.The following questions are intricate and advanced on business law

1. 'The most we can say about the Demand Curve is that it slopes down

unless it slopes up.' Discuss.

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Examination questions and answer notes 333

2. Explain the determination of the optimal price and output combination in a situation of monopolistic competition. Use the resulting

equilibrium to illustrate the statement that 'production inefficiency is

a necessary price to pay for product variety'. Comment on this

statement.

3. Assess the contribution of business games to the study of decisionmaking processes, illustrating your answer by reference to one

business game with which you are familiar.

4. 'Given that the future is unknown, the best we can do is to estimate

the likelihood of future events and then use expected profit as the

decision criterion.' Discuss.

5. The senior partner in a local accountancy firm is concerned about the

error rate amongst assessments issued by her office. A careful check

over the past few years enables her to estimate that the error rate has

the following probability distribution:

Error rate Probability

0.05 0.25

0.10 0.35

0.15 0.25

0.20 0.15

Each error costs 40 because of the labour time involved in reassessment. Her firm is just entering the assessment 'season', and is

expected to perform 500 assessments over the next few months.

One way to reduce the error rate is to send all staff to a one-day

training course at the local university- 'Precision in Assessment' . The

university claims this would ensure an error rate of 0.05, but she

considers that an error rate of 0.10 would be equally likely.

The course fee is 700 for all her staff, whilst lost profit from one

day's work missed would be 500. Advise her on whether to send staff

on the course or not.

A careful check of that day's output shows that in ten assessments,

two contained errors. Use this information to update the error rate

probability distribution and hence determine whether your advice

needs amendment.

6. 'The fitting of mathematical trend curves is by far the easiest and

cheapest method of forecasting long-run changes in product demand,

and is likely to be just as reliable as any alternative method. ' Discuss.

7. An engineering firm has applied for patents on two new products and

has just learned that only one application has been successful.

Compare and contrast the optimal pricing and promotional strategies

for each of these new products.

8. Critically examine the view that advertising can be . seen as the

334 Managerial Economics

provision of information valuable to the consumer, for which the

consumer will be prepared to pay extra.

9. (a) Briefly analyse the effect of an increase in interest rates on the

investment portfolio of a profit maximising holding company.

(b) The University is contemplating building a new squash court,

adjacent to its new hall of residence. To secure local support for

its planning application, the University has offered to open the

court to local players at student rates for the first five years.

After five years, the University can charge what it likes for the

courts. Consequently, the University estimates that net revenue

from the court will be 1000 for each of the first five years, rising

by 10% (compounded) in each of the sixth to tenth years. In the

eleventh and twelfth years rising maintenance costs will completely offset rising fees so that net revenue stays at tenth year

level. At the end of the twelfth year, the site is due for

redevelopment.

The cost of building the squash court is estimated to be 6000.

To finance the court, the University must draw from its reserves, currently earning 12% in Local Authority Bonds. Selling

sufficient bonds would involve legal and administrative costs of

320. Advise the University on the viability of the project. What

other factors should the University take into account?

10. A firm has an annual demand of S units for a good whose purchase

cost is c per unit. Each order costs a to place, and the cost of

holding stock is b% of the average value of stock per annum.

Determine the optimal order quantity.

A local firm uses 2000 units of a particular component each year. The

component has a purchase price of 4/unit, while the cost of holding

stock is estimated at 20% of the average stock value. If the cost of

placing each order is 12.50, find the optimal number of orders placed

each year. Suppose the component supplier offers a discount of 2%

on the purchase price if orders are placed in units of 1000. Is the

discount worth accepting?

Suppose that instead of a single figure you had been given a

probability distribution for the number of units used each year.

Indicate the effect on stock policy.