BMA5001 Final Test Answer Keys Semester I, AY2021-2022

Managerial Economics 14 November, 2021

BMA5001
MANAGERIAL ECONOMICS

ONLINE FINAL TEST

14 November, 2021

Time Allowed: 100 minutes including e-copy submission

(90 minutes for doing the questions and 10 minutes for e-submission)

1. GENERAL INSTRUCTION:

• It is an online open-book test. However, cooperation/discussion among students or

consultation with others is not allowed.
• All students are required to stay on the Zoom session during the entire test duration, with
your video on and face clearly visible.

2. e-SUBMISSION OF YOUR FINAL TEST ANSWER (Please read carefully!)

• Please submit an e-copy – either typed or scanned – via LumiNUS (‘Files’  ‘Final
Test’  ‘Final Test Answer Submissions'  'Your Section' folder.)
• Please submit your file in PDF format only.
• On top of Page 1, please type/write (i) your matriculation ID number (that starts with
A) and (ii) your personal number. (Personal numbers have been attached at the end of
the test paper.)
• When submitting your answer, your file name should be simply your personal
number. (For example, if your personal number is 17, just simply name your file ‘17’
and nothing else.)
• Submission deadline is 3:40pm. If late, you will lose one mark for every minute past the
submission deadline.
BMA5001 Final Test Answer Keys Semester I, AY2021-2022
Managerial Economics 14 November, 2021

QUESTION I (15 x 3 = 45 marks)

Please answer the following questions, with brief explanations.

(1) Consider an electricity industry that requires a substantial size of investment in power generating
facility before it serves the market and thus is under a natural monopoly. A monopoly creates a
deadweight loss and thus a price regulation is often recommended. An economist suggested that
the government could introduce a maximum price control policy based on the firm’s average cost
to improve economic welfare. Briefly explain why.

(2) Jay, an avid golf business entrepreneur, has opened an indoor screen golf club, Golf 365, which is
the first and the only one with the indoor screen golf bays and a bar. Jay learned that there are 500
male golfers and 1000 female golfers who are keen to join the club if the membership fee and the
use fee are right. Each male golfer’s demand is known to be P = 50 – QM and each female golfer’s
demand is known to be P = 60 – QF, where QM and QF denote the number of golf rounds to be
played by each male and female golfer per year and P denotes the price a golfer needs to pay for a
round of golf at the club. The club has enough capacity to serve all the potential golfers. It costs
the club $10 to provide a round of screen golf, while all of its fixed cost is sunk. Jay has
introduced a annual membership fee of $1,000 and $10 per round of screen golf at the club to each
customer.
Question: How much profit would Jay earn each year? (No graph is required but you need to show
your work briefly.)

(3) Spread, the only cafeteria in NUS Business School, has decided to simplify its breakfast menu by
offering only two items – coffee and salad. The manager in charge, Sam, has conducted an
experimental research and found that there are two possible customer types, A and B, with 100
customers in each type and all of them would buy one cup of coffee and one bowl of salad each day
if prices are attractive to them. Sam also learned that each customer’s reservation values for the
items are as follows:

Items
Coffee Salad
A $7 $7
Customers
B $2 $9

Sam, however, cannot identify a customer’s type and thus can only charge the same price to all
customers. Since it costs very low for Sam to prepare each menu, he has decided to price the items
in a way to maximize their sales revenue. Please help Sam.

(1) If Sam wants to charge each item separately, what price should he charge for coffee and salad,
respectively and how much would his daily revenue be?
(2) If Sam wants to create a set menu with one cup of coffee and a bowl of salad, what price should
he charge for the set menu and how much would his daily revenue be?
(3) If Sam wants to offer a mixed menu by offering a set menu at $10 and a bowl of salad at
$11.99, what price should he charge for a cup of coffee? 14
8.99
BMA5001 Final Test Answer Keys Semester I, AY2021-2022
Managerial Economics 14 November, 2021

QUESTION II (30 marks)

Two platform firms, MetaV Inc. and SpatialV Inc., are in an online virtual communication platform
rivalry and are contemplating over two possible technical protocols they can adopt for the newly
rising metaverse platform development – Tech A and Tech B. Their popularity among the platform
participants’ preferences and each protocol’s technological specifics complicate the prospected profit
flows for each firm over the next decade. Each firm’s present value of the future profit flows have
been ‘correctly’ estimated to be as follows, which should depend on who adopted which protocol. The
payoffs are presented in the order of (MetaV’s, SpatialV’s).

SpatialV
Tech A Tech B
Tech A X, 6 5, 9 15,6 5,9
MetaV
Tech B 3, 10 14, Y 3,10 14,8

Answer the following questions. No explanation is required except for question (4). 15,6 5,9 5
3,10 14,8 3
Suppose that the two firms make decisions simultaneously. 6
8
(1) (7 marks) For what range of X and Y would the above game be a Prisoner’s Dilemma game?

(2) (7 marks) For what range of X and Y would the above game be a Chicken Game?

Now suppose that still X = 15 and Y = 8.

(3) (8 marks) Find the Nash equilibrium and the maximin strategy outcomes, respectively.

(4) (8 marks) If the two firms can make decisions in sequential order, who would want to move first
and who would want to move second? (Provide a brief explanation for this question.)
BMA5001 Final Test Answer Keys Semester I, AY2021-2022
Managerial Economics 14 November, 2021

QUESTION III (20 marks)

In many cases firms enter a market sequentially – like convenient stores or restaurant chains – and
individual firm profit usually falls as more entrants enter. The following table gives profits per firm
in a market where entrants enter sequentially. (For example: When there is only one firm in the
market it earns $41 million, and if two firms enter the market then competition drives per-firm profit
to $27 million etc. The profits are defined as the present value of a firm’s future earnings stream.)
All firms are identical in every aspect.

Number of Firms Profits per Firm ($millions)

1 41
2 27
3 18
4 12
5 –2

Because of brand recognition and loyalty, incumbents can use advertising to deter entry. That is, to
enter, an entrant must spend on advertising an amount equal to the total market advertising
expenditure by all of the incumbent firms. Otherwise, the entrant cannot expect to run the business
profitably due to the lack of consumer recognition and loyalty. (For example, if three incumbent firms
were in the market and each of them spent $X on advertising, an entrant must spend $3X on
advertising to successfully enter the market as the fourth firm.) The profits in the table above do not
include the advertising spending.

To act as a deterrent, advertising must be directed against a specific entrant each time. Hence, if the
first firm tries to keep out a second firm and fails, its advertising cost should be considered sunk and
non-salvageable. If the two incumbents now try to keep out a third firm, the first firm must reinvest in
advertising an amount which is equal to that spent by the second firm and so on. (In case you wonder,
the equal amount advertising expenditure per incumbent is justified by assuming that the incumbent
firms are advertising through the same agency, who is then going to split the total bill into equal
amount per firm.)

All the information above is assumed to be a common knowledge. Assume also that the firms would
not enter when indifferent between entering and staying out. The firms are all rational profit-
maximizing game players.

Question:

How many firms will enter the market and what will be each firm’s net profits when the entry decisions
are all over? Provide a brief reasoning underlying your answer.
BMA5001 Final Test Answer Keys Semester I, AY2021-2022
Managerial Economics 14 November, 2021

BONUS QUESTION IV

Answer the following questions for bonus marks. No answer then no bonus marks, seriously.

(1) (5 or 2 or zero bonus marks)

As openly announced earlier, here goes my early Christmas gift for you. You really can earn some
extra marks on this final exam, yet only if you and your classmates think and choose right.
You can choose one of the two options – 5 marks or 2 marks – regarding how many
extra marks you want. You will get whichever marks you chose as long as fewer
than 20% of all students – i.e. twenty one or fewer students – chose 5 marks.
Otherwise, however, no one gets any extra marks. (For your information, there
are 110 students taking this test now.)
Now, make your choice!

(i) 5 marks

(ii) 2 marks

(2) (5 bonus marks)

Which of the below best reflects how you feel after the test today? Provide a supplementary
reason why.

(i) The questions are fair and economics is beautiful.

(ii) Fair? Beautiful? Nahhhhh….. Economics betrayed me and so did you, Prof. Jo.
(iii) Hurray! Test is over, and what else would I need? Beer time!
(iv) None of the above. (Then, provide your own answer separately.)

-------------------------------

END OF FINAL TEST PAPER

 SF1/SF1A Group Personal Numbers
(Name of your e-submission file should be simply your personal number.)

Personal Number Name Personal Number Name

1 Aditi Kapur 30 Muskan Harlalka
2 Akshay Pareek 31 Nayada Ting
3 Alexandra Yii Lun Lee 32 Nguyen Quynh Ngoc
4 Ayla Francesca Tablante Reyes 33 Nontakorn Terdtoontaveedej
5 Azat Kabdrashitov 34 Peng Chung Hau
6 Chen Shuyue 35 Phua Hong Kiat
7 Ching Terk Zhi 36 Remy Tran
8 Daegeon Kim 37 Ren Jingyao
9 Daryl Goh Wei He 38 Sarang Kuchhal
10 Dong Qian 39 Shaurya Thapar
11 Francesca Katrina Tankiang 40 Shi Jia
12 Gwendolyn Ong Wei Ling 41 Shota Kawabata
13 Han Danyang 42 Shreyas Likhite
14 Himanshu Kaul 43 Spencer Alexander Olof Oester Jenk
15 Hsiao Yu-Wen 44 Steve Prawiromaruto
16 Jae Hoon Oh 45 Surya Shruthi Nadiminti
17 Jiazhi Duan 46 Venkata Sai Prajwal Savanam
18 Kohei Sugiyama 47 Vincent Mathieus Chan Syling
19 Kor Zhi Yuan, Joseph 48 Wang Xiao
20 Kun Hee Lee 49 Xi Cao
21 Kwok Wai Wong 50 Xinyue Wang
22 Lina Ichiki 51 Xu Luping
23 Liu Chen 52 Yimiao Lu
24 Manoj Ananth 53 Yi-Ting Chen
25 Masayuki Sunaga 54 Yuqiao Zhou
26 Miaoyang Chen 55 Zhang Qiuxia
27 Mikito Maruno 56 Zhang Yan Ting
28 Mohammed Sahil Akbar 57 Zhu Jing
29 Muhammad Ali Burney
 SF2/SF2A Group Personal Numbers
(Name of your e-submission file should be simply your personal number.)

Personal Numbers Name Personal Numbers Name

58 Aashika Treesa Saju 85 Mitun Gunasekar Dhandapani
59 Aditya Saharia 86 NING WEIWEI
60 Angus Michael Kendall Bower 87 Nishant
61 Aniruddh Fatehpuria 88 Patil Saloni Vivek
62 Anmol Sinha 89 PLAVENDERRAJ DIWAKAR
63 Atippaj Pattapongwat 90 Pongdao Premrote
64 Chen Huixue 91 Sanjana Manku
65 Chih-Ching Hsien 92 Sathya Karunagaran
66 Chin Su Lin 93 Shivam Misra
67 Chun Ting Wu 94 Subhashruthi Nadathur Jayakumar
68 Daehee Lee 95 Sunghan Kim
69 Dang Lan Anh 96 Takichiro Gondokusumo
70 Daniela Collazos Zarate 97 Tang So Yu
71 Deng Yiting 98 Tao Liu
72 Feng Lan 99 Udit Dewan
73 Gabrielle Ma. T. Castaneda 100 Vipul Jain
74 Gao Rong Ron Lee 101 Wang Juan
75 Guo Zhen 102 Wang Yue
76 Hashim Fazal Hasnain 103 Xinyu Zhou
77 Hitoshi Takahashi 104 Xu Xinyi
78 Jehan Karanjia 105 Yi Xu
79 Kanda Wanichtanarak 106 Youngjin Son
80 Katherine Qi Jing Sun 107 Yuan Sun
81 Kuanying Tseng 108 Yutaka Oba
82 Li Zihao 109 Zha Junqiu
Ludovic Regis Marie De Geis De
Zhang Wanlu
83 Guyon De Pampelonne 110
84 Masahiko Hongo 111 Zhongxiu Tang