FINAL EXAMINATION

City Graduate School

Course
MPME7113
Managerial Economics
:

Date
:

Time
:

Duration : 3 hours

Lecturer : DR NOR SAIDI BIN MOHAMED NASIR

Total marks : 100 marks (worth 40%)

Instructions to candidates:

1. Write your name and student number on the Examination Paper AND Answer Booklet.

2. Answer questions according to the instruction for each section.

3. Do not detach any portion of the examination paper.

4. Begin writing, as indicated, after the reading time has ended.

5. All questions to be answered in PDF file format and submit to LMS

Materials allowed for this examination:

1. Non-programmable calculator.

DO NOT REMOVE ANY PART OF THIS EXAMINATION PAPER FROM THE

EXAMINATION ROOM

Student ID : 201903040008

NIRC/Passport No : 950905085352

Program : MBA CT9

Lecturer : DR. NOR SAIDI BIN MOHAMED NASIR

Name : JIWAAJOTHESWARRIE THAMILSELVAN

 Date: 18 August 2022 Course : MPME7113 MANAGERIAL ECONOMICS

SECTION A –STRUCTURED QUESTIONS [TOTAL = 60 MARKS]

Answer ALL questions.

QUESTION 1 (15 MARKS)

a. Consider the graph below, which shows the dollar sum versus the quantity made in Sales Revenue
Maximisation. What results are possible?

From the graph, we are able to deduce that the rm has the potential to generate positive profits;
alternatively, the rm has the potential to generate losses; and the point at which profits are
maximised. We are able to make an educated guess as to whether the company made a profit or a
loss based on the profit and loss curve. The company is experiencing a loss between "e to q" and "q
to f." At point q and point q, the company has made no profit. During this time period, the
company is generating a positive profit. At the point q on the graph where the disparity between
the total revenue curve and the total cost curve is at its highest, the business realises its greatest
amount of profit. And it would behove this company to start producing now in order to maximise
their profits.

(10 Marks)

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Date: 18 August 2022 Course : MPME7113 MANAGERIAL ECONOMICS

b. Describe the law of demand and give an example?

According to the law of demand, when prices go up, demand goes down, and when prices go
down, demand goes up. This happens in the opposite direction when prices go down. Consider
the case of a baker who offers bread rolls at a price of one dollar each. At that price, they sell
fifty each and every day. But when the baker decides to raise the price to $1.20, they only sell
forty of them.

(5 marks)

QUESTION 2 (15 MARKS)

a) ACME coal paid $5000 to lease to railcar from the Reading Railroad. Under the terms of the lease,
$1000 of this payment is refundable if the railcar is returned within two days of signing the lease.

i. Upon signing the lease and paying $5000, how large are ACME’s fixed costs and its
sunk costs?

The amount that ACME paid to lease the railcar is considered a fixed cost, and it was
$5,000. This is due to the fact that the price of the lease does not depend in any way on
the output or how they intend to use the railcar. The term "sunk cost" refers to the
amount of money that ACME will not be able to recover even if it returns the railcar
within two days. That is, sunk cost is $5,000 divided by two, which equals $2,500.

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Date: 18 August 2022 Course : MPME7113 MANAGERIAL ECONOMICS

ii. Define sunk costs.

Sunk costs are costs that have already been incurred but cannot be recouped
because they have been spent.

iii. One day after signing the lease, ACME realizes that it has no use for the railcar. A
farmer has a bumper crop of corn and has offered to sublease the railcar from ACME at
a price of $4500. Should ACME accept the farmer’s offer and explain with your own
idea.

If ACME turns down the farmer's offer and returns the railcar, it will only receive
$2,500, which is half of the amount it originally paid for the railcar. The remaining
balance of $2,500 cannot be recouped. However, in the event that it keeps the
railcar and accepts the farmers' offer, he will be given $4,500, which will result in
an additional benefit of ($4,500 minus $2,500), which is $2,000. Therefore, ACME
ought to take advantage of this offer.

(4 marks)

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Date: 18 August 2022 Course : MPME7113 MANAGERIAL ECONOMICS

b) What is the profit-maximizing level of output for firm 2 when firm 1 produces zero units
of output? What is it when firm 1 produces Q1* units?
(7 marks)

QUESTION 3 (10 MARKS)

Assume there are six companies in a certain industry. Four companies have $10 sales apiece, while two
companies have $5 sales each. What is the industry's four-firm concentration ratio?

Sale of 1st rm = 10
Sale of 2 rm = 10
Sale of 3 rm = 10
Sale of 4 rm = 10
Sale of 5rm = 5
Sale of 1 6 rm = 5
Total sales = sum = 10 + 10 + 19 + 10 + 5 + 5 = 50 % of sales with 10 million = Sales / total sales
*100 = 10 / 50 * 100 = 20%

Market share of 1 = 2 = 3 = 4 = 20% % of sales with 5 million = Sales / total sales *100 = 5 / 50 *
100 = 10%

Market share of 5=6 = 10% industry's four-rm concentration ratio = sum of total market share of
top four rm = 20% + 20% + 20% + 20%
Industry's four-rm concentration ratio = 80%

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 Date: 18 August 2022 Course : MPME7113 MANAGERIAL ECONOMICS

QUESTION 4 (10 MARKS)

Assume the manager is located at point B in the diagram above, and he is charging a price of P0. What
does the demand for the firm's goods look like if the management anticipates that rivals would not
match price reductions but will match price rises instead of price decreases?

At first, the manager places a demand on the employee at point B, when the
employee is paying price p0 and quantity q0. In the event that the competitor does
not match price reductions, he will be D1D1. The demand curve will take the form
of a unitary elastic curve. If he is willing to move at lower prices, then the demand
curve would shift to the more elastic D2D2 position. However, he will not be going
on reduction, and instead will be at D1D1, which is the unitary elastic demand
curve.

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Date: 18 August 2022 Course : MPME7113 MANAGERIAL ECONOMICS

SECTION B – ESSAY QUESTIONS [TOTAL = 40 MARKS]

Answer ALL questions.

QUESTION 1 (10 MARKS)

(a) Explain FIVE (5) forces framework on sustainable industry profit.

(10 marks)

The number and strength of a company's competitive rivals, as well as the possibility of new
market entrants, suppliers, customers, and substitute products, all have an impact on the
profitability of a company. An analysis of the Five Forces can be used to direct business
strategy in order to increase a company's competitive advantage. According to this model,
competitiveness is not solely derived from the companies with which one competes. Instead,
the level of competition in an industry is determined by five fundamental forces: the threat of
new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat
of substitute products or services, and the rivalry that already exists within the industry.

QUESTION 2 (10 MARKS)

a) In today’s global economy, the number of firms in the market critically depends on the entry and
exit decisions of foreign firms. Recently, several Chinese automakers including the biggest
brand announced ambitions plans to expand abroad. For instance, Chery Automobile Co. already
exports to 70 developing countries in Asia, the Middle East and Latin America and is eyeing
further expansion into more developed markets.

i. With the aid of diagram, indicate what happen to supply curve if Citroen increase the price
and explain.

A company's profitability is affected by a variety of factors, including the number and

strength of the competitive rivals a company faces, the possibility of new market
entrants, suppliers, customers, and substitute products, and the possibility of new market
entrants. An examination of the Five Forces can be utilised to guide business strategy in
the interest of enhancing a company's position of preeminence in its industry. According
to this model, one's level of competitiveness does not solely stem from the companies in
their industry with which they compete. Instead, the level of competition in an industry is
determined by five fundamental forces. These forces are the threat of new entrants, the
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Date: 18 August 2022 Course : MPME7113 MANAGERIAL ECONOMICS
bargaining power of suppliers, the bargaining power of buyers, the threat of substitute
products or services, and the rivalry that already exists within the industry.

(4 marks)

ii. Discuss and explain THREE (3) determinants of supply.

The price of the good or service is the most obvious factor in determining supply, but there
are other factors as well. If there is no change in any of the other factors, then a higher
relative price will lead to an increase in the supply of a product. The explanation is
straightforward. When a company sells products or provides services with the intention of
making a profit, and those prices go up, the company's profit goes up as well.

(6 marks)

QUESTION 3 (10 MARKS)

(a) The owner of a small chain of gasoline stations in a large Midwestern town read an article in a
trade publication stating that the own price elasticity of demand for gasoline in the United
States is -0.2.
i. Indicate the elasticity either elastic or inelastic.

The demand is said to be elastic if the formula results in an absolute value that is greater than
1. To phrase it another way, quantity shifts more quickly than price. Demand is considered to
be inelastic if the value is less than 1. In other words, price changes more quickly than
quantity changes.

(1 mark)
ii. Should he increase or decrease the price to obtain higher revenue and profits? Explain.

If he increase in price result in an increase in total revenue(total expenditure),

indicates direct relation so demand will be inelastic (E<1).

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Date: 18 August 2022 Course : MPME7113 MANAGERIAL ECONOMICS

QUESTION 4 (10 MARKS)

(a) Competition in international market is often keener than in domestic markets. This is true
especially in developing economies, where price rather than product differentiation is the main
driver of consumer purchase decisions. The French automaker PSA Peugeot- Citroen had a
minuscule share of China’s auto market in the mid -2000s. The managers remarked “if prices
fall, we will also follow suit, but not more than the decrease in the market”. In your opinion,
what does this this remark suggest?

Decisions regarding output and pricing made by businesses are influenced by a wide range
of factors, the most important of which are the nature of consumer demand and the
production costs. When dealing with international markets, the decision-making process
becomes significantly more difficult because it calls for an in-depth familiarity with the
nation in which the venture is going to be established. In the example that was presented
earlier, the French automaker PSA Peugeot-Citroen had a minuscule share of China's auto
market in the middle of the 2000s. This suggests that they had limited success and,
potentially, limited ability to have an impact on the market. First, I will talk about some of
the limitations they might have been up against at the time, and then I will elaborate on
what the given remark suggests to me. PSA Peugeot-Citroen, being a French company,
would have been subject to a number of production limitations in China, which would have
resulted in increased production costs and a decreased capacity for supply. The most
significant limitation would have been a supply chain that was significantly longer than
necessary. Due to the fact that China's economy was still in the process of developing, it
was unlikely that the country would have access to all of the necessary components and
expertise to manufacture automobiles. For instance, the company might have been
required to bring in engineers from the United States or Germany as well as import some
of the electrical components of the cars from Taiwan or South Korea. In addition, there
would have been a linguistic barrier, as well as the potential for a lack of production
infrastructure, such as developed roads and electricity, as well as the policies of the
Chinese government. These policies could have included an insistence that the company
obtains its goods from China or hires people from China as employees. It's possible that a
lack of initial investment capital or expansion funding was to blame for the restricted
supply capacity. These limitations may have played a role in PSA Peugeot-decision
Citroen's to limit price cuts to the same level as the majority of competitors in the market.

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Date: 18 August 2022 Course : MPME7113 MANAGERIAL ECONOMICS
Companies in developing economies are given an incentive to lower their prices in order to
attract a greater number of customers when price differentiation, rather than product
differentiation, is the primary factor that influences the purchasing decisions of consumers.
The inability of PSA Peugeot-Citroen to reduce prices beyond a certain extent must have
been a primary factor in the company's decision to forego doing so. Because of the high
costs of production, the company would not have been able to reduce their prices below a
certain threshold without incurring losses in revenue. It's possible that the limited
production capacity of the company was a contributing factor, even though they would
have been unable to meet the increased demand regardless. In the same vein, PSA Peugeot-
Citroen would have to at the very least lower their prices to the extent that is determined
by the prices of other companies in the market; failing to do so would result in their
customers switching to the services of other businesses.

(10 marks)

-END OF QUESTIONS-

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