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Examination questions and answer notes 345 putational and data problems associated with each, referring to examples. For what decisions are cost functions necessary? Finally, note that 'it is better to be vaguely right than precisely wrong', Refer to Chapter 7. 6. Note that the quotation is reproduced in Chapter 10. Consider the methods available for determining the advertising budget, ranging from marginalism through the informational approach to the Dorf- man-Steiner model. Contrast these with the more pragmatic approaches encountered in practice. See Chapter 10. 7. Refer to Q9, 1985 and answer notes. Analyse the effects of an increase in interest rates via the allocation of funds model and the discounting approach. Explain the effects of inflation on the discount- ing approach, noting the consistency required. 8. (a) First derive the economic order quantity, and then illustrate the appropriate sensitivity results, if necessary reproducing the relevant diagram from Chapter 11. Outline the assumptions made, and consider their relevance. (b) Apply the model generated in part (a), and then (i) show that an order would simply be placed when stock falls to two weeks worth (since demand is uniform). Briefly outline the consequences if 'two weeks' is an uncertain parameter. (ii) compare the savings from the discount with the increase in inventory costs as a consequence of ordering beyond the E.O.Q. 9. ) Refers to the first year of the course, and should be avoided, although 10. Chapter 3 may provide a basis for answering Q.10. Economics 1987 1. A question about the basic philosophy of scientific decision-making, to be answered only as a last resort! If you must answer the question, do so analytically, by expounding a scientific framework for deci- sions, and then examining the circumstances in which that framework may (or may not) improve the decision process. See Chapters 1 and 4. 2. Explain the profit maximisation hypothesis, and briefly outline the price/output decision model with profit as the objective. List the theoretical arguments against this, including informational difficul ties, the weakening of competition and the divorce of ownership and control. Finally explain the empirical evidence: do firms maximise profits, either by accident (as if ) or by design? This question is not an opportunity to parade a summary of alternative models. 3. This question is a relatively simple application of the "Newsboy 346 Managerial Economics Problem', with one or two little twists. Part (a) is answered by using the formula: Fixed costs Breakeven= Price - Marginal cost To answer part (b), find the opportunity loss corresponding to each combination of act and event (production or demand equal to 1000, 1200, etc.). Then convert the frequency to a probability distribution, and find the action to minimise opportunity loss. The answer to part (c) requires the use of the failure rate probability distribution so that the expected number of saleable loaves is 1200 The expected failure rate is 0.095, so 1326 must be produced to give an expected 1200 saleable loaves (1326 x 0.905 = 1200).