LAHORE UNIVERSITY OF MANAGEMENT SCIENCES

SULEMAN DAWOOD SCHOOL OF BUSINESS

Managerial Economics

Roll Number:

Time: 90 minutes Total Marks: 100

Final Examination

Instructions:

1. Please write your roll numbers at the start of the examination.

2. Please answer all questions. All questions carry equal marks.
3. In case of any confusion, please write your concern in the paper and any assumption which underlie your written answer and
marking will be adjusted accordingly. Invigilators/ Instructor will not be able to help during the exam even if you consider a
question completely wrong.
4. Please give reasons for your statements. Unsubstantiated statements would carry no value. For numerical type questions, please
provide all the working. Otherwise you would be awarded zero marks even for a right answer.
5. Any attempt to engage in any discussion or to look at the paper of a fellow candidate is strictly prohibited. Such incidents will be
reported and appropriate disciplinary action will be taken.
6. Cell phones are not allowed in exam. Using them as calculators would result in immediate cancellation of paper.
7. No extra sheets would be provided
8. Kindly check that total number of questions is 14.

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1. Please draw and properly label graph of a profit-making monopoly producing at and charging a price, meeting the conditions of
allocative and productive efficiency. Please also show optimal price in the same graph.

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2. The Lahore Power Company faces following cost and demand functions

Total Cost function: TC = 0.5 Q2 + 100Q

Off-Peak Demand function: P=4-Q
Peak Demand function : P=8–Q

Where prices are in Rs./Kilowatt-hour and quantities are in millions of Kilowatt-hours. Please calculate the price and
quantity demanded for peak and off-peak hours. What kind of Price discrimination is this?

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3. Give five reasons to argue that Pakistani mobile service providers are not very competitive.

Reason 1

Reason 2

Reason 3

Reason 4

Reason 5

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4. A painting by 19th century French artist Edgar Degas worth hundreds of thousands of pounds has been found on a bus
near Paris. Degas's painting Les Choristes, or The Chorus Singers, dates back to 1877 and was stolen nine years ago from a
museum in Marseilles. The artwork was discovered in a luggage compartment of a bus after police were carrying out random
checks at a highway rest area about 20 miles east of Paris. None of the passengers on the bus claimed the painting and its
authenticity was confirmed by the Orsay museum. The pastel painting is said to be worth approximately 800,000 euros
(£700,000). You have been hired to sell the painting to wealthy LUMS alumni having annual income in access of US$ 1 billion.
Can you draw and properly label only a simple demand and supply curve of the painting?

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5. An MBA Graduate plans to start an export venture of traditional Pakistani clothes. He discovers that fixed costs of making and
exporting 3500 pieces amounts to PKR 24000 and variable cost is PKR 500 per piece. Looking at the innovation potential and his
marketing knowledge, graduate expects to sale each piece at a flat rate of US$ 10.5 (Assume 1 US$ = PKR 160). Would you
kindly calculate marginal cost, average fixed cost and average variable cost at the breakeven point?

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6. Amazon.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it
sells. Amazon.com knows that its customers can be divided into two distinct groups according to their likely responses to the
discount. The accompanying table shows how the two groups respond to the discount. Suppose Amazon.com knows which group
each customer belongs to when he logs on and can choose whether or not to offer the 10 % discount. If Amazon.com wants to
increase its total revenue, should discounts be offered to group A or to group B, to neither group, or to both groups?

Group A Group B
(Sales per (Sales per
week) week)
Volume of sales before the 10% discount 1.55 million 1.50 million
Volume of sales after the 10% discount 1.85 million 1.80 million

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7. Assume you are launching a new product named as flubber. An economist says that you need to use capital (K) and Labor (L) to
produce that. He further estimates that using a logarithmic form of the Cobb-Douglas production function [ Y = A * ( Kα ) * ( Lβ ) ]
after 300 units of production, α and β sum up to 1. Lower than that they sum up to 2 from ten units and above level of production.
How can you use this information in production process?

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8. A party in Badland is planning to go for a war to win elections. On the other hand, it can back-fire owing to the severe reaction
from Goodland if they also go for a war. With the following payoff matrix which shows the number of projected votes in millions,
what are the dominant strategies and Nash equilibrium for the Goodland and Badland?

Goodland

War No War

War (5,6) (6,10)

Badland
No War (0,1) (0,0)

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9. According to Sabharwal CEO Wendy Burgers, the price elasticity at lower price points is huge in India. "You can sell more than 700
burgers a day at Rs 27 per unit but this drops to 250 if you increase price to Rs 35 per unit," he says. Prices at Burger King start at
Rs 35, McDonald's sells burgers upwards of Rs 27, and KFC sells burgers starting at Rs 29. Do you think this Burger market in India
is an application of Kinked demand curve model? If yes, what is the inflexion point? If no, what further information you need to
find inflexion point?

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10. The government on Sunday imposed a price ceiling for chicken and goat meats in the Kathmandu Valley in a bid to control a
possible price hike during the festivals of Dashain and Tihar. With this, meat shops cannot sell chicken and goat meats at more
than Rs 285 and Rs 850 per kg, respectively. Gokul Prasad Dhital, director general of the Department of Supplies Management,
said the Ministry of Supplies took the decision after holding consultations with meat sellers. Kindly indicate three negative
consequences of the announced policy?

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11. Imagine two drivers racing toward each other at high speed on a very narrow road. Each driver has the option to swerve or to
race on. If one swerves while the other races on she is ridiculed and called a chicken. If both swerve it is a tie and if none swerves
it ends in mutual destruction. What are the dominant strategies and Nash equilibrium of the game?

Axe
Swerve Race On
Brown Swerve (1, 2) (0, 2)
Race On (2, 0) (-10, -10)

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12. If price elasticity of demand for a product named garlic is - 0.9 and cross price elasticity of demand for the same product vis-à-vis
a similar product named ginger is - 1.1, what challenges would you face in pricing the product? You have also been given the
information that garlic has an income elasticity of demand of - 0.5 and for ginger the same is 0.5. The country itself is doing terribly
badly as owing to a catastrophe, people are losing jobs and businesses are shifting abroad.

Challenge 1 Challenge 2 Challenge 3

Challenge

Reason 1

Reason 2

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13. He said that the federal and provincial governments have almost ten million tons of surplus wheat, which is rotting in warehouses.
Earlier this year, the government increased regulatory duty on wheat imports from 25% to 40% but it failed to deter importers,
said Hussain. Surplus stock could not be sold in the international markets due to low prices despite frequent extension of dates
and upward revision in the export rebate which hit almost $90 per ton, he noted.

Do you think government should impose price ceiling or price floor in wheat market under these conditions? No other option is
possible. Please explain with reasons.

Answer:

I think government should

Set price floor

Set price ceiling

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14. Please make graph of a firm operating under Perfect Competition with Quantity demanded on Y-axis and Price and cost on X-
axis. Please also show both average variable cost and average total cost on the same graph. Properly label the graph but you do
not need to explain in words.

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