be fast in answering the following questions

1. Critically assess the view that an understanding of the principles of

'scientific' decision-making is fundamental to the success of a modern

economy.

Examination questions and answer notes 335

2. (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.

3. '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.

4. 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.

5. 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?

6. '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.

7. Analyse the effects of an increase in interest rates on the investment

activity of a profit maximising firm. Does it matter if inflation

increases in proportion to the increase in interest rates?

8. (a) Show that an increase in the unit value of stock will lead to a less

than proportionate fall in the optimum amount of stock held.

What assumptions underlie your answer?

(b) A firm faces a uniform annual demand of 100 000 units. The

purchase cost of stock is 10 per unit, whilst the cost of ordering

stock is 20, and the cost of holding stock is 14% of the average

stock value. Find the Economic Order Quantity and the Minimum Acquisition Cost.

How are your answers affected by:

(i) the fact it takes two weeks between placing an order and

stock arriving;

(ii) the offer of a 1% discount off the purchase cost if stock is

ordered in lorry loads of 17 000 units.

9. 'The market allocates resources to the firms that best meet the needs

of consumers.' Discuss.

10. 'The force of competition, the desires of managers and the needs of

shareholders combine to ensure that firms maximise profit.' Discuss.