eas THE UNIVERSITY OF THE WEST INDIES CAVE HILL CAMPUS EXAMINATION OF JULY 2008 CODE AND NAME oF course: MGMT2020 — MANAGERIAL ECONOMICS DATE AND TIME: DURATION: 2 HOURS INSTRUCTIONS TO CANDIDATES: This paper has 4 pages and 8 questions. SECTION ONE IS COMPULSORY AND IN SECTION TWO, YOU ARE REQUIRED TO ANSWER ANY TWO (2) OF THE REMAINING SEVEN (7) QUESTIONS. SECTION ONE (1) IS WORTH THIRTY (30) MARKS AND IN SECTION TWO, EACH QUESTION IS WORTH TWENTY-FIVE (25) MARKS. \CTION ONE (@) ANSWER FOUR (4) OF THE FOLLOWING QUESTIONS: (a) Briefly list the six principles that comprise effective management in the context of managerial economics. (8 marks) (©) Explain the managerial utility-maximising model. (Bmarks) (©) The Stopdecay Company sells an electric tooth brush for $25. Iis sales have averaged 8,000 units per month over the last year. Recently, its closest competitor, Decayfighter, reduced the price of its electric tooth brush from $35 to $30. Asa result, Stopdecay’s sales declined by 1,500 units per month. (@ What is the are cross price elasticity of demand ‘between Stopdecay's toothbrush and Decayfighter’s toothbrush? (6 marks) Gi) What does this elasticity indicate about the relationship betweea the two products? (2 marks)ANSWER EITHER QUESTION (@) OR (¢) BUT NOT BOTH. (@ A Jeeal lawn care company is operating in a perfectly competitive environnent and estimates that ils short-run total costs are given by TC = 1000-2 + 0.02 9 Where Q is the number of lawns cared for. Below what price should the firm shut down its operations? (6 marks) (©) _ List at least three pros and cons of corporate takeovers. (6 marks) (Grand Total of 30 marks) SECTION TWO, Q G) @ ‘The significant changes that have occurred in the global business environment over the past two decades have made the purpose and existence ‘of firms irrelevant. Critically discuss. (25 marks) (@) With the aid of diagrams wherever possible, briefly explain all three of the following questions: (i) The Marris Model (8 marks) (ii) The Behaviouralist Model (7 marks) (iii) The concept of X’ inefficiency (7 marks) (b) Which of the above is the most relevant in the modem day business environment? (3 marks) Nutrients Ine, is the supplier of Superior Life Multivitamins. From market research, the following demand equation for superior Life Multivitamins was obtained: Qv=5.6—0.7Pv + 0.3Po + 0.21 + 0.88 GA) 62.8) (4) (2.9) (2.5) R2= 091 n=S0__ tstatistic in brackets Where Qy = demand for Nutrients Inc. Superior Life Multivitamins; Py is the price of Nutrients Inc. Supericr Life Multivitamins; Pa is the price of other multivitamins, 1's income and A is the advertising budget of Nutrients Inc. @ Folly analyse this demand equation, (21 Marks) Gi) Forecast the change in demand for superior Life Multivitamins in the following year if the company were to increase its advertising budget by $1000.00, assuming that all the other determinants remain unchanged. (4 Marks) PLEASE TURN OVER. 8) @ (b) (6) (a) 0) Define and list the characteristics and properties of the Cobb-Douglas production fonction. (12 marks) Given the total cost function $t Lucian Construction Firm is: TC = 1500 + 10Q -0.997+ 0.04 @ i. Find the rate of output that results in minimum average variable cost. (S marks) i, Suppose that the output level was 14,000 units, calculate the following values: = The marginal cosi. (2 marks) © The average cost. (2 marks) + The total costs at these output levels, (2 marks) * The average varisble costs. (2 marks) ‘The market for cellular phones in Dominica, can hest be described as monopolistically competitive. The demand for cellular phones is estimated to be as follows: P=20-0.008Q Where Q is the number of weekly video rentals. The long run average cost function for cellular phones is estimated to be LRAC = 12 - 0.009Q + 0,000003Q” gicel managers want to know the profit-maximising price and output levels, and the level of expected total profits at these price and output levels, (10 marks) Given the case of a competitive market process dominated by few firms, assume that a two-firm duopoly dominates the market for spreadsheet application software, and that the firms face a linear market demand curve 1,250-Q Where P is price and Q is total outpat in the market (in thousands). Thus Q=Q, + Qs For simplicity, also assume that both firms produce an identical product, have no fixed costs, and marginal cost MC, = MCx = $50. In this circumstance, total revenue for firm A is TRa=$1,2500,-Qs”- Qa0n Marginel revenue for firm A is MRa= GTR/Qg = $1,250 - $2Q4- Qa Similar total revenue and marginal revenue curves hold for firm B. i. Derive the output reaction curves for firms A and B. ii, Calculate the Courtnot market equilibrium price/output solutions.4 @ (@_—_Asthe chief financial analyst of a conglomerate group of diverse companies, .@ your advice is sought by the Chief Executive Officer on the various factors to consider in determining the optimal financial structure to pursue in order to guarantee these companies survival in the competitive and uncertain global business environment. This information is needed by the CEO, to present to 2 special shareholders meeting next week. (18 marks) (b) Briefly explain the concept of credit rationing, (7 marks) (8) Solve the following linear programming problem using the simplex method: Maximise P= 40X;+30X2+20X3 Subject to X;4+X2+X5 $12 (resource A) OXr+ 6X2 +2 Xs 48 (resource B) 36X) + 24X; +18X5 <360 (resource C) Xi, X22 0 (25 marks) The University of the West Indies