SY 2022-2023

1st Semester
Republic of the Philippines
University of Southeastern Philippines Midterm Exam
College of Business Administration
eMBA

Nash N. Reginio

eBA 200 Managerial Economics

NAME JASON S. QUIÑO SCORE
SECTION eBA 200 7PM – 10PM RATE

Test I. PROBLEM

Instruction: Solve the following. Show all possible computations. (40 POINTS)

1. (20 points) Given the following total-revenue and total-cost functions of a firm:

TR = 4Q
TC = 0.04𝑄3 – 0.9Q2 + 10Q + 5

Determine:

A. the level of output at which the firm maximizes its total profit.
B. the maximum profit that the firm could earn.

Solution:
= TR-TC
= 4Q-(0.04𝑄3 – 0.9Q2 + 10Q + 5)
= 4Q-0.04𝑄3 – 0.9Q2 + 10Q + 5
= – 0.04𝑄3 + 0.9Q2 – 6Q– 5

Equation I : – 0.04𝑄3 + 0.9Q2 – 6Q– 5

Equation II: – 0.12Q2 + 1.8Q –6

A. the level of output at which the firm maximizes its total profit.
To maximize , ddQ = 0
So, – 0.12Q2+ 1.8Q –6 / 0.12
-Q2+ 15Q-50 =0
-Q2+ 10Q+5Q-50 =0
Q (-Q + 10) –5 (10 – Q) = 0
(Q – 5)*(10 – Q) = 0
Q – 5 = 0 and 10 – Q = 0
Q = 5 and Q = 10

d2dQ2 = 1.8 – 0.24Q

At Q= 5,

d2dQ2 = 1.8 – 0.24(5)

= 0.6 > 0 Is Minimum.

At Q= 10,

d2dQ2 = 1.8 – 0.24(10)

= - 0.6 Is Maximum.

B. The firm can earn a maximum profit at Q= 10

– 0.04𝑄3 + 0.9Q2 – 6Q– 5

eBA 200 – Managerial 1

 – 0.04(10)3 – 0.9(10)2 – 6(10) – 5
= -40 + 90 – 60 – 5
= -15

Other way of solving the problem will be:

π = TR – TC
π = (4Q) – (0.04Q3 – 0.9Q2 + 10Q + 5)
π = 4Q – 0.04Q3 + 0.9Q2 - 10Q - 5
π = – 0.04Q3 + 0.9Q2 – 6Q – 5

IST derivative of Q
dπ / dQ = - 0.12Q2 + 1.8Q – 6 = 0
dπ / dQ = - 0.12Q2 + 1.2Q + 0.6Q – 6 = 0
dπ / dQ = - 0.12Q (Q – 10) 0.6 (Q - 10)
dπ / dQ = (Q – 10) (0.6 – 0.12Q)
Q – 10 = 0 , 0.6 - 0.12Q = 0
Q = 10 , Q = 0.6/0.12
Q=5

2ND derivative of Q
d2 π / d2Q = - 0.24Q + 1.8

If critical value is Q = 5
d2 π / d2Q = - 0.24Q + 1.8
d2 π / d2Q = - 0.24(5) + 1.8
d2 π / d2Q = - 1.2 + 1.8
d2 π / d2Q = 0.6 > 0

2nd derivative grater then zero so function is minimum at the critical value of Q = 5
If critical value is Q = 10 d2 π / d2Q = - 0.24Q + 1.8
d2 π / d2Q = - 0.24(10) + 1.8
d2 π / d2Q = - 2.4 +1.8
d2 π / d2Q = - 0.6 < 0

2nd derivative smaller then zero so function is maximum at the critical value of Q = 10

2. (20 points) For the following total-profit function of a firm:

π = 144X – 3X2 – XY – 2Y2 + 120Y – 35

Determine:

A. the level of output of each commodity at which the firm maximizes its total profit.
B. the value of the maximum amount of the total profit of the firm.

π = 144x – 3x2 – xy – 2y2 + 120y – 35

SOLUTION:
πx = - 6x – y + 144 --------- (i)
πy = - 4y – x + 120 ------------- (ii)

Solve by simply adding

- 6x – y + 144
- 6x – 24y + 720
+ + -

23y – 576 = 0
Y = 576/23
Y = 25.04

Putting the value of y in the equation (ii)

- 4y – x + 120 = 0
- 4(25.04) – x + 120 =0
- 100.16 +120 - x = 0
X = 19.84

eBA 200 – Managerial 2

2nd order direct & cross partial derivative
π xx = - 6 , π xy = - 1
π yx = -1 , π yy = - 4
RULE
π xx . π yy > (π xy)2
(- 6). (- 4) > (1)2
24 > 1
Here, function is maximum if x = 19.84 & y = 25.04

Test II. MINI CASES

Instruction: Discuss briefly and justify your answer with computations.

1. A new startup firm has a dilemma on the project it needs to undertake. Thus, you were hired as
a consultant to help decide which of three options to take to maximize the value of the firm
over the next three years. The following table shows annual profits for each option. Interest
rates are expected to be constant at 8% over the next three years.

Option Profits in Year 1 Profits in Year 2 Profits in Year 3

A $80,000 $90,000 $100,000
B $60,000 $100,000 $110,000
C $40,000 $110,000 $125,000

A. Discuss the difference in the profits associated with each option. Provide an example of real-
world options that might generate such profit streams. (20 points)

Answer:
Option A has the highest first-year profits, but the lowest second- and third-year profits. Option B earns less
in the first year than option A, but more in years two end three. Option C has the lowest first year profits, but the
greatest profits in years two and three. Option A might represent a low current advertising budget; it doesn't cost
much today and thus current profits are relatively high). However, a low current advertising budget does not
increase future profits as much as a moderate (Option B) or an intensive (Option C) level of current advertising
budget.

B. Which option has the greatest present value? (20 points)

Answer:
PVA-80,000/(1.08) + 90,000/(1.08)² + 100,000/(1.08) 3 - $230,617.79.

PVB - 60,000/(1.08) + 100,000/(1.08)²+ 110,000/(1.08)3 - $228,610.98.

PVC - 4 0,000/(1.08) + 110,000/(1.08)² + 125,000/(1.08)3 - $230,573.34.

It just means that Option A has the highest present value.

eBA 200 – Managerial 3

 2. You were just promoted as the new manager of Hilton Hotel and Resorts and tasked to decide
where to locate a new hotel. The finance department suggests that Philippines is the best choice
over Hong Kong based on tax considerations. Specifically, your current year tax savings from
locating in the Philippines are $5 million but only $4 million in Hong Kong. On the other hand,
the marketing department has provided you with sales estimates that suggest that the present
value of the gross (of taxes) operating profits from locating in the Philippines are only $10
million but are $14 million for Hong Kong. It will cost $15 million to build the hotel in either
location. Ignoring all other considerations, where should you build the hotel? What are your
firm's economic profits if you locate the hotel in the Philippines? (20 points)

Answer:

Type of option LOCATION Gross Sales Tax Savings Cost to Build

the hotel

Option A Philippines $10M $5M $15M

Option B Hongkong $14 M $4M $15M

Difference $4 M $1 M 0

Ignoring all other considerations, in terms of marketing , it is beneficial to choose Option B

Hongkong since you will have $3M accounting profit than option A

Option A

Accounting profit = (Gross operating profit+Tax Saving)- cost of building the hotel

= ( $10M+$5M)-$15M

= $15M - $15M

=0

Option B

Accounting profit = (Gross operating profit+Tax Saving)- cost of building the hotel

= ( $14M+$4M)-$15M

= $ 18M- $15M

= $3 M

The economic profit if you will locate the hotel in the philippines.

Economic Profit = Accounting Profit - Opportunity Cost ( Best Forgone Alternative )

= 0- $3 M

= - $3 M

Therefore, there will be a negative of $3M if Philippines will be chosen.

Thank you and God bless us all!

eBA 200 – Managerial 4