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CONFIDENTIAL BM/OCT2003/ECO555/510/465/456/550/505

UNIVERSITI TEKNOLOGI MARAFINAL EXAMINATION

COURSECOURSE CODEDATETIMEFACULTY

SEMESTERPROGRAMME/CODE

MANAGERIAL ECONOMICSECO555/510/465/456/550/50514 OCTOBER 20033 HOURS (9.00a.m-12.00p.m)Business Management / Accountancy / InformationTechnology & Quantitative Science / Hotel an d TourismManagementJune 2003 - November 2003Bachelor of Business Administration (Hons) (Transport) / BM216Bachelor of Business Administration (Hons) (Marketing) / BM220Bachelor of Business Administration (Hons) (Insurance) / BM221Bachelor ofBusiness Admnistration (Hons) (Finance) / BM222Bachelor of Business A dministration (Hons)(Operations Management) / BM224Bachelor of BusinessAdmnistration (Hons)(Retail Management) / BM225Bachelor of Business Administration (Hons)(International Business) / BM226Bachelor of Business Administration (Hons) (Islamic Banking) / BM229Bachelor of Accountancy (Hons) / AC220Bachelor of Science (Hons) (Information Technology) / CS220,Bachelor ofScience (Hons) (Statistics)/ CS221Bachelor of Actuarial Science (Hons) (Actuarial Science) / CS222Bachelor of Science (Hons) (Intelligent System) / CS223Bachelor of Science (Hons) (Business Computing) / CS224Bachelor of Science (Hons) (Data Communications and Networking) /CS225Bachelor of Science (Hons) (Information Systems Engineering) / CS226Bachelor of Science (Hons) (Hotel Management) / HM220Bachelor of Science (Hons) (Tourism Management) / HM221Bachelor of Science (Hons) (Food Service M anagement) / HM222

INSTRUCTIONS TO CANDIDATES1. This question paper co nsists of two (2) parts: PART A (6 Questions)PART B (3 Q uestions)2. Answer FIVE (5) questions from PART A and answer ALL questions from PART B.Answer PART A and PART B in the Answer Booklet. Start each answer on a new page.3. Do not bring any material into the examination room unless permission is given by the invigilator.4. Please check to make sure that this examination pack consists of:i) the Question Paperii) anAnswer Booklet - provided by the Faculty

DO NOT TU RN THIS PAGE UNTIL YOU ARETOLD TO DO SOThis examinat ion paper consists of 8 printed pages CONFIDENTIAL

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PART A (40 marks)Answer only FIVE (5) questions.

QUESTION 1The demand and total cost curves for Quick Alert Alarm Systems Inc. are given by theequations:

Q = 12500 - S O P (Demand equation)TC = 200 000 + 30Q + 0.002Q2 (Total Cost equation)

where Q is quantity, P is price and TC is total cost.a) Calculate the price and output that will maximize total revenue. (3 marks)b) Calculate the profit-maximizing price and output level. (2 marks)c) Calculate the price and output level at which Average Cost is minimized. (3 marks)

(Total: 8 marks)QUESTION2Freddy Krueger, marketing manager for a large department store, is trying to decide on theoptimal allocation of an advertising budget for the next quarter. Krueger has data thatindicate television and newspaper advertising have the following impact on total revenue:

TR = 20T + 5N + 20TN - T2where T is units of television advertising

N is units of newspaper advertisingEach television advertising unit cost RM10 while a unit of newspaper advertising costs RM5.a) Assuming a RM100 budget constraint, what is the combination of television andnewspaper advertisement that will maximize total revenue? (6 marks)b) What is the value of the Lagrangian multiplier? Interpret the Lagrangian multiplier.(2 marks)

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QUESTION3Given the following total cost function:

TC = 2000 + 400Q - 18Q2 + 0.5Q3

a) What is the value of Average Fixed Cost at an output of 20 units? (1 mark)b) At what output level is Marginal Cost at its minimum? (2 marks)c) At what output is Average Variable Cost at its minimum? (2 marks)d) If the price of the firm's output is RM230 per unit, should the firm continue or shutdown its operations? Why? (3 marks)

(Total: 8 marks)

QUESTION 4Icee Industries manufactures a certain frozen food product that can be sold directly to retailoutlets or to restaurants. The demand functions for each of these markets are:

P! = 40 - Qi for retail outletsP2 = 60 - 2Q 2 for restaurants

Icee's total cost function for the manufacture of this product is:TC = 10 + 8Q where Q = Q! + Q 2

a) W hat are the profit-maximizing price and output levels for the product in each of the2 markets? (6 marks)b) Calculate Icee's total profits if the firm is effectively able to charge d ifferent prices inthe 2 markets. (2 marks)

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QUESTION 5a) In a perfectly competitive industry, the market price is RM12. A firm is currentlyproducing 50 units of output. The average cost is RM10, marginal cost is RM15 andaverage variable cost is RM7.

Is the firm making the profit- maximizing decision? Why or w hy not?If not, what should the firm do? (4 marks)

b) Explain why the demand curve facing a perfectly competitive firm is assumed to beperfectly elastic.(4 marks)(Total: 8 marks)

QUESTION 6

a) You have a choice of opening your own business or being employed by someoneelse in a similar type of business. Name 2 considerations in terms of opportunitycosts that youwould have to include in arriving at your decision.(4 marks)

b) How does implicit costs lead to a difference between accounting and economicprofits? (4 marks)(Total: 8 marks)

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CONFIDENTIAL 5 BM/OCT2003/ECO555/510/465/456/550/505

PART B (60 marks)Answer ALLquestions.

QUESTION 1

Getaway Travel is a firm that sells packaged holiday tours to a country resort. Its demandfunction for a 3-day 2-night package is shown by the following regression equation:

Q = 220 - 2.5 P + 2Y + 4PC - 1.5A(12.65) (0.4) (0.35) (1.2) (1.6)R2 = 0.854figures in parentheses show standard error of coefficients

whereQ = market demand for Getaway Travel's 3-day 2-night packaged toursP = price of Getaway Travel's 3-day 2-night packaged toursY = consumers' average household incomePc= price of a similar packaged tour offered by a competitorA = advertising e xpenditure of Getaway Travel on its packaged tours

Currently, the values of each of the variables are:P = RM450 Y = RM4,000 Pc= RM400 A = RM3.000

a) At the 5% level of significance, which independent variables have a significantinfluence on the demand of Getaway Travel's packaged tours? (2 marks)b) Interpret the coefficient of determination, R 2. (2 marks)

c) Are all signs of coefficient consistent with economic theory? (2 marks)

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d) Compute price elasticity of demand, income elasticity of demand and cross elasticityof demand of Getaway Travel's packaged tours. (6 marks)

e) What will happen to total revenue if Getaway Travel increases its price of itspackaged tours? (2 marks)

f) How does a 5% increase in income affect the demand for Getaway Travel'spackaged tours? (2 marks)g) How will a 10% decrease in competitor's price affect the demand for GetawayTravel's packaged tours? (2 marks)h) Determine the demand curve function for Getaway Travel's packaged tours.

(2 marks)(Total: 20marks)

QUESTION2

a) The short-run production function of a dress-making firm is given by the equation:Q = L-0.00125L2

where Q denotes the number of dresses made per week and L is the number oflabour hours used per week. Price of labour is RM20 per hour and the price of adress is RM40.i) How many labour hours should the firm employ in order to maximize p rofits?

(4 marks)ii) How many dresses should the firm make in a week so as to maximize profits?

(2 marks)iii) If the firm wished to maximize output, how many labour hours should itemploy? (2 marks)

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b) A firm's production function is given by the equation:Q= 12K05L05

where Q is output , K is the number of capital units and L is the number of labourunits.Input prices are RM36 per labour unit and RM16 per capital unit.

i) Derive an equation for its expansion path. (4 marks)ii) What is the optimal combination of labour and capital needed to produce5400 units of output? (4 marks)iii) Calculate the minimum total cost to produce this level of output. (2 marks)iv) How much will output change if the firm increases the use of capital by 5%and at the same time decreases labour usage by 10%?

(2 marks)(Total: 20 marks)

QUESTION3

Mega Motors Inc. believes it faces the following kinked demand curve:P = 150 - 0.5Q forprice increases

an d P = 200 - 1.5Q for price decreases.a) Explain why such a kinked demand curve is likely to exist. (2 marks)b) Give TWO (2) characteristics of this market structure. (2 marks)

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c) Mega Motors total cost function is:TC = 500 + 15Q + 0.5Q2

What is Mega Motors profit- maximizing price and output combination? (8 marks)

d) What is Mega Motors profit-maximizing price and output combination if total costincreases to:TC = 500 + 60Q + 0.5Q2

Illustrate with a diagram. (8 marks)(Total: 20 marks)

END OFQUESTIONPAPER

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