Explain the attached questions
reached by default. In a sense, this is a statement of faith on which all Examination questions and answer notes 337 rational approaches to human affairs are based' (Amara and Lipins- ki). Discuss this statement, and assess the value of the analytical decision approach as an operational tool of management decision- making. 2. Critically examine the theoretical and empirical validity of the profit maximisation hypothesis. 3. The Hot-Bake shop sells only bread made that day. Each loaf produced has a variable cost of 30p and sells for 50p. 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 (a) Fixed costs are estimated at EX 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 Probability 0.05 0.25 0.10 0.60 0.15 0.15 (i) Find the number of loaves produced if the expected num- ber 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 f11 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. 4. '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 5. Cambrian Railways runs a daily container freight train between Cardiff and Birmingham. Its two major customers are British Steel and the Welsh Farming Cooperative. The demand for container by each customer is given by the equations: P. = 500-80, for British SteelCaruin and Duninguam. is two major customers are Dian SICC and the Welsh Farming Co-operative. The demand for containers by each customer is given by the equations: P1 = 500-80, for British Steel P2 = 400-502 for Welsh farming. P, is the price charged by Cambrian per container, and @, is the number of containers used by each customer. Cambrian's total cost function is given by the equation: TC = 10 000+ 200 where O is the number of containers per trip. (a) What are the necessary conditions for profitable price discri- mination 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 discri- mination. Determine Cambrian's price and output combination to maximise profit, and hence estimate the opportunity cost to Cambrian of the Anti-Price Discrimination law. 6. 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. 7. (a) Compare and contrast the explanatory and extrapolatery approaches to demand estimation. Illustrate your answer with reference to the problem of estimating demand for a new luxury food processor. (b) The Welsh Kitchen Design Company sells its deluxe food proces- sor for f150/unit. Company experience suggests that both price and consumer incomes affect sales, with an estimated price elasticity of demand of -3.0, whilst income elasticity is estimated at 4.0. In 1986 the company sold one million units, whilst total consumer disposable income was $600 billion. Estimated con- sumer disposable income for 1987 is $650 billion. (i) Assuming price remains the same in 1987, estimate total sales revenue. Examination questions and answer notes 339 (ii) If 1988 consumer income is expected to remain constant at $650 billion, whilst price is expected to fall by $25, estimate sales revenue in 1988. (ii) Estimate sales revenue in 1988 if consumer income rises by 10% between 1987/88, whilst price falls by 15%. (iv) Use the information above to estimate demand as a linear function of price and income. 8. "Despite the theoretical advantages of the discounting procedure, capital investment was either justified in terms of some "need to have" case presented by lower management or on the basis of some elementary payback period calculations." Discuss this conclusion from an empirical survey of investment decision-making. 9. Explain the inability of economic theory to find satisfactory solutions to the theoretical problem of price and output decision-making in oligopolistic markets. 10. 'Advertising in the modern economy has entered the state of person- sion as distinct from proclamation or iteration' (Turner). Discuss , his view of advertising in relation to its role in the modern firm, and explain the determination of an optimal advertising budget.An optimal inventory policy is one that minimises the sum of stock purchase and acquisition (holding, ordering and stock-out) costs. It is easy to show that under carefully defined circumstances this occurs when the marginal increase in holding costs equals the marginal fall in order costs. However each of the specified conditions deviates from these circumstances, and has implications for an optimal stock policy. For example uncertain demand introduces the possibility of profitable sales forgone, and thus increases the average stock level. 7. Outline the explanatory and extrapolatery methods, listing the benefits/disadvantages of each, and show how each could be used to estimate demand for the new food processor. Note that past experi- ence may not be much of a guide if the new processor has special characteristics. Examination questions and answer notes 347 Answering part (b) requires that differing price and income values be used with the elasticity estimates to estimate sales revenue under different conditions. The answers (i) to (iii) generate enough information to set up simultaneous equations that can be used to answer (iv). 8. Explain what is meant by the discounting approach to investment appraisal, and contrast this to more ad hoc methods such as payback. Show that there may be circumstances where information is inade- quate for discounting, and where other methods more adequately reflect the firm's objectives. Finally discuss the empirical evidence (which seems to point to the use of other methods in smaller companies, but that discounting is increasingly used by large corporations). 9. This question is a spillover from the previous course, although Chapter 8 might help towards an answer. 10. A difficult question that asks you to judge the effects of advertising in shifting the demand curve. Whether adverts are persuasive or in- formative is a matter of psychological judgement: whether advertising shifts the demand curve is a matter of empirical observation. The determination of an optimal advertising budget requires a compari- son of the costs and benefits of advertising that may proceed in a number of ways, from marginalism through the Dorfman-Steiner theorem to an informational approach. 11. Another spillover from microeconomics, although Chapter 7 may help. Basically the answer involves the factors that determine costs, and the relation of these particular circumstances to the general theory. The net effects depend on whether the increase in labour productivity outweighs the increase in wages, together with any substitution effects. Economics 1988 1,2. Both of these questions reflect the earlier (microeconomics) course, and should only be answered when all else proves impossible. 3. The evidence that very good decisions are made by some people with no reference to any decision model is not a refutation of that model. Bad decisions are also made by not using any decision model, or by using a model badly. The issue is really whether using a relevant decision model in a consistent and sensible way leads to decisions that are, on average, better than the alternatives. In the absence of reliable data, this remains a matter of belief rather than fact, although it is interesting that talking through the decision process with managers often reveals a process that is consistent with the decision model i.e. objectives are stated, alternatives considered, etc., even though this process is more implicit than explicit. APrice (f/ton) Sales (tons) Nov. 1985 7.5 84.5 Dec 8.0 82.0 Jan. 1986 8.0 84.0 Feb 7.2 92.0 March 7.0 95.0 April 8.0 92.0 May 8.5 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 useful- ness 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 f10 per unit, whilst the cost of ordering stock is f20, and the cost of holding stock is 14% of the average stock value. Find the Economic Order Quantity and the Mini- mum 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. ECONOMICS 1987 Time allowed - 3 hours Answer FOUR questions 1. 'Statistically we expect that good decisions will lead to favourable outcomes more often than will either poor decisions, or decisions reached by default. In a sense, this is a statement of faith on which all K
