CAVITE STATE UNIVERSITY

College of Economics, Management and Development Studies

DEPARTMENT OF MANAGEMENT
Midterm Examination
(Due Date: November 30, 2022)
BA 245 - Managerial Economics Dr. Gilchor P. Cubillo
MBA First Semester, AY 2022-2023 Professor

Crea Criselda Madula-Sedano

MBA 202020235
1. Explain the influence/effect of the five forces affecting industry sustainability to the
effective managerial decision-making. (15 points)
Porter's model can be applied to any segment of the economy to understand the level
of competition within the industry and enhance a company's long-term profitability. The Five
Forces model is named after Harvard Business School professor, Michael E. Porter. Porter's 5
forces are:
a. Competition in the industry
b. Potential of new entrants into the industry
c. Power of suppliers
d. Power of customers
e. Threat of substitute products
Porter's Five Forces framework defines the most important criteria to consider when
looking at the competitive landscape of a corporation. High threat levels typically signal that
future profits may deteriorate and vice versa. For example, an early startup in a fast-growing
industry might quickly become shut out if barriers to entry are not present. Likewise, a
company selling products for which there are numerous substitutes will not be able to
exercise pricing power to improve its margins, and it may even lose market share to its
competitors.
The reason Porter's model became so widely adopted is that it forces companies to
look beyond their own immediate business and to their industry as a whole when making
long-term plans. Porter's still plays a vital role in that, but it should not be the sole tool in the
toolbox when it comes to building a business strategy.
 2. Explain and illustrate how excise taxes, ad valorem taxes, price floors and price
ceilings impact the functioning of a market. (15 points)
The Price Celing and Price Floor enables a series of experiments on different demand
and supply curves in order to learn about price ceilings and floors.
Price restrictions take the form of maximum (price ceilings) or minimum (price
floors) prices for which a good may be legally sold (green color on the graphs below). A
price ceiling leads to a persistent shortage of the good and a price floor leads to a persistent
surplus.

P S P S

Price Ceiling
Qe D Qe D
Q Q
Qs Qd Qd Qs

One important aspect of price regulations are that they impair the market's ability to
allocate resources. In the case of the price ceiling, too little output is produced because the
quantity supplied at the legally mandated price is below the unregulated equilibrium quantity.
With a price floor, too much output is produced because the quantity supplied at the
minimum legal price is greater than the equilibrium quantity.
In both cases, price regulations distort the allocation of resources. By not allowing
prices to rise or fall, the price regulation causes too little or too much output to be produced.
In fact, the case against price regulations rides on an important assumption, that Qe (the
unregulated equilibrium quantity) is the optimal quantity. This is only true for well-behaved,
competitive markets.
Further study in economics will explain under what conditions the free market
equilibrium quantity is optimal and measure in dollars the cost of the distortion.
Price regulations have a second drawback. Maintaining price ceilings and floors
requires pressure to counteract the market's push on prices. In the case of ceilings, illegal
sales must be prevented and alternative ways to allocate the available Qs among the buyers
must be used. With floors, policies (such as government purchase of the excess supply) must
be implemented to maintain price supports.
Governments routinely tax specific commodities. Gasoline, liquor, and cigarettes are
taxed by governments around the world.

S
PBuyer

PSeller
Qe D
Q
Qe
w/ tax
 Once the tax is imposed, the market is allowed to operate freely and it equilibrates at
the point where S+Tax=D. There are two issues to consider:
a. The new Qe with the tax (Qe w/ tax) is lower than the original equilibrium quantity (plain
Qe). Thus, the tax has distorted the allocation of resources (less of this good is produced than
without the tax). This is the same problem that we identified with price regulations. If you
believe the untaxed market's Qe is optimal, then Qe w/ tax is obviously sub-optimal.
b. Buyers pay more and sellers receive less than when there was no tax. The question of who
bears the bigger burden, called tax incidence, is an interesting one. You would think that if
the supplier is responsible for paying the tax to the government, then the supplier bears the
burden of the tax. A moment's reflection should convince you that this is untrue. After all,
the seller might be able to charge higher prices and simply pass on the tax. If property taxes
rise, it is quite possible that the landlord will charge higher rent, thereby passing on the tax. In
that case, it's the renter who bears the burden of the tax, not the landlord.
3. Explain and illustrate how various elasticities of demand as quantitative tools to
forecast changes in revenues, prices, and/or units sold. (15 points)
The price elasticity of demand attempts to determine the percentage change in the
quantity demanded of a particular good or service when the price of that good or service
changes by a certain percentage.
When a good or service is considered to have perfectly elastic demand, a change in
price would eliminate all demand for the product.
Relatively elastic demand means that there will be more change in the quantity
demanded of a good or service than in the price of that good or service.
Perfectly inelastic demand means that regardless of price, the quantity demanded of a
good or service remains constant.
Relatively inelastic demand means that there will be more change in the price of a
good or service than in the demand for that good or service.
 The price elasticity of demand measures the responsiveness of quantity demanded to
changes in price; it is calculated by dividing the percentage change in quantity demanded by
the percentage change in price.
Demand is price inelastic if the absolute value of the price elasticity of demand is less
than 1; it is unit price elastic if the absolute value is equal to 1; and it is price elastic if the
absolute value is greater than 1.
Demand is price elastic in the upper half of any linear demand curve and price
inelastic in the lower half. It is unit price elastic at the midpoint.
When demand is price inelastic, total revenue moves in the direction of a price
change. When demand is unit price elastic, total revenue does not change in response to a
price change. When demand is price elastic, total revenue moves in the direction of a quantity
change.
The absolute value of the price elasticity of demand is greater when substitutes are
available, when the good is important in household budgets, and when buyers have more time
to adjust to changes in the price of the good.
4. Explain the four basic properties of a consumer’s preference ordering and illustrate
their ramifications for a consumer’s indifference curves. (15 points)
Consumer preferences determine which goods will be consumed. The four basic
properties of consumer’s preference ordering and their ramifications for a consumer’s
indifference curves are:
a. Completeness– Being indifferent with all the bundles, the consumer should be capable to
express some particular preference. The consumer is assumed to be capable of expressing a
preference for, or indifference among, all bundles, when the preferences are assumed to be
complete.
b. More is better- The consumer will see the product, as a good or bad product, with different
considerations. The consumer views the products as goods instead of bads in the concept of
more is better.
c. Diminishing Rate of Marginal Substitution- As a consumer demands Good , the more he or
she is willing to give up Good to purchase another unit of Good , as a conclusion Good will
decrease.
d. Transitivity- This property never gives the people the chance to choose between different
goods. Preferences can be transitive if they are internally consistent.
 If a good satisfies all four properties of indifference curves, the goods are referred to
as ordinary goods. They can be summarized as the consumer requires more of one good to
compensate for less consumption of another good, and the consumer experiences a
diminishing marginal rate of substitution when deciding between two goods.
- Indifference curves never cross. If they could cross, it would create large amounts of
ambiguity as to what the true utility is.
- The farther out an indifference curve lies, the farther it is from the origin, and the higher the
level of utility it indicates. As illustrated above on the indifference curve map, the farther out
from the origin, the more utility the individual generates while consuming.
- Indifference curves slope downwards. The only way an individual can increase
consumption in one good without gaining utility is to consume another good and generate the
same amount of utility. Therefore, the slope is downwards sloping.
- Indifference curves assume a convex shape. As illustrated above in the indifference curve
map, the curve gets flatter as you move down the curve to the right. It illustrates that all
individuals experience diminishing marginal utility, where additional consumption of another
good will generate a lesser amount of utility than the prior.
5. Explain alternative ways of measuring productivity of inputs and their contributions
to the role of the manager in the production process. (10 points)
Productivity is a measure of a company's ability to make a product or provide a
service. Productivity is also defined as an index that compares the production of goods and
services to the input of capital, labor, materials, energy, and other factors. As a result, it can
be written as:
Productivity = units of output/units of input
There are two basic methods for increasing productivity: increasing output and
lowering input. Organizations can use this method to quantify the productivity of inputs such
as labour, machine productivity, capital productivity, and energy productivity in a variety of
ways. For a single process, a productivity ratio can be determined for a division, a facility, or
the entire organisation
Role of a manager in the production process:
A productivity metric shows how effectively an organization's resources are being
utilised to produce outputs from inputs. Because productivity is a relative metric, it must be
compared to something in order to be meaningful or useful. This could be similar firms, other
departments within the same firm, or previous productivity data for the same firm or
department.
The manager's involvement in the production process is as follows:
- To define productivity and direct productivity-related behaviour
- Monitor performance and give feedback
- Productivity analysis, including trend analysis, problem identification, and corrective action.
- Facilitate cost, time, output rate, and plan resource consumption and control to enable
pricing, production scheduling, purchasing, contracting, and delivery scheduling, among
other things.
- Encourage innovation as a means of achieving ongoing improvement.
6. Discuss the economic trade-offs associated with obtaining inputs through various
methods and explain in what circumstances or situations each can better serve the
purpose. (15 points)
There are three generic ways to acquire inputs:
a. Spot Exchange – When the buyer and seller of an input meet, exchange, and then go their
separate ways. This is purchasing on an as needed basis at the then prevailing market price.
Spot exchanges allow firms to avoid vertical integration, and to concentrate on their primary
specialty.
b. Contracts – A legal document that creates an extended relationship between a buyer and a
seller. This is an agreement to purchase inputs under some continuing arrangement that
specifies the terms of exchange. In many instances, particularly when the arrangement is
fairly complicated, terms of the exchange are not entirely spelled out. These areas are a
problem of incomplete contracts and are a basis for negotiation.
c. Vertical Integration – When a firm shuns other suppliers and chooses to produce an input
internally. Internal production can come at the cost of administrative overhead, and requires
development of a specialization in production of the input.
Example: Suppose I sell ice cream cakes. I need ice cream as an input.
- If I go to a food wholesaler and make purchases as needed, I make a spot purchase.
- If I strike a one-year deal with Breyer’s, to use only their products, I have made a
contractual arrangement.
- If I decide to make ice cream myself, I have gone into internal production.
7. Explain the interplay among industry structure, conduct and performance and discuss
the limitations in the analysis of such characteristics and measures. (15 points)
The market structure would determine firm conduct which would determine
performance. Market structure can be measured by a number of factors, such as the number
of competitors in an industry, the heterogeneity of product and the cost of entry and exit.
Conduct refers to a number of specific actions taken by a firm, which include price taking,
product differentiation, tacit collusion and exploitation of market power. The performance of
the firm can be measured from a number of indicators such as productive efficiency,
allocative efficiency and profitability.
The range of options and constraints facing a firm is defined by the attributes of the
industry within which a firm operates. In some industries with higher competition, very few
options are available to the firms and the firms have lots of constraints. Firms in these
industries generate maximized social welfare and in the long run, the returns earned by the
firms can only cover the cost of capital. In summary, the industry structure determines the
firm's conduct and long-run firm performance. On the other hand, the firms operating in a
lower competitive industry environment have a greater range of conduct options and the
number of constraints faced by the firms is limited.