COURSE

COURSE CODE

EXAMINATION

TIME

MANAGERIAL ECONOMICS/ECONOMICS AND

STATISTIC SOCIAL

ECO556/555/550/510

OCTOBER 2008

3 HOURS

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of two (2) parts: PART A (6 Questions)

PART B (3 Questions)

2. Answer five (5) questions from PART A and ALL questions from PART B in the Answer

Booklet. Start each answer on a new page.

3. Do not bring any material into the examination room unless permission is given by the

invigilator.

Please check to make sure that this examination pack consists of:

i) the Question Paper

ii) an Answer Booklet - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

PART A

QUESTION 1

There are only three manufacturers of Product X in the country and the demand functions

faced by each manufacturer for Product X are as follows:

Manufacturer 1: Pi = 800-0.75Qi

Manufacturer 2: P2 = 500 - 1.4Q2

Manufacturers: P3 = 600-0.4Q3

Where P = price of Product X and Q = quantity demanded for Product X

a) If the price of Product X is set by the government at RM200 per unit, calculate the

total revenue earned by Manufacturer 1.

(2 marks)

b) If Manufacturer 3 wants to sell 300 units of Product X, what should be the price

charged?

(1 Vz marks)

c) Calculate the revenue maximizing output for Manufacturer 2.

(2 marks)

d) Determine the market demand curve function for Product X

(21/4 marks)

QUESTION 2

The estimated market demand for Suny TV is given as:

Qs = 6216 - 4.6PS - 3.4PX

Where

Qs = quantity demanded for Suny TV

Ps = price of Suny TV (RM800)

Px = price of good X (RM400)

a) Calculate the price elasticity of demand for Suny TV.

(2 marks)

b) Interpret the above price elasticity of demand for Suny TV. Give one (1) factor that

influence the price elasticity of demand.

(2 marks)

c) Calculate the cross price elasticity of demand.

(2 marks)

d) Define income elasticity of demand.

(2 marks)

QUESTION 3

Given the following short run production function (Q):

Q = 10L2-0.5L3

Where

Q = units of output

L = units of labour

a) Derive the functions for:

i) marginal product of labour (MPL)

(1 mark)

ii) average product of labour (APL)

(1 mark)

b) How many units of labour should the firm hire in order to maximize total product?

(1 14 marks)

c) Calculate the most efficient range of values for labour that the firm should hire.

(21/2 marks)

d) Sketch the marginal product and average product functions in a diagram. Show the

most efficient range of labour in the diagram.

(2 marks)

QUESTION 4

a) Given the following total cost function:

TC = 600 + 400Q - 48Q2 + 0.4Q3

i) What is the level of output where marginal cost is minimised?

(2 marks)

ii) At what output level does marginal cost intersect with average variable cost?

(2 marks)

b) Nordin has RM50.000 in his savings account. He is thinking of using this savings to

pursue a one-year MBA programme at a private college. The tuition fee for the

programme is RM10,000. He has to incur monthly costs of RM200 for

accommodation and meals. He also estimates that the total cost for books and other

supplies will be RM700 for the whole year.

He could have earned RM25,000 per year by getting a job instead of going to the

private college. Currently the banks' interest rate on savings account is 4%. Calculate

Nordin's explicit costs and implicit costs.

(4 marks)

QUESTION 5

The market supply (Qs) and demand curves (QD) for a product traded in a perfectly

competitive market are given below:

Qs = 80 + 30P

QD = 280 - 20P

a) Calculate the market equilibrium price in the industry.

(1 mark)

b) If a firm's total cost function is given as:

TC = 10 + 4Q + 3Q2-0.2Q3

what is the profit-maximizing price and quantity for this firm?

(3 marks)

c) How much is the total maximum profit for the firm? State the type of profit earned by

the firm.

(2 marks)

d) Should the firm shut down or continue operation? Justify your answer.

(2 marks)

QUESTION 6

Goldie & Co. a company that produces two types of burgers: chicken burger (C) and beef

burger (B). The average cost (AC) function is:

AC = 5C2 - 6CB - 3C + 8B2 - 2B - 120

a) Goldie & Co. expects the total order for both the chicken and beef burgers to be 10

boxes. Using the Lagrangian technique, determine the number of boxes of beef

burger and chicken burger that the company has to produce in order to minimize the

average cost.

(6 marks)

b) Calculate the minimum average cost.

(2 marks)

PARTB

QUESTION 1

The estimated demand function below is for Brand T shoes:

QT = 30205 - 50.4PT + 34.8PZ - 13.6Y + 0.4A

(-2.6) (3.9) (-2.98) (1.9)

Where

QT = quantity demanded of Brand T shoes

PT = price of Brand T shoes

Pz = price of competitor's Brand Z shoes

Y = consumers income

A = advertisement expenditure

Assume that PT = RM90 per pair, Pz = RM130 per pair, Y = RM2100, A = RM1200

Coefficient of determination (R2) = 0.76

Standard error of estimation = 62.56

The values in parentheses are the t-statistics for each coefficient.

(The critical t-value at 95% confidence interval is 1.96)

Based on the above regression results:

a) Derive the demand and marginal revenue curve functions of Brand T shoes.

(3 marks)

b) Calculate the income elasticity of demand for Brand T shoes. Interpret your answer.

(3 marks)

c) Do you think that an increase in the advertisement expenditure is advisable to the

seller? Why?

(2 marks)

d) What should be the price charged for Brand T shoes if the producer wants to

maximize total revenue?

(2 marks)

e) At the total revenue-maximizing price, what range of quantity output would you

expect at 95% confidence interval?

(2 marks)

f) What would be the effect on quantity demanded for Brand T shoes if the price of

Brand Z increases by 20%? (Answer in percent)

(3 marks)

g) What is the range of price where demand for Brand T shoes is elastic?

(2 marks)

h) Identify the variables that are statistically significant at 95% confidence interval.

(2 marks)

i) Interpret the coefficient of determination (R2).

(1 mark)

QUESTION 2

a) The production function of Dahlia Bakery is given as:

Q = 6.5L06K08

Where

Q = quantity of bread

L = labour input

K = capital input

The price of labour is RM20 per person and capital is RM18 per unit. Currently it

employs 25 units of labour and 15 units of capital.

i) How much is the total cost incurred by Dahlia Bakery based on the current

inputs used?

(1 !4 marks)

ii) Determine the current output level of Dahlia Bakery.

(1 V* marks)

iii) Derive the expansion path equation for Dahlia Bakery.

(4 marks)

iv) What should be the optimal combination of labour and capital to produce the

current output level?

(4 marks)

v) Show that the average cost using the optimal input mix is lower as compared

to the current input mix.

(3 marks)

b) Define 'economies of scale' and 'diseconomies of scale'. How do they influence the

shape of the long-run average cost curve?

(6 marks)

QUESTION 3

a) Krunchmore Co. is a keropok manufacturer selling its product in 2 countries;

Malaysia and Thailand. The demand functions for the two markets are:

Malaysia: QM = 200 - 4PM

Thailand: QT = 100 - PT

The total cost function is: TC = 150 + 5Q

Advise whether Krunchmore Co. should practice price discrimination or should it

charge a uniform price, in order to get maximum profit (show your working).

(12 marks)

b) The market demand curve for a product sold by a seller is given as Q = 120 - 4P and

its total cost function is TC = 300 + 1.5Q2

i) What is the type of market structure for this seller? Give your reason.

(2 marks)

ii) Calculate the price and quantity that maximizes its profit.

(3 marks)

iii) Calculate and define the type of profit earned?

(3 marks)

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