Error
t-Statistic
Prob.
C
13.45380 22.29197
0.603527
0.5725
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BMME5103JAN01/SI
PRICE
-1.366341 0.798579
-1.710965
0.1478
CPRICE
0.901199 0.434643
2.073425
0.0928
INCOME
1.108869 0.473254
2.343074
0.0661
ADVERT
0.833683 0.054681
15.24617
0.0000
R-squared
0.996652
Mean dependent var
175.0000
Adjusted R-squared 0.993973
S.D. dependent var
31.00179
S.E. of regression
2.406810
Akaike info criterion
4.901334
Sum squared resid
28.96367
Schwarz criterion
5.052627
Log likelihood
-19.50667
F-statistic
372.0625
Durbin-Watson stat
0.965608
Prob(F-statistic)
0.000002
Multiplicative Functional Form
Dependent Variable: LSALES
Method: Least Squares
Date: 06/23/06 Time: 23:17
Sample: 1 10
Included observations: 10
Variable
Coefficient Std. Error
t-Statistic
Prob.
C
0.548186 0.469004
1.168831
0.2952
LPRICE
-0.119036 0.076162
-1.562930
0.1788
LCPRICE
0.107955 0.052447
2.058359
0.0946
LINCOME
0.132551 0.054605
2.427464
0.0596
LADVERT
0.821427 0.062422
13.15932
0.0000
R-squared
0.995642
Mean dependent var
5.150326
Adjusted R-squared 0.992155
S.D. dependent var
0.180385
S.E. of regression
0.015977
Akaike info criterion
-5.128435
Sum squared resid
0.001276
Schwarz criterion
-4.977143
Log likelihood
30.64218
F-statistic
285.5476
Durbin-Watson stat
1.125965
Prob(F-statistic)
0.000004
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BMME5103JAN01/SI
Descriptive Statistics
SALES
PRICE
CPRICE
INCOME
ADVERT
Mean
175.0000
15.10000
19.10000
17.95000
174.0000
Median
175.0000
15.25000
19.00000
18.25000
175.0000
Maximum
220.0000
18.00000
23.00000
21.50000
220.0000
Minimum
130.0000
12.00000
15.00000
14.00000
130.0000
Std. Dev.
31.00179
1.882669
2.378141
2.608214
31.69297
Skewness
-5.41E-17
-0.150592
0.032394
-0.227337
0.054746
Observations
10
10
10
10
10
Towns
SALES
PRICE
CPRICE
INCOME
ADVERT
Johor Bharu
160
15.0
20
19.0
150
Melaka
220
13.5
23
17.5
220
Seremban
140
16.5
18
14.0
140
K. Lumpur
190
14.5
20
21.0
190
Ipoh
130
17.0
18
15.5
130
Penang
160
16.0
22
14.5
160
Alor Setar
200
13.0
15
21.5
200
Kuantan
150
18.0
17
18.0
150
K. Terengganu 210
12.0
20
18.5
210
Kota Baharu
15.5
18
20.0
190
Data
190
[TOTAL: 35 MARKS]
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BMME5103JAN01/SI
Question 3
Consider the following short-run production function for three-in-one Kopi Jantan, where
X is material inputs, and Q is output.
Q = 10X - 0.25X2
Suppose the Kopi Jantan is sold for RM10 per pack, and assume that the firm can obtain
as much of the variable materials, input (X), as it needs at RM20 per unit:
a.
Determine the marginal revenue product function of materials.
[5 marks]
b.
Determine the marginal factor cost function.
[5 marks]
c.
Determine the optimal value of X, given the objective is to maximize profits.
[5 marks]
d.
If the price of Kopi Jantan were to rise, what happens to the optimal value of X
employed to produce them?
[5 marks]
e.
If the marginal product (MP) of the material X were to rise, what would happen to
the optimal value of X employed to produce them?
[5 marks]
[TOTAL: 25 MARKS]
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Question 4
An All-in-one handphone was just released to the market by Nokia. The cost schedule
and the estimated total cost functions in various forms for producing the handphone are
presented Figure 2a.
a.
Choose the “best” estimated cost function that represents the relationship
between the output produced and cost. Why?
[10 marks].
b.
If the manufacturer is operating under perfect competition and the price of the
hand-held computer is RM1410.20, what is the profit maximizing quantity?
[5 marks].
Please illustrate the answer graphically.
[5 marks].
c.
If the same manufacturer is operating under monopolistic competition market
structure, and a schedule of prices and quantities and its estimated demand
equation is as shown in Figure 2b, what are the profit-maximizing price and
quantity?
[5 points].
Please illustrate the answer graphically.
[5 marks].
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BMME5103JAN01/SI
FIGURE 2a: DATA AND ESTIMATED TOTAL COST FUNCTION
Q
TC
10
22810
20
32680
30
40269
40
46240
50
51250
60
70200
70
86170
80
108000
90
140400
100
174500
where Q = quantity produced (units); and TC = total cost (RM)
Linear Function
Dependent Variable: TC
Method: Least Squares
Date: 01/10/04 Time: 12:05
Sample: 1 10
Included observations: 10
Variable
Coefficient Std. Error
t-Statistic
Prob.
C
-9302.933 10918.64
-0.852023 0.4190
Q
1573.724 175.9698
8.943152
R-squared
0.909070
0.0000
Mean dependent var 77251.90
Adjusted R-squared 0.897704
S.D. dependent var
49973.03
S.E. of regression
Akaike info criterion
22.37333
Sum squared resid 2.04E+09
Schwarz criterion
22.43384
Log likelihood
F-statistic
79.97997
Prob(F-statistic)
0.000019
15983.25
-109.8666
Durbin-Watson stat 0.476391
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BMME5103JAN01/SI
Quadratic Function
Dependent Variable: TC
Method: Least Squares
Date: 01/10/04 Time: 12:04
Sample: 1 10
Included observations: 10
Variable
Coefficient Std. Error
t-Statistic
Prob.
C
32257.15 5613.426
5.746428
0.0007
Q
-504.2799 234.4404
-2.150995 0.0685
Q2
18.89095 2.077053
9.095071
R-squared
0.992906
0.0000
Mean dependent var 77251.90
Adjusted R-squared 0.990879
S.D. dependent var
49973.03
S.E. of regression
Akaike info criterion
20.02254
Sum squared resid 1.59E+08
Schwarz criterion
20.11331
Log likelihood
F-statistic
489.8494
Prob(F-statistic)
0.000000
4772.705
-97.11270
Durbin-Watson stat 1.334524
where Q2 = square of Q (Q2)
Power Function
Dependent Variable: LTC
Method: Least Squares
Date: 01/10/04 Time: 12:09
Sample: 1 10
Included observations: 10
Variable
Coefficient Std. Error
t-Statistic
Prob.
C
7.829351 0.392506
19.94709
0.0000
LQ
0.848679 0.101268
8.380546
0.0000
R-squared
0.897742
Adjusted R-squared 0.884960
Mean dependent var 11.06539
S.D. dependent var
19
0.656577
BMME5103JAN01/SI
S.E. of regression
0.222695
Akaike info criterion 0.010830
Sum squared resid 0.396745
Schwarz criterion
0.071347
Log likelihood
F-statistic
70.23356
Prob(F-statistic)
0.000031
1.945850
Durbin-Watson stat 0.443060
Where LTC = log of TC; LQ = log of Q
FIGURE 2b: DATA AND ESTIMATED DEMAND FUNCTION
Q
P
10
1570
20
1520
30
1490
40
1450
50
1425
60
1386
70
1367
80
1310
90
1306
100
1278
where Q = quantity produced (units); and P = price
Dependent Variable: Q
Method: Least Squares
Date: 09/11/03 Time: 16:01
Sample: 1 10
Included observations: 10
Variable
Coefficient Std. Error
t-Statistic
Prob.
C
487.7196 16.72380
29.16320
0.0000
P
-0.306850 0.011833
-25.93075 0.0000
R-squared
0.988242
Adjusted R-squared 0.986773
Mean dependent var 55.00000
S.D. dependent var
20
30.27650
BMME5103JAN01/SI
S.E. of regression
3.482120
Akaike info criterion 5.510016
Sum squared resid 97.00126
Schwarz criterion
5.570533
Log likelihood
F-statistic
672.4036
Prob(F-statistic)
0.000000
-25.55008
Durbin-Watson stat 2.021346
[TOTAL: 30 MARKS]
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BMME5103JAN01/SI
Question 5
Suppose that in a city there are 100 identical self-service gasoline stations selling the
same types of gasoline. The total daily market demand function for gasoline in the
market is QD = 60,000 – 25,000P, where P is expressed in RM per gallon. The daily
market supply is QS = 25,000P for P > RM0.60.
a.
Determine the equilibrium price and quantity of gasoline in the market. Please
also illustrate the answer graphically.
[5 marks]
b.
If a firm average variable cost function is AVC = 0.002Q, what is the optimum
level of output that will maximize the profit of the firm?
[5 marks]
c.
Illustrate graphically the answer in (b).
[5 marks]
d.
Suppose that now the market is monopolized (for example, a cartel is formed that
determines the price and output as a monopolist would, and allocates production
equally to each member), and the monopolist total cost function is TC = 50,000 +
0.00001Q2, what is the optimum level of output and price of the monopolist?
[10 marks]
e.
Illustrate graphically the answer in (d).
[5 marks]
[TOTAL: 30 MARKS]
THIS QUESTION ENDS HERE
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