QUESTION TWO
a. Discuss the importance of production functions in managerial economics? (3 marks)
b. What are the decisions making principles in production? (2 marks)
c. Explain the difference between diminishing returns and decreasing returns to scale. (3 marks)
d. A manufacturer of home appliances faces the production function
Q = 40L – L2 + 54 K -1.5K2 with the inputs costs of PL = ¢15 and PK =¢10
i. What is the optimal combination of capital and labour? (2 marks)
ii. What is the resulting output when K= 9? (3 marks)
iii. What is the minimum cost? (2 marks)

QUESTION FOUR
a) Explain the importance of the concept of elasticity? (2 marks)
b) Explain with examples, the types of elasticity of demand? (3 marks)
c) Discuss with illustrations, the various determinants of elasticity? (3 marks)
d) Consider the following demand and supply relationships in the market for golf balls:
Qd = 180 - 4P - 4T Qs = -18 +4P - 50R
where T is the price of titanium, a metal used to make golf clubs, and R is the price of rubber.
i. If R = 4 and T = 20, calculate the equilibrium price and quantity of golf balls (2 marks)
ii. At the equilibrium values, calculate the price elasticity of demand (2 marks)
iii. At the equilibrium values, calculate the cross-price elasticity of demand for golf balls
with respect to the price of titanium. What does the sign of this elasticity tell you about
whether golf balls and titanium are substitutes or complements? (3 marks)