1. Explain the determination of the optimal price and output combination in a situation of monopolistic competition. Use the resulting

equilibrium to illustrate the statement that 'production inefficiency is

a necessary price to pay for product variety'. Comment on this

statement.

2. Assess the contribution of business games to the study of decisionmaking processes, illustrating your answer by reference to one

business game with which you are familiar.2.6

3. 'Given that the future is unknown, the best we can do is to estimate

the likelihood of future events and then use expected profit as the

decision criterion.' Discuss.

4. The senior partner in a local accountancy firm is concerned about the

error rate amongst assessments issued by her office. A careful check

over the past few years enables her to estimate that the error rate has

the following probability distribution:

Error rate Probability

0.05 0.25

0.10 0.35

0.15 0.25

0.20 0.15

Each error costs 40 because of the labour time involved in reassessment. Her firm is just entering the assessment 'season', and is

expected to perform 500 assessments over the next few months.

One way to reduce the error rate is to send all staff to a one-day

training course at the local university- 'Precision in Assessment' . The

university claims this would ensure an error rate of 0.05, but she

considers that an error rate of 0.10 would be equally likely.

The course fee is 700 for all her staff, whilst lost profit from one

day's work missed would be 500. Advise her on whether to send staff

on the course or not.

A careful check of that day's output shows that in ten assessments,

two contained errors. Use this information to update the error rate

probability distribution and hence determine whether your advice

needs amendment.

5. 'The fitting of mathematical trend curves is by far the easiest and

cheapest method of forecasting long-run changes in product demand,

and is likely to be just as reliable as any alternative method. ' Discuss.

6. (i) Explain the concept of opportunity loss, and show that the

minimum opportunity loss is equal to the Expected Value of

Perfect Information.

(ii) The failure rate in a particular examination is estimated to be

40%. Construct a table showing the probabilities of 0, 1, 2 . . . 5

students failing in a sample of five.

(iii) 150 graduate entrants are due to take their first professional

accounting exam at the Institute of Certifiable Accountants.

The probability distribution for the failure rate is estimated in

the following table:

Failure rate

0.1

0.2

0.3

0.4

0.5

Probability

0.1

0.2

0.3

0.3

0.1

Each failing student is entitled to a 10 refund on professional

fees. The Institute's senior tutor is confident that she could

ensure a failure rate of 0.1 by holding an intensive revision

course, at a cost to the Institute of 300. Advise the Institute on

whether the revision course should take place.

A tutorial test of five students resulted in no failures. Use this

information to revise the failure rate probability distribution,

and hence reassess the revision course.

7. 'Despite being a small local shopkeeper I can always beat the price

that Woolworths charge for the same product. Woolworths must pay

rent on its store while I own my shop and have no rent to pay.'

Discuss.

8. A firm keeps a record of sales and prices over the past seven months,

resulting in the following table:

Nov. 1985

Dec.

Jan. 1986

Feb.

March

April

May

Price (/ton)

7.5

8.0

8.0

7.2

7.0

8.0

8.5

Sales (tons)

84.5

82.0

84.0

92.0

95.0

92.0

91.5

Use these observations to estimate demand as a linear function of

both price and time. Utilise this function to estimate demand for the

following month, on the assumption that:

(a) price remains unchanged,

(b) price increases to 9/ton.

336 Managerial Economics

Hence estimate the price elasticity of demand between these prices

and find the price which would maximise sales revenue.

Given the nature of the observations, comment on any difficulties in

interpreting your results for decision-making purposes.

9. Critically assess the methods used to generate empirical estimates of

both short- and long-run cost functions. Do the empirical difficulties

encountered rob the resulting estimates of any general operational

utility?

10. 'About half of all advertising expenditure is wasted. The problem lies

in knowing which half.' Discuss this statement and assess the usefulness of managerial models of advertising allocation decisions.