Arab Academy Graduate School of

Business Final Take-Home Exam

(90 points)
Course Name: Managerial Economics
Instructions: Please read carefully.
1- Kindly note that this is NOT a group assignment; that is, you MUST work on this exam
independently. Any kind of collaboration between individuals or similarity of answers will be
thoroughly investigated, and if considered as an act of cheating, it will result in an “F” grade in
the course.
2- Answer all questions in order and your answers should be typed with font (Calibri) size (12).
3- For each question, you must state CLEARLY any references or sources of data you used; for instance,
books, articles, websites, …. etc.
4- On the cover page, type ONLY the following information in order: Your Full Name as it is in the
class list, Course Name, Group Lecture Day, Group Code, and Date of Submission.
5- Rename the file exactly as follows:
Your Full Name_AAGSB_Managerial Economics Final Exam_Group Code_March2022
6- Failure to abide by any of the exam instructions will result in deducting points from your score.
7- Please, email your answers in PDF format to your class coordinator on Sunday, March 20th, 2022
between 7:00 pm and 8:00 pm.
8- The deadline for your class coordinator to email me the compressed folder containing your
answers is Sunday, March 20th, 2022, @ 8:30 pm.
9- Kindly note that your class coordinator will email me his/her own answer file by Sunday, March
20th, 2022, @ 6:30 pm.
10- All answers submitted after the deadline will not be accepted regardless of the quality of the
work.

Answer the following questions in order.

1. Read the following statement and answer the question that follows.
"Cell phones have quickly become taken as much for granted as electricity or water
supply. They have had a major impact on our lives and the way that we perform
everyday tasks. Many of these changes are apparent, while others we may not even
be aware of. People nowadays really don’t remember quite well how life was
before cell phones existed!"
Use the demand-supply model to illustrate the changes in the market for cell phones over the
last twenty years. Try as much as possible to relate the demand-side factors and the supply-side
factors we studied in class to the market under study. Although drawing graphs is not
necessarily required, yet it could help you to illustrate your answer. Support your answer with
relevant real-life data.

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2. Read the following statement and answer the question that follows.
"The term product life cycle refers to the length of time a product is introduced to
consumers into the market until it is removed from the shelves. The life cycle of a
product is broken into four stages: introduction, growth, maturity, and decline."
Source: https://www.investopedia.com/
Describe how price elasticity of demand varies across the stages of the “product life cycle” and
explain the implications regarding the pricing decision in each stage. Support your answer with
real-life examples.

3. With an estimated market share of 37%, Atlas is the dominant company and the price leader in an
oligopolistic steel industry. The remaining market share is distributed equally between seven
companies. Suppose that one of those ten companies, Norton, attempts to gain market share by
undercutting the price set by Atlas.
Calculate the “Four Firm Ratio” and Herfindahl-Hirschman Index “HHI” in the above-described
market and interpret your answer. What model can best resemble this market? Briefly explain
this model. In your opinion, what will be the effect of Norton’s attempt described above on
Atlas’s market share: will it increase, decrease, or not affected at all? Justify your answer.

4. Suppose you are the economic advisor of Jackie Brown Company, a perfectly competitive
company that is suffering economic losses due to unforeseen continuous drop in the market price.
Jackie Brown is a price taker; hence it cannot influence the market price, nor could it change
production technology in the short run. You are asked to decide whether the company should shut
down its operations or to continue to operate at a loss. Jackie Brown is selling 50 units of output
per day, at a price of $20 per unit. The cost of raw material, direct labor, energy, and other
variable inputs is about $24000 monthly. Unfortunately, an estimate of Jackie Brown fixed costs is
currently unavailable.
So, what is your decision? Justify your answer.

5. Galaxy, a multinational corporation, has two plants, one in the United States and the other in
Mexico, and it cannot change the size of the plants or the amount of capital equipment in the
short run. The wage in Mexico is equivalent to US $5 per hour. The wage in the U.S. is $25 per
hour. Given current employment situation, the productivity per worker in Mexico is 200 units per
hour, and the productivity per worker in the U.S. is 400 units per hour.
Is Galaxy maximizing output relative to its labor cost? If not, what should Galaxy do? Justify your
answer.

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6. Consider the market for cola soft drinks where Pepsi and Coke are dominating this market with
well above 90% markets share combined.

Under what market structure do Pepsi and Coke operate? What microeconomic model can best
describe the behavior of Pepsi and Coke? Explain the main theme of this model. Given the
obvious market share of both Pepsi and Coke, on what grounds would you justify the multi-
billion-dollar annual advertising spending by those two companies?

7. Apex is a perfectly competitive firm. It has total fixed costs of $300/day and a daily variable cost
schedule in the table below. Apex’s product sells for $200 per unit.
Quantity (units) 0 1 2 3 4 5 6 7 8 9 10
Total Variable
0 100 180 220 300 390 500 640 800 1000 1250
Cost (TVC)

Answer the following questions:

a. What is the profit-maximizing level of output? Calculate Apex’s profit.
b. If the market price dropped to $80, what is the profit-maximizing level of output? What is Apex’s
profit (or loss) in this case?
c. If the market price dropped further to $40, what is the profit-maximizing level of output? What
is Apex’s profit (or loss) in this case?
d. Comment on your answers to parts (2) and (3).

8. The transition from short-run to long-run equilibrium in a monopolistically competitive industry is

rather analogous to that in a perfectly competitive one.
What factor(s) might drive profits to zero in a perfectly competitive firm in the long run? Would
your answer to the previous question differ if we consider a monopolistically competitive firm
rather than a perfectly competitive firm? Finally, why would a firm choose to operate at a loss in
the short run? When would it decide to shut down production temporarily?

9. “In the short run, a company has to operate as efficient as possible to accomplish the profit
maximization goal”.

Answer the following questions:

a. If achieving efficiency is not attainable in the short run, what long-run decisions should the
company do? Explain your answer highlighting the pros and cons(risks) of long-run decisions.
b. How do you perceive the term “Normal Profit”? Support your answer with numeric example.
c. By means of the excel file we discussed in class, use any suitable data set to describe how to
calculate the most efficient level of production.

Best Wishes
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