1. Critically examine the theoretical and empirical validity of the profit

maximisation hypothesis.

2. The Hot-Bake shop sells only bread made that day. Each loaf

produced has a variable cost of 30p and sells for SOp. Any bread

unsold at the end of each day is thrown away.

At the start of each day, the manager must decide how many loaves

to produce. The table below records sales over the past month:

Daily sales Frequency

1000 6

1200 10

1400 10

1600 4

(a) Fixed costs are estimated at X per day. Find the breakeven

number of loaves produced and sold, and the number if expected

daily profit was 50.

(b) Find the number of loaves produced to minimise expected

opportunity loss.

(c) Bread is produced by a fully automated machine which mixes the

dough, divides it into 1 lb units, fills each baking tin and passes

them through an oven. Out of each batch, some are rejected for

being underweight or burnt.

The proportion rejected has the probability distribution given

below:

Proportion rejected

0.05

0.10

0.15

Probability

0.25

0.60

0.15

(i) Find the number of loaves produced if the expected number of saleable loaves equals your answer to question (b).

(ii) The services of a maintenance engineer would set the

rejection rate equal to 0.05, but would cost 11 per day.

Advise the manager on whether to engage the engineer or

not, if the desired daily production is 1300.

(d) Comment on the assumptions underlying your answers, and

discuss the relevance of other decision criteria.

3. 'Profit is the maximum value a company can distribute during the

year and still expect to be worth as much at the end of the year as it

was at the beginning.' Discuss this statement, and comment on its

value in measuring profit for decision-making.

338 Managerial Economics

4. Cambrian Railways runs a daily container freight train between

Cardiff and Birmingham. Its two major customers are British Steel

and the Welsh Farming Co-operative. The demand for containers by

each customer is given by the equations:

P 1 = 500- 8Q1 for British Steel

P2 = 400-5Q2 for Welsh farming.

P; is the price charged by Cambrian per container, and Q; is the

number of containers used by each customer.

Cambrian's total cost function is given by the equation:

TC = 10 000+20Q

where Q is the number of containers per trip.

(a) What are the necessary conditions for profitable price discrimination by Cambrian?

(b) What profit -maximising rule will Cambrian use if setting prices as

a discriminator? Determine the profit-maximising quantity of

freight service Cambrian will supply, show how this will be

divided between steel and agriculture and find the prices charged

in each market. Calculate Cambrian's total profit.

(c) Assume that Cambrian is prevented by law from price discrimination. Determine Cambrian's price and output combination

to maximise profit, and hence estimate the opportunity cost to

Cambrian of the Anti-Price Discrimination law.

5. Define an optimal inventory policy, and assess the impact on that

optimal inventory policy of:

(i) uncertain demand

(ii) uncertain lead times

(iii) customer reactions to product shortages

(iv) an oligopolistic product market.

6. Assess the view that privatisation can have little impact on the

behaviour of previously nationalised industries, since a state monopoly is simply replaced by a private one.

7. 'Attempting to learn how to make decisions is an exercise in futility.

All the most important decisions are made by people with little time

and even less information, acting on instinct.' Discuss.

8. Critically assess the relevance of the 'as if' principle used to justify the

reliance on profit maximisation as the working objective of the

modern business corporation.

340 Managerial Economics

9. (a) Evaluate the operational utility of demand elasticity estimates,

and outline any interpretational difficulties in the use of such

estimates.

(b) The annual demand function for a particular motor car is

estimated as:

D = 16000-10P/3+ Y2/1000

where D =annual demand, P =price in 's and Y =average

disposable income.

(i) Given that the retail price next year will be 12 000, whilst

average disposable income is expected to be 8000, estimate next year's annual demand. If the manufacturer

receives 80% of the retail price for each car sold, estimate

the manufacturer's revenue next year.

(ii) Find the retail price to maximise manufacturer's revenue

next year.

(iii) If the marginal cost per car is estimated to be 6000, find

the price to maximise profit next year.

(iv) In the subsequent year the retail price is expected to rise to

13 000, whilst incomes should increase by 5%. Estimate

demand and manufacturer's revenue for that year, and use

this information to estimate the price and income demand

elasticities.

10. 'There is a simple relationship between advertising and profitability:

the most profitable firms are the ones that advertise most. Therefore

advertising must increase profitability.' Discuss.