ME 11- Managerial Economics

Midterm Examination

Instruction: Write your answers in a sheet of paper, for Part-3, compute and show your solutions to
the problems. Don’t forget to write your name and class schedule, take a photo and send it to my
messenger account. Submission will be until 11:59 pm today, October 26, 2020.

Part 1 – Identification
1. When the total cost of production divided by the number of units produced is known as __.
2. A decision regarding how much or how many of a product to produce is called ___.
3. It is the additional cost/revenue incurred by producing and selling one more unit ___.
4. Costs that cannot be recovered ___.
5. If the present value of the net cash flows is larger than zero, the project is profitable __.
6. Finding present value of future payment ___.
7. Costs that you get back if you shut down operations ___.
8. It is equal to the average avoidable cost per unit ___.
9. What is an example of a good incentive compensation scheme that reflects effort? ___.
10.The quantity that will lead to zero profit___.

Part 2 – Multiple Choice

1. When economists speak of “marginal” they mean-
a. Opportunity b. scarcity c. incremental d. unimportant

2. Managers undertake investment only if-

a. Marginal benefits of the investment are greater than zero.
b. Marginal costs of the investment are greater than marginal benefits of investment.
c. Marginal benefits are greater than marginal costs
d. Investment decisions do not depend on marginal analysis

3. A manager of a clothing firm is deciding whether to add another factory in addition to one
already in production. The manager would compare-
a. The total benefits gained from the two factories to the total costs of running the two
factories
b. The incremental benefit expected from the second factory to the total costs of running the
two factories
c. The incremental benefit expected from the second factory to the cost of the second factory.
d. None of the given choices

4. After the first week of his MBA managerial economics class, one of your pharmaceutical sales
representatives accuses you of committing the sunk-cost fallacy by refusing to allow him to
reduce price to make what he considers to be a really tough sale. Which of the following
suggests the sales representative maybe right?
a. Most of the costs of drug development are sunk, not fixed.
b. Sales representatives are paid a sales commission on revenue, so they don’t care about the
costs of drug development.
c. Sales representative don’t worry that a low price today may make it more difficult for the
company’s other sales representatives to charge higher prices to their customers tomorrow.
d. Sales representatives think only about sales.

5. Break-even quantity is a point where-

a. The level of profit is maximized.
 b. The level of cost is minimized.
c. Only variable costs are covered.
d. There are zero profits.

Part 3 - Problem Solving:

1. A firm produces 500 units per week. It hires 20 full-time worker (40 hours per week) at an
hourly wage of P15. Raw materials are ordered weekly, and they cost P10 for every unit
produced. The weekly cost of the rent payment for the factory is P2,250. How do the overall
cost break down? (total variable, total fixed, total cost) (10pts)

2. A retailer has to pay P9 per hour to hire 13 workers. If the retailer only needs to hire 12
workers, a wage rate of P7 per hour is sufficient. What is the marginal cost of the 13 th worker?
(5pts)

3. You expect to sell 500 cell phones a month, which have an MC of P50. If your fixed costs are
P5000 per month, what is the break-even price? (5pts)

4. You are considering opening a new business to sell dashboards. You estimate that your
manufacturing equipment will cost P100,000, facility updates will cost P250,000, and on
average, it will cost you P80 (in labor and material) to produce a board. If you can sell
dashboard for P100 each, what is your break-even quantity? (5pts)

5. The following are information of an investment proposal for the purchase of a machine:

Acquisition cost P 10, 000,000

Economic Life 10 years
Salvage value 100,000
Earnings and cost per year
Income 5,000,000
Expenses - 2,000,000
Net Income before tax and depreciation 3,000,000
Less: Depreciation (Straight Line) 990,000
Net Income before tax 2,010,000
Less: Income Tax 620,000
Average Net Annual Earnings 1,390,000

Cash Inflows Per Year = Net Earnings + Depreciation = P 2,380,000

1,390,000 + 990,000
Additional data: If the desired rate of return is 25%, the cash inflows for the ten-year period
maybe computed to determine the present value for each year.

Cash Flow Future Value Present Value

Out Flow - P 10,000,000

Inflows

1st year P 2,380,000 P 1,904,000

nd
2 year 2,380,000 _________
3rd year 2,380,000 _________
th
4 year 2,380,000 _________
5th year 2,380,000 _________
th
6 year 2,380,000 _________
7th year 2,380,000 _________
8th year 2,380,000 _________
9th year 2,380,000 _________
th
10 year 2,380,000 _________
10th year (salvage value) 100,000 _________
TOTAL P 23,900,000 _________

Requirement:
a. Complete the data on the table. (11pts)
b. Find the net present value. (10pts)
c. Interpret the result of your computation . (10pts)
d. What will be your decision on this investment proposal? (19pts)

Part 4- Decision-making

1. A Company is producing 15,000 units. At this output level, MR is P22 and MC is P18. The firm
sells each unit for P48 and an average total costs is P40. What can we conclude from this
information? (10pts)
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