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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. 1 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] 2 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. 3 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. 4 BMME5103JAN07/SI 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 5 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] 6 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] 7 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] 8 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. 9 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. 10 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] 11 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 12 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 13 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 14 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] 15 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] 16 BMME5103JAN01/SI 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]. 17 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 18 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] 21 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 22