Questions and Answers of Fundamentals of Managerial Economics

2 A company uses raw materials at a rate of 30 tons per year. The purchase cost is 30 per ton, order cost 10 per order, and stock-holding cost 20 per cent per annum. (i) Find the economic order
1 Examine the impact of market structure on the stock-holding decisions of the firm.
5 A firm has a choice between two mutually exclusive investment projects, A and B, with the following initial outlays and timed returns: Project A B Initial outlay 800 1000 Year 1 -100 300 2 200 400
4 'The uncertainty surrounding future costs and revenues interacts with the difficulties of determining the discount rate to make discounting an investment appraisal method of significance only to
3 Comment on the difficulties raised for discounting by the existence of an imperfect capital market or multi-period returns.
2 Examine the impact of an increase in interest rates on the investment activity of a profit-maximising firm.
1 A firm must choose between investment projects A and B, with the following timed returns: Return£ A B YearO -100 -100 1 45 50 2 45 50 3 34 10 Advise the firm, using the following alternative
6 Form and solve the dual of the following production problem: maximise Z=2x+3Y subject to 10X+10Y
5 A manufacturer produces two products, A and B, using 3 inputs X, Y and Z. To produce one unit of commodity A requires 8 units of X, 5 units of Y and 4 units of Z; to produce one unit of B requires
4 Suppose a firm produces two goods, x and x2. Each requires three inputs: machine time, labour time and a single raw material. The amount of each input required to produce a unit of each output,
3 Using the Simplex method solve the following problem: maximise subject to and Z=2x1 - 3x2+x3 3x+6x2 +x3
2 The delineation of products is simple. If the cross-elasticity of demand is unity, the products are the same. If not, they are different.' Discuss.
1 'Since the future is unknown, any expansion activity is a gamble.' Comment on this statement, considering how attitudes towards risk determine the direction of expansion activity into new products
5 When the sale of a particular good creates a future monopoly market for components the optimum strategy is to charge a low price for the original good and a high price for components. Discuss.
4 What factors determine the discretion that firms have over the prices they charge for their products?
3 The economic theory of price is irrelevant to business decisions since the theory assumes that firms sell direct to consumers. Discuss.
2 Given that cost-plus pricing is likely to result in less than maximum profit, how do we account for its widespread use in practice?
1 'The development of a new product creates a monopoly that is likely to be transitory. In setting a price for the new product, it is essential to take account of the transitory nature of the
4 'Since it is impossible to identify the relationship between cost and output in practice, intuition is likely to be a more reliable guide than empirical investigation.' Discuss.
3 To what extent does the opportunity for duplication eliminate the possibility of diseconomies of scale?
2 'Neither logic nor appeal to any facts at present available makes possible the estimation of the benefits of competition relative to economies of scale'. (C. F. Pratten.) Discuss.
1 Explain how the shape of the total cost function is related to: (i) the firm's production function; (ii) the supply curve for inputs.
3 Determine the marginal product of capital and labour in the following pro- duction function: Q=5L-2LK +2LK - 5K. (i) Do the factors exhibit diminishing returns? (hint - returns to the factors are
2 As a result of innovation it is possible to produce the same level of output with 10 per cent less capital and 5 per cent less labour. Analyse the effect of this change on (i) the isoquants for the
1 'The value of output per man in industry A is 5000. In industry B it is 4000. Therefore industry A is more efficient than B.' Discuss. What can we say about relative efficiency if A and B are two
5 To generate data for demand estimation oranges are sold in four supermarkets at different prices for one week. Price Number sold Supermarket A ABCD 3579 65 55 45 35 From these observations,
4 Indicate the statistical problems associated with the estimation of a linear demand function from time series data on past prices and quantity sold.
3 'All that is required of a forecast is accuracy. The reason why it is accurate is not only unimportant, it is irrelevant'. Discuss.
2 'The best way to prepare short-term forecasts of product demand is to ask potential customers about their buying intentions'. Discuss.
1 APEC Ltd, well-known publishers of textbooks, are considering production of a new book, A Popular Guide to Demand Analysis. (i) Indicate how APEC may estimate the demand for this book. (ii) If a
4 Determine the optimal strategies for each player in the following games. What is the value of each game to player A? Each table shows the pay-off to player A. (i) A II B 07217 -4 31572 III IV 1 4
3 'Product differentiation is of greater importance than the number and size of firms in determining the extent of competition in an industry.' Discuss.
2 'The market uncertainty which a firm has to face varies inversely with the number of firms in the industry.' Discuss.
1 Examine how the market structure within which the firm operates delineates the discretion which managers have to make decisions.
4 'Since ownership no longer implies control, we can no longer explain business behaviour on the assumption of profit maximisation.' Discuss.
3 Examine the impact of an increase in production costs on price and output decisions if the objective of the firm is to maximise sales revenue.
2 'Long-run profit is the sum of successive short-run profits. Therefore the maximisation of short-run profit ensures that profits are also maximised in the long run.' Discuss.
1 What are the possible objectives of a modern firm? How far are these sub- stitutes for, or complements to, profit?
3 Profit might be defined as 'the maximum value which the company can dis- tribute during the year, and still expect to be as well off at the end of the year as it was at the beginning' (Sandilands
2 'To an accountant, profit is essentially a historical record of the past. To an economist it is a speculation about the future.' (Joel Dean). Discuss.
1 'Profit is simply the difference between revenue and cost that arises because some firms are more efficient than others." Discuss.
2 Each defective unit costs 20 to replace. An overhaul would set the failure rate to 0.01 but would cost 200. Given that the firm's objective is to minimise expected cost, should the firm overhaul?
1 APEC Ltd, well-known publishers of economic textbooks, are considering the publication of a new book, Managerial Economics for Beginners. If the book is produced it will cost 1000 to set up by the
2 A monopolist has a demand function P= -BQ and an average cost function. a AC- =b+cQ Q with all coefficients > 0 and >. Find Q (output), which gives (i) maximum revenue; (ii) minimum average cost;
1 Determine the marginal products of capital (MPK) and labour (MPL) in the following production functions: (i) Q 5L-L2 + LK + 4K-3K; (ii) Q=10L+L+3L3 +2LK-L2K+4K - 2K.
Comprehend the measures of controlling business cycles.
Understand multiplier and accelerator.
Develop a critical understanding of the various theories on business cycles.
Examine the intricacies of business cycles, causes of such cycles, and their effects.
Analyse the reasons behind inflation, its impact on the economy and measures to curb it.
Understand various measures of inflation and their role in decision-making.
Explain concepts like wage price spiral, hyperinflation and inflationary gap.
Explore the realms of inflation and its different frontiers.
Understand the value of money and demand and supply of money.
Know the evolution of money and its functions.
Elaborate the concept of balance of payments and its importance.
Appreciate the difficulties in estimating national income.
Understand the advantages of national income calculation in global perspective.
Discuss and analyse the different methods to measure national income.
Explain the concept of real and nominal national income.
List the various concepts of national income, like GDP, GNP and NNP.
Comprehend the role of government in reducing externalities and in providing public goods.
Analyse the impact of externalities on market forces.
Understand the nature of public goods.
Differentiate between consumption and production externalities.
Differentiate between positive and negative externalities.
Introduce the concept of externalities.
Illustrate the different theories of profit.
Understand the determination of rent and interest.
Explain the nuances of determination of wage and backward bending supply curve of labour.
Introduce different factors of production and their pricing.
Understand dumping and its impact.
Learn the effect of administered pricing on general pricing policies.
Relate product life cycle stages as well as different phases of business cycles with pricing decisions.
Understand cost based, value based and perception based pricing strategies.
Introduce the rationale behind different pricing decisions of a firm.
Illustrate the application of game theory concepts in models of economics.
Determine Nash equilibrium, minmax and maxmin strategies.
Discuss dominated and dominant strategies.
Explain the relevance of game theory in economic theory.
Understand the intricacies of risk and uncertainty in economic decision-making.
Identify with the practice of price leadership by an oligopolist.
Comprehend the nuances of collusive oligopoly, with detailed analysis of its various forms, including cartels.
Understand the indeterminate demand curve for a firm under oligopoly and look into the various models of price and output decisions under oligopoly.
Examine the nature of an oligopoly market.
Understand the rationale behind advertising for the “unique” product of a monopolistically competitive firm.
Comprehend why a firm in monopolistic competition operates with excess capacity.
Analyse the pricing and output decisions of a monopolistically competitive firm in the short run and long run.
Understand the nature of imperfect competition or monopolistic competition.
Introduce the concept of monopsony.
Lay down a representation of the economic inefficiency of monopoly.
Explore the nuances of price discrimination by a monopolist and the different degrees of such discrimination.
Develop an understanding of output and pricing decisions of a multi-plant monopolist.
Analyse the pricing and output decisions of a monopolist in the short run and long run.
Explore the vistas of emergence of monopoly power, with focus on barriers to enter the market.
Examine the nature and different forms of a monopoly market.
Analyse the pricing and output decisions of a perfectly competitive firm in the short run and long run.
Understand market demand and firm’s demand under perfect competition.
Examine the nature of a perfectly competitive market.
Introduce the basics of market morphology and identify the different market structures.

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