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UNIVERSITY OF GHANA
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DEPARTMENT OF DISTANCE EDUCATION

SECOND SEMESTER EXAMINATION: 2022/2023

BACHELOR OF SCIENCE/ARTS IN BUSINESS ADMINISTRATION

FINC 304: MANAGERIAL ECONOMICS

. (3 CREDITS)

TIME ALLOWED: 2 hours and 30 minutes (2:30 hours)

INSTRUCTIONS: Answer all questions.

Question 1 (40 marks)

F or this question, refer to the two articles on the recent movements in oil prices that are attached
to the questions.

a) According to the article from The Economist titled "Why the price of oil is falling"
the author identifies a number of demand-side and supply-side factors behind the fall
in the price of oil starting from June 2014. Mention three demand- side and three
supply-side factors identified by the article. (6 marks)

b) With the aid of a diagram, explain how the factors identified in part (a) above explain
the fall in the price of oil since June 2014. (6 marks)

c) The author of the article titled "Why is the price of oil rising", identifies a number of
factors behind the recent recovery in the price of oil. Mention three of these factors. (4
marks)

d) With the aid of a diagram, explain how the factors identified in part (c) above explain
the recent rise in the price of oil. (6 marks)
For the remaining parts of this question, refer to the article from The Economist magazine titled
"Why the gold price is falling".
e) The article identifies a number of factors behind the falling price of gold. Mention three
of these factors and indicate whether they are demand-side or supply-side factors. (6
marks)

f) According to the article, what is the relationship (i.e., substitutes or complements)

between interest-bearing assets and gold? Explain. (2 marks)

g) According to the article, what is the relationship (i.e., substitutes or complements)

between the prospects of the US economy and gold? Explain. (3 marks)

h) According to the article, "unusually good political news" is one of the reasons for the
recent decline in gold prices. With the aid of a diagram, explain how good political
news leads to a fall in the price of gold. (5 marks)

Question 2 (20 marks)

Most weeks, the demand for roses can be approximated by QD = 2400 - SOP, Where QD is
the total quantity delnanded (in dozens) at price p (per dozen). Currently, roses are supplied by
50 identical growers, each having total costs C = 0.25Q2 + 0.5Q + 20, where Q is the number
of roses supplied by the grower. The GHS 20 cost can be avoided on a daily basis.

a) What IS the short-run supply curve for each individual grower?

(4 marks)

b) Derive the short-Iun market supply schedule, which gives quantity supplied as a
function of price. (2 marks)

c) What is the equilibrium price for a dozen roses in the market? (5 marks)

d) Assuming there is free entry into and exit from this market. Will there be entry into or
exit from this market going into the long-run? Explain your answer. (4 marks)

e) Derive the shut-down output function (5 marks)

Question 3 (20 marks)

Consider a firm with the following production function: Q = f(L, K) = L 0.5 KO. 5 . The price of
labour (L) is $4 per unit while the price of capital (K) is $5 units per unit. This firm has 20 units
of capital that it cannot change in the short-run

a) Derive the finn's total cost function (6 marks)

b) Derive the firm's marginal and average cost functions (3 marks)
c) What is the total cost of producing 50 units of output? (3 marks)
d) Suppose the firm is now free to choose any level of capital and labour to produce 50 units
of output. How many units of capital and labour will it choose? What is the total cost of
producing the 50 units? (8 marks)

Question 4 (20 marks)

Consider the cost function, C(Q)= 125+4Q2

Determine the profit-maximizing output and price, and discuss its implications, if:
a) You are a price taker and other firms charge $40 per unit (6 marks)
b) You are a monopolist and the inverse demand for your product is P=100-Q (8 marks)
c) You are a monopolistically cOlnpetitive firm and the demand curve for your brand is

Q=lOO-P. (6 marks)
'5/31/23, i'1:20AM Why Is The Price Of Oil Rising? - Forbes Advisor

Advisor Investing Advertiser Disclosure

Why Is The Price Of Oil Rising?

By Taylor Tepper Benjamin Curry

Forbes Advisor Staff Editor <!i Fact Checked

Updated: Feb 16,2023, 8:09am

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not
affect our editors' opinions or evaluations.

Getty

Just when America's drivers thought the worst of the sun1n1er gasoline price spike was in the
rearview n1irror, geopolitics strikes back.

A gallon of gas costs $3.83 today, up about $0.05 over the past month, reversing a n10nths long
trend of declining prices after hitting record highs of $5 a gallon earlier this summer.

The pump price lllay be inching up even further after OPEC+ agreed to reduce oil production by
2 Inillion barrels a day, the first proposed target reduction since the Covid-19 pandemic. Why
https:llwww.forbes.com/advisor/investing/high-oil-pricesl 1/32
·5/31/23, 11 :20 AM
' Why Is The Price Of Oil Rising? - Forbes Advisor

The 1110ve comes as OPEC+ is already producing less than its target amount. A barrel of WfI
crude oil was almost $88 a barrel after the nlove was announced, an 11% increase since the end
of September.

"On the bearish side, one could say that an OPEC+ cut is a signal that there are nleaningful
concerns around global oil demand and an increase in OPEC+ spare capacity takes sonle of the
scarcity premium out of the price," said Noah Barrett, research analyst for energy & utilities at
Janus Henderson Investors. "On the bullish side, one could say that OPEC+ is signaling a strong
desire to support oil prices ... and any oil supply coming off the market is a positive for higher
prices."

A production cut by OPEC and its Russian ally is just another blow for global energy conSUlners,
piled atop the sanctions imposed on Moscow by lnany western countries after Russia's
unprovoked invasion of Ukraine.

Where will oil prices go now? The answer is complicated by conflicting narratives pointing in
opposing directions.

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OPEC Production Cuts Mean Higher Oil Prices

One of President Joe Biden's principal foreign policy endeavors has been to convince Saudi
Arabia and the rest of OPEC to increase their oil production.

2/32
hUps:llwww.forbes.com/advisorlinvesting/high-oil-pricesl
 Why Is The Price Of Oil Rising? - Forbes Advisor

G-20 meeting in November 2021..

Late last year, inflation had been high for six months, and the promise of a "transitory"
inflationary period was fading away.

Biden n1ade another appeal directly to Saudi officials during a trip to the gulf state in .July 2022.
At the time, drivers were getting crushed at the pump, and a barrel of oil was going for about
$100 a barrel.

Since then, the price of oil has drifted downward, but not because Saudi Arabia decided to pUlnp
Illore oil. Instead, econolnies around the globe are weakening:

Expectations for China's gross domestic product (GDP) have halved, as the world's second
largest economy has struggled with stringent, and ill-fated, lockdown policies llleant to sniff
out all Covid cases.
European nations are dealing with their own sky-high inflation, as well as a burgeoning
energy crisis due to their reliance on Russian natural gas.
The United States has suffered through two successive quarters of negative economic
growth, and the Federal Reserve is detern1ined to increase interest rates for as long as it
takes to bring inflation down, which will ultin1ately cause the economy to weaken further.

The price of oil is viewed through the lens of future global econon1ic growth: Higher prices can
signal investor belief that consumers will spend more, while falling prices demonstrate a
conviction that den1and will reduce.

The decision by OPEC+ to slash production is meant to help boost the cost of oil given the
weakening demand.

The Russo . . Ukrainian War Goes On

While Saudi Arabia is the world's second largest producer of oil (after the United States), Russia
is in third place.

That reality was thrown into stark relief after Russia invaded Ukraine in late February, causing
crude oil prices to briefly rise above $100 a barrel, before ultimately touching $120 a barrel a few
lnonths later as the u.S. and its western allies imposed crippling sanctions on Russia.

Energy giants such as Shell, BP and Exxon all pulled out of Russian energy deals, while the
Biden administration has announced a ban on importing Russian oil and other petroleum
products, which represents about 8% of U.S.-bound crude shipn1ents.

But Russia has not stood idly by, instead locating new buyers, especially in Asia and even the
Middle East, for one of its n1.ost iInportant exports.

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5/31/23, 11 :20 AM Why Is The Price Of Oil Rising? - Forbes Advisor

Fresh European trade restrictions are scheduled to go into effect this winter. If they are
successfully implemented, this could result in less supply on the market, and therefore higher
prices. More expensive energy coming as tenlperatures drop in Europe could further aggregate
already simmering geopolitical tensions.

The escalation of the war, including the mysterious sabotaging of the Nord Strealn pipelines,
Russia annexing four Ukrainian provinces and the threat of nuclear warfare will only further put
tension on energy production that hundreds of r11i11ions of people depend on to live their lives.

UoS Oil Production Has Been Slow to Respond

Given all the geopolitical uncertainty, U.S. oil companies aren't in a hurry to dramatically
expand production. For instance, the U.S. produced 11.5 million barrels of crude oil a day in May
2022, according to the U.S. Energy Information Agency. While that's 200,000 more than a year
ago, it's roughly half a million barrels a day less than in 20 1 9.

Why? For one thing, major oil companies don't want to invest heavily on new wells only to see
supply increase, prices decline and their profits dwindle.

This was a major thenle of the fracking boonl that helped propel the U.S. to become the number
one global oil-producing nation over the last decade and a half. Many con1panies went bankrupt
as they overextended thelllselves building out infrastructure, only to see oil and gas prices
plumlllet on greater and greater supply.

Meanwhile, there's a large push by some of the world's largest institutional investors, including
BlackRock, to steer investn1ent toward companies with low levels of environn1ental, social and
governance (ESG) risk. That's moved money away from oil and gas producers w·hen those dollars
would help increase production.

"Underinvestment because of ESG is one of the confluence of issues causing the price to
increase," Jack McIntyre, a portfolio manager at Brandywine Global, said.

Meanwhile, the Biden administration has paused new oil and gas leases on Federal land. That
lllay not have an immediate inlpact on prices, but does affect supply in the years to COlne.

"My view is that [the] OPEC+ cut will keep prices f1at-to-higher from current levels,with a risk
that we return to triple-digit prices if we see signs of global demand in1proving-particular in
China-and/or a llleaningful reduction in Russian supply as enlbargoes kick in," said Barrett.

That is, until the next developnlent occurs.

https:/lwww.forbes.com/advisor/investing/high-oil-prices1 4/32
'5/31/23,11:43 PM Why the oil price is falling

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The Economist explains

Why the oil price is falling

The drop in prices is the result of four different factors

Dec 8th 2014

Share

ByE.L.

THE oil price has fallen by more than 400/0 since June, when it was $115 a barrel.
It is now below $70. This comes after nearly five years of stability. At a meeting
in Vienna on November 27th the Organisation of Petroleum Exporting
Countries, which controls nearly 400/0 of the world market, failed to reach
agreement on production curbs, sending the price tumbling. Also hard hit are
oil-exporting countries such as Russia (where the rouble has hit record lows),
Nigeria, Iran and Venezuela. Why is the price of oil falling?

The oil price is partly determined by actual supply and demand, and partly by
expectation. Demand for energy is closely related to economic activity. It also
spikes in the winter in the northern hemisphere, and during summers in
countries which use air conditioning. Supply can be affected by weather (which
prevents tankers loading) and by geopolitical upsets. If producers think the
The Econornist offers unrnissable insight
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https :llwww.economist.com/the-econom i st-explai ns/20 14/12/08/why-the-oi I-price-is-fall ing 1/5

 Why the oil price is falling

curbs supply sharply, it can send prices spiking. Saudi 'Arabia produces nearly
10m barrels a day-a third of the OPEC total.

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sanguinea.bbutgeO'pblitlc,ip'rJsl(. Thirdly, America has become the world's
largest oil producer. Though it does not export crude oil, it now imports much
less, creating a lot of spare supply. Finally, the Saudis and their Gulf allies have
decided not to sacrifice their own market share to restore the price. They could
curb production sharply, but the main benefits would go to countries they
detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite
easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6
per barrel) to get out of the ground.

The main effect of this is on the riskiest and most vulnerable bits of the oil
industry. These include American frackers who have borrowed heavily on the
expectation of continuing high prices. They also include Western oil companies
with high-cost projects involving drilling in deep water or in the Arctic, or
dealing with maturing and increasingly expensive fields such as the North Sea.
But the greatest pain is in countries where the regimes are dependent on a high
oil price to pay for costly foreign adventures and expensive social programmes.
These include Russia (which is already hit by Western sanctions following its
https:l/www.economist.com/the-econ om i st-explai n s/20 14/ 1 2/0B/why-the-oi I-price-is-fall ing 2/5
•
'5/31/23, '1:43 PM Why the oil price is falling

meddling in Ul<raine) and Iran (which is paying to l<eep the Assad regime afloat
in Syria). Optimists think economic pain may make these countries more
amenable to international pressure. Pessimists fear that when cornered, they
may lash out in desperation.

Dig deeper:
The economics of oil have changed (Dec 2014)
Will falling oil prices curb America's shale boom? (Dec 2014)
What is the oil cartel up to? (Dec 2014)

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