North South University

School of Business and Economics (SBE)

MBA Program

Summer Semester 2020

Final Examination

Course: BUS 525, Sec. 2 ( Managerial Economics)

Total Marks: 40

Time: 2 hours

Answer the following questions. Marks for each question are shown on the right-hand margin.

5+5= 10 marks

1. (a) Explain the difference between ‘returns to scale’ and ‘returns to a factor’. State the law of
diminishing marginal returns. Why does diminishing marginal returns occur?
(b) Consider the following Cobb-Douglas production function :
Q= AK αLβ
where Q is the rate of output, and K and L represent inputs of capital and labor, respectively.
Determine the equations for the marginal product functions for each input.
5+5= 10 marks
2. (a) Explain how a firm determines the optimal quantity of labor to be hired when the amount of
capital is fixed.
(b) Explain how the optimal employment rates of capital and labor are determined by a firm
when both inputs are variable.
5+5= 10 marks
3. (a) Differentiate between (i) fixed cost and variable cost, and (ii) short run and long run. Why are
the per unit cost functions U-shaped? Why does the MC curve intersect both the ATC and AVC
curves at their minimum points?
(b) The total cost function of an electronics firm is
TC = 200 + 5Q – 0.04Q 2 + 0.001Q3
Determine the level of fixed cost (if any) and equations for average total cost, average variable
cost, and marginal cost.
4+2+2+2 = 10 marks
4. (a) State and explain the market structure characteristics of perfect competition.
(b) Explain what we mean when we say that ‘ a perfectly competitive firm is a price-taker’.
(c) What is the shape of the demand curve faced by a perfectly competitive firm? What does this
shape indicate?
(d) At what point is the equilibrium output of a profit-maximizing perfectly competitive firm
determined?