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UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE COURSE CODE DATE TIME

FACULTY

MANAGERIAL ECONOMICS ECO555/510/465/456/550/505 14 OCTOBER 2003 3 HOURS (9.00 a.m-12.00 p.m)

Business Management / Accountancy / Information Technology & Quantitative Science / Hotel and Tourism Management June 2003 - November 2003
Bachelor of Business Administration (Hons) (Transport) / BM216 Bachelor of Business Administration (Hons) (Marketing) / BM220 Bachelor of Business Administration (Hons) (Insurance) / BM221 Bachelor of Business Administration (Hons) (Finance) / BM222 Bachelor of Business Administration (Hons) (Operations Management) / BM224 Bachelor of Business Administration (Hons) (Retail Management) / BM225 Bachelor of Business Administration (Hons) (International Business) / BM226 Bachelor of Business Administration (Hons) (Islamic Banking) / BM229 Bachelor of Accountancy (Hons) / AC220 Bachelor of Science (Hons) (Information Technology) / CS220, Bachelor of Science (Hons) (Statistics) / CS221 Bachelor of Actuarial Science (Hons) (Actuarial Science) / CS222 Bachelor of Science (Hons) (Intelligent System) / CS223 Bachelor of Science (Hons) (Business Computing) / CS224 Bachelor of Science (Hons) (Data Communications and Networking) / CS225 Bachelor of Science (Hons) (Information Systems Engineering) / CS226 Bachelor of Science (Hons) (Hotel Management) / HM220 Bachelor of Science (Hons) (Tourism Management) / HM221 Bachelor of Science (Hons) (Food Service Management) / HM222

SEMESTER PROGRAMME/CODE

INSTRUCTIONS TO CANDIDATES 1. 2. 3. 4. This question paper consists of two (2) parts: PART A (6 Questions) PART B (3 Questions) 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. Do not bring any material into the examination room unless permission is given by the invigilator. Please check to make sure that this examination pack consists of: i) the Question Paper ii) an Answer Booklet - provided by the Faculty

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO This examination paper consists of 8 printed pages
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PART A (40 marks)

Answer only FIVE (5) questions.

QUESTION 1

The demand and total cost curves for Quick Alert Alarm Systems Inc. are given by equations: Q = 12500 - SOP
TC = 200 000 + 30Q + 0.002Q2

the

(Demand equation)
(Total Cost equation)

where Q is quantity, P is price and TC is total cost. a) b) c) Calculate the price and output that will maximize total revenue. (3 marks) Calculate the profit-maximizing price and output level. (2 marks) Calculate the price and output level at which Average Cost is minimized. (3 marks)
(Total: 8 marks)
QUESTION 2

Freddy Krueger, marketing manager for a large department store, is trying to decide on the optimal allocation of an advertising budget for the next quarter. Krueger has data that indicate television and newspaper advertising have the following impact on total revenue:
TR = 20T + 5N + 20TN - T2

where T is units of television advertising N is units of newspaper advertising

Each 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 and newspaper advertisement that will maximize total revenue? (6 marks) What is the value of the Lagrangian multiplier? Interpret the Lagrangian multiplier. (2 marks)
(Total: 8 marks)
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b)

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QUESTION 3

Given 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) c) At what output level is Marginal Cost at its minimum? (2 marks) 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 shut down its operations? Why? (3 marks)
(Total: 8 marks)
QUESTION 4

Icee Industries manufactures a certain frozen food product that can be sold directly to retail outlets or to restaurants. The demand functions for each of these markets are:
P! = 40 - Qi
P2 = 60 - 2Q2

for retail outlets

for restaurants

Icee's total cost function for the manufacture of this product is:
TC = 10 + 8Q where Q = Q! + Q2

a)

What are the profit-maximizing price and output levels for the product in each of the 2 markets? (6 marks)

b)

Calculate Icee's total profits if the firm is effectively able to charge different prices in the 2 markets. (2 marks) (Total: 8 marks)
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QUESTION 5

a)

In a perfectly competitive industry, the market price is RM12. A firm is currently producing 50 units of output. The average cost is RM10, marginal cost is RM15 and average variable cost is RM7.
Is the firm making the profit- maximizing decision? Why or why not? If not, what should the firm do? (4 marks)

b)

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

QUESTION 6

a)

You have a choice of opening your own business or being employed by someone else in a similar type of business. Name 2 considerations in terms of opportunity costs that you would have to include in arriving at your decision. (4 marks)
How does implicit costs lead to a difference between accounting and economic profits? (4 marks)
(Total: 8 marks)

b)

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PART B (60 marks) Answer ALL questions.

QUESTION 1

Getaway Travel is a firm that sells packaged holiday tours to a country resort. Its demand function 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 = 0.854

figures in parentheses show standard error of coefficients

where

Q = market demand for Getaway Travel's 3-day 2-night packaged tours

P = price of Getaway Travel's 3-day 2-night packaged tours

Y = consumers' average household income Pc= price of a similar packaged tour offered by a competitor A = advertising expenditure 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 significant influence on the demand of Getaway Travel's packaged tours? (2 marks)

b)

Interpret the coefficient of determination, R2. (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 elasticity of demand of Getaway Travel's packaged tours. (6 marks) What will happen to total revenue if Getaway Travel increases its price of its packaged tours? (2 marks)

e)

f)

How does a 5% increase in income affect the demand for Getaway Travel's packaged tours? (2 marks)
How will a 10% decrease in competitor's price affect the demand for Getaway Travel's packaged tours? (2 marks)

g)

h)

Determine the demand curve function for Getaway Travel's packaged tours.
(2 marks)
(Total: 20 marks)

QUESTION 2

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 of labour hours used per week. Price of labour is RM20 per hour and the price of a
dress is RM40.

i)

How many labour hours should the firm employ in order to maximize profits?

(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 it
employ?

(2 marks)

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b)

A firm's production function is given by the equation:

Q = 12K 05 L 05

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

i)
ii)

Derive an equation for its expansion path.

(4 marks)

What is the optimal combination of labour and capital needed to produce 5400 units of output? (4 marks)

iii)
iv)

Calculate the minimum total cost to produce this level of output. (2 marks)
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)

QUESTION 3

Mega Motors Inc. believes it faces the following kinked demand curve:
P = 150 - 0.5Q
and P = 200 - 1.5Q

for price increases

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 cost increases to:
TC = 500 + 60Q + 0.5Q2

Illustrate with a diagram. (8 marks)

(Total: 20 marks)

END OF QUESTION PAPER

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