i will not accept wrong answers

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

Examination questions and answer notes 337

rational approaches to human affairs are based' (Amara and Lipinski). Discuss this statement, and assess the value of the analytical

decision approach as an operational tool of management decisionmaking.

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 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.

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 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.

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 extrapolatory

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 processor for 150/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 consumer 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.

(iii) 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 persuasion as distinct from proclamation or iteration' (Turner). Discuss this

view of advertising in relation to its role in the modern firm, and

explain the determination of an optimal advertising budget.

11. Analyse the effects of an increase in both wage rates and labour

productivity on the costs of the firm.