ECO201

Examination – January Semester 2009

Managerial Economics
Wednesday, 13 May 2009 7.30pm – 9.30pm
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Time allowed: 2 hours

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INSTRUCTIONS TO STUDENTS:

1. This examination contains FOUR questions and comprises SEVEN printed

pages (including cover page).

2. You must answer ALL questions.

3. All answers must be written in the answer book.

At the end of the examination

Please ensure that you have written your examination number on each answer book
used.

Failure to do so will mean that your work cannot be identified.

If you have used more than one answer book, please tie them together with the string
provided.

THE UNIVERSITY RESERVES THE RIGHT NOT TO MARK YOUR

SCRIPT IF YOU FAIL TO FOLLOW THESE INSTRUCTIONS.

ECO201 Copyright © 2009 SIM University Page 1 of 7

Examination – January Semester 2009
SECTION A (Total 100 marks)

You must answer ALL the questions in this section.

Question 1

(a) You have decided to start a printing company. You are now deciding which
printer to buy out of three choices. You have a budget of $6,000 and can buy as
many printers as you want within this budget.

- Printer A is the newest model. It is the most productive printer and costs
$1000.
‐ Printer B is an older model. It is less productive and costs $750.

‐ Printer C is the oldest model. Although it is the least productive printer,

it is also the cheapest at $500.
The following table shows the marginal number of copies per hour produced by
each additional unit of printer purchased. For example, the fifth unit of Printer B
purchased gives you an additional 300 copies per hour.

Marginal number of copies per hour

Number of MB of Printer A MB of Printer B MB of Printer C
printers ($1000) ($750) ($500)
purchased
1 1000 800 600
2 900 600 500
3 800 500 400
4 700 400 300
5 600 300 200
6 500 300 200

How would you allocate your budget among these three kinds of printers?
Show your calculations clearly.
(10 marks)

(b) Your friend and you have each paid $10 to watch a movie. Halfway through the
movie, both of you realise that the movie is boring and a waste of your time.
Your friend suggests leaving the cinema, but you think that since you have
already paid $10, it makes more sense to just finish watching the movie. Using
the economic principles you have learnt in class, who is correct? Explain why.
(5 marks)
(c) In Singapore, there are three telecommunications providers: Singtel, M1 and
Starhub. What kind of market would you term this as? Give two reasons why it
is difficult for a new company to penetrate this market.
(5 marks)

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Examination – January Semester 2009
 (d) You sister owns a hair salon, and currently charges $40 for a lady’s haircut.
Would you recommend that she charge less than $40, $40, or more than $40 for
a men’s haircut? Why?
(5 marks)

Question 2
(a) Shop A and Shop B both sell shoes and are located next to each other. Both A
and B can choose to price their shoes high (H), medium (M) or low (L). A and
B want to sell as many shoes as possible.
The following payoff matrix describes the number of shoes A and B will each
sell, depending on which pricing schemes the two of them choose. For example,
if A chooses M and B chooses M, then A’s payoff is 2 and B’s payoff is 4.
Shop B
H M L
H 5,8 5,5 8,6
Shop A M 6,7 2,4 4,5
L 7,5 3,2 9,3

(i) What is A’s dominant strategy, if any?

(3 marks)

(ii) What is B’s dominant strategy, if any?

(3 marks)

(iii) What is the Nash Equilibrium in this game?

(3 marks)

(iv) Is there another outcome that is better than the Nash Equilibrium for
both A and B? Why is it not possible for them to achieve this outcome?
(4 marks)

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Examination – January Semester 2009
(b) You work for a company that manufactures instant noodles. The demand
function for your product is:

Q = 20 – 2P – 0.001M – 1.5Px

Q is the number of packets of instant noodles demanded

P is the price of a packet of instant noodles
M is the income level of the consumer
Px is the price of a related good, Good X

(i) From the demand function, are instant noodles a normal or inferior
good? Why?
(2 marks)

(ii) Explain why instant noodles could be seen as an inferior good.

(2 marks)

(iii) Assume P=1, M=1000 and Px=2. What is the price elasticity of instant
noodles at this point?
(4 marks)

(iv) Is Good X a substitute or complement? Why?

(2 marks)
(v) Give an example of what Good X could be.
(2 marks)

Question 3

(a) You are the owner of a computer shop at Sim Lim Square selling hard disks.
Because there are so many stores around you selling the exact same hard disks,
you are in a perfectly competitive market. Assume that the market price of a
hard disk is $200.
From your experience in the past, you estimate that the AVC function of your
hard disks is: AVC = 200 – 2Q + 0.02Q2.

(i) What is the MC function for the hard disks?

(3 marks)

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Examination – January Semester 2009
 (ii) At P = 200, should the firm operate or shut-down? Show your working.
(5 marks)

(iii) How many hard disks should you produce?

(3 marks)

In real life, it is difficult to find a perfectly competitive market. The market for
hard disks in Sim Lim Square is more likely to be monopolistically competitive.

(iv) Name one similarity between a perfectly competitive market and a

monopolistically competitive market.
(2 marks)

(v) Name one difference between a perfectly competitive market and a

monopolistically competitive market.
(2 marks)

(b) You are the owner of BaggedUp, a shop selling handbags. Each handbag
currently retails for $250. You decide to produce the handbags in two factories,
Factory A and Factory B.
The following are the MC functions for the factories:
Factory A: MCA = 100 + 0.3QA
Factory B: MCB =200 + 0.2QB

MCA is the marginal cost function to produce handbags in Factory A

QA is the number of pairs of handbags produced in Factory A
MCB is the marginal cost function to produce handbags in Factory B
QB is the number of pairs of handbags produced in Factory B

You calculate the sum of the MC functions to be MCT = 160 + 0.12QT.

(i) How many handbags in total should you produce in order to maximize
profits?
(2 marks)
(ii) How many handbags should you produce in Factory A? How many
handbags should you produce in Factory B?
(8 marks)

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Examination – January Semester 2009
Question 4
(a) You are the owner of Flowerspro, a flower-delivery service.

(i) Explain why Flowerspro may experience seasonal effects in the demand
for its services. In which parts of the year (Quarters I, II, III or IV)
would you expect Flowerspro to have higher sales?
(4 marks)
The following is your estimated demand function:
Q = a + bT + cD1 + dD2 + eD3,

Q is the number of deliveries demanded in the Tth quarter

T refers to the quarter—T=1 for 2004 (I), T=2 for 2004 (II) etc
D1 = 1 if T is in quarter I; 0 otherwise
D2 = 1 if T is in quarter II; 0 otherwise
D3 = 1 if T is in quarter III; 0 otherwise

Your regression output is as follows:

DEPENDENT VARIABLE: Q R-SQUARE F-RATIO P-VALUE ON F

OBSERVATIONS: 20 0.8642 88.91 0.0001
VARIABLE PARAMETER STANDARD T-RATIO P-VALUE
ESTIMATE ERROR
INTERCEPT 125.78 167.71 0.75 0.4641
T 20.92 3.66 5.71 0.0001
D1 143.14 36.99 3.87 0.0014
D2 79.88 55.86 1.43 0.1720
D3 -30.93 10.48 2.95 0.0094

Where necessary, assume that you are using a 5% significance level.

(ii) Do the sales in Quarter I of any given year differ significantly from
Quarter I of the previous year? How do you know?
(3 marks)

(iii) Do the sales in Quarter I of any given year differ significantly from
Quarter IV of the same year? How do you know?
(3 marks)

(iv) Predict the number of deliveries demanded in 2009 (I).

(5 marks)

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Examination – January Semester 2009
(b) You have just finished your ECO201 course, and your brother wants you to
estimate the demand function for the pizza café he is running. He believes that a
log-linear demand specification is appropriate:

Q = aPbMcPXd

Q: quantity demanded of his pizza

P: price of his pizza
M: income of his consumer
Px: price of the pizza sold by his competitor, Café X
(i) Convert your brother’s log-linear function to a linear function.
(3 marks)

After surveying your brothers’ customers for three days, you estimate the
following:

Parameter Estimate
a 1.34
b -0.67
c 0.85
d -0.53

(ii) What is the income elasticity of demand for your brother’s pizza
according to your estimates?
(2 marks)

(iii) Your brother complains that one of your estimates is not realistic. Which
estimate is he referring to, and what is wrong with this estimate?
(3 marks)

(iv) Suggest a way of improving your estimates.

(2 marks)

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Examination – January Semester 2009