ASSIGNMENT

_______________________________________________________________________________
BPME7103
ADVANCED MANAGERIAL ECONOMICS
MAY SEMESTER 2021

SPECIFIC INSTRUCTION

1. Answer in English.

2. Number of words: 5,000 – 10,000 words excluding references.

3. Submit your assignment ONCE only in a SINGLE file.

4. Submit your assignment ONLINE.

5. Submission date: 1th AUGUST 2021

6. This assignment accounts for 100% of the total marks for the course

1
 ASSIGNMENT QUESTION

TASK 1 (30%):
QUESTION 1 (CLO 1):

Managers should concentrate on maximising shareholder value alone only if three conditions are
met. These conditions require: (a) complete markets, (b) no significant asymmetric information,
and (c) known re-contracting costs.

Discuss how a violation of any of these conditions necessitates a much larger view of
management’s role in firm decision making.
(15)
[Total: 15 marks]
QUESTION 2 (CLO2)
Suppose that a person is considering an investment in a new product. The cost of producing and
marketing the product is estimated to be $6 000. Three possible outcomes can result from this
investment:

 The product can be extremely successful and yield a net profit of $24,000.
 The product can be moderately successful and yield a net profit of $12,000.
 The product can be unsuccessful, in which case the loss will be equal to the initial cost of
producing and marketing the product (that is, $6,000).

Additionally, assume that if the person does not invest in the new product, the $6,000 can be
invested in another venture that is certain to yield a net profit of $1,500. Furthermore, suppose
that he or she has assessed the chances of the product being extremely successful, moderately
successful, and unsuccessful at 0.10, 0.20, and 0.70, respectively.

You are required to do the following:

a. Determine the decision alternatives.

(3)
b. Determine the possible outcomes for each decision alternative.
(3)
c. Formulate the problem in a payoff table format showing the net profit that will result
from each alternative action/state-of-nature combination.
(3)
d. Determine the expected net profit of each decision alternative.
(3)
e. Assuming that the objective is to maximise expected monetary payoff, which alternative
should be chosen?
(3)
[Total: 15 marks]
[TOTAL: 30 marks]

2
TASK 2 (70%):

QUESTION 1 (CLO1)

a. Olive Garden anticipates a purchase frequency of 60 servings of lasagna per night at a

price of $11.99 and plans their operations accordingly. When fewer than 60 customers
arrive on a given evening, the Olive Garden restaurateur does something very different
than a Ford auto dealer might in similar circumstances. The restaurant slashes orders;
fewer trays of pre-prepared lasagna are put into the oven and baked. Instead of slashing
prices in the face of deficient demand, restaurants order less production and increase the
size of their servings. Why is that?
(5)

b. Discuss market equilibrium in terms of consumers’ surplus and producers’ surplus. Include
in your discussion, the situation where there is a shortage and a surplus; as well as the
effect of changes in demand and supply to the equilibrium. Use graphs to aid your answer.
(5)

[Total: 10 marks]
QUESTION 2 (CLO 2)

a. Market equilibrium is one of the fundamental concepts in economics. Describe market

equilibrium using relevant graphs and discuss market surplus and market shortage.
(5)

b. Economists have made estimates of the price elasticity of demand for a variety of goods
and services.
i. What is price elasticity of demand and why is it important to estimate it? Provide
your own examples to support your answer.
(5)

ii. The government commissioned a research firm, Super Consulting, to conduct a

study on the market demand for cigarettes. The firm reported that the price
elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes costs $2 and
the government wants to reduce smoking by 20 percent, by how much should it
increase the price using the midpoint method?

(5)
[Total: 15 marks]

3
QUESTION 3 (CLO 1):

a. Explain the differences between a short-run and long-run production function. Cite one
example of this difference in a business situation.
(3)

b. What are the key points in a short-run production function that delineate the three stages
of production? Explain the relationship between the law of diminishing returns and the
three stages of production.
(3)

c. Discuss the problems of measuring productivity in actual work situations. How might
productivity be measured for each of the following industries?

i. Government (e.g., the social security office, the internal revenue service)
(3)
ii. Manufacturing (e.g., soap and toothpaste, computers, heavy machinery)
(3)
iii. Finance and insurance (e.g., banks, insurance companies, brokerage houses)
(3)

[Total: 15 marks]
QUESTION 4 (CLO3)

Economists at the Wilson Company are interested in developing a production function for
fertiliser plants. They have collected data on 15 different plants that produce fertiliser as shown
in the table below.

Plant Production Capital Labour

1 606 18891 700
2 566 19201 652
3 647 20655 823
4 524 15082 650
5 712 20300 859
6 488 16079 613
7 762 24194 851
8 443 11504 655
9 821 25970 901
10 398 10127 550
11 897 25622 842
12 359 12477 541
13 979 24002 949
14 332 8042 576
15 1065 23972 926
a. Estimate the Cobb-Douglas production function Q = αL β1Kβ2 where Q = output; L =
4
 labour input; K = capital input; and α, β1, and β2 are the parameters to be
estimated. (Note: If the regression program on your computer does not have a
logarithmic transformation, manually transform the preceding data into the
logarithms before entering the data into the computer.)
(6)
b. Test whether the coefficients of capital and labour are statistically significant.
(2)
c. Determine the percentage of the variation in output that is "explained" by the
regression equation.
(3)
d. Determine the labour and capital production elasticities and give an economic
interpretation of each value.
(2)
e. Determine whether this production function exhibits increasing, decreasing, or
constant returns to scale (ignore the issue of statistical significance).
(2)
[Total: 15 marks]

QUESTION 5 (CLO3)

OPEC cut key to market rebalancing

 Oil glut will last well into 2017 unless cartel fulfils pledge to reduce output: IEA

A massive oil glut may weigh on world markets deep into next year unless the Organisation of the
Petroleum Exporting countries (OPEC) makes good on its promise to cut output, the International
Energy Agency (IEA) said yesterday. The oil price has recovered steadily since the oil cartel said
last month that it would reduce production, with details to be hammered out at the cartel’s
November meeting, and such a deal would “speed up the process” of working off global
inventories, the IEA said in its monthly report. “Even with tentative signs that bulging inventories
are starting to decline, our supply-demand outlook suggests that the market – if left to its own
devices – may remain in oversupply through the first half of next year, “the IEA said. “If OPEC
sticks to its target, the market’s rebalancing could come faster.”

Initially greeted with skepticism among analysts, OPEC’s agreement to cut output has gained
traction in the oil market, with IEA noting that the oil price has risen by 15% since the cartel’s
announcement on September 28, 2016. However, oil prices fell almost 2% on 8 November, 2016
retreating from one-year highs after mixed responses by Russian oil industry officials towards
OPEC’s call for all major crude producers to cut output. Igor Sechin, Russia’s most influential
executive and head of Rosneft, told Reuters in an interview his company will not cut or freeze oil
production as part of a possible agreement with OPEC.

Source: https://www.pressreader.com/malaysia/the-sun-malaysia/20161012/281809988410733

5
Questions

a. Discuss different forms of collusion, while giving special attention to cartel

(3)

b. Elaborate important factors affecting the likelihood of successful collusions. Do you think
OPEC has been successful? Justify your answer
(4)

c. Based on the above article, if you are the chairman of OPEC, what would you do in
responding to Igor Sechin’s decision?
(8)
[Total: 15 marks]
[TOTAL: 70 marks]