University of Sri Jayewardenepura

Faculty of Management Studies & Commerce

MBA/M.Sc. in Management Program - 2023
Term End Examination/Year I/Term I – June 2023
MMS 5102 - Economics for Management

Time: Three (03) Hours

Instructions:
This question paper consists of six (06) Questions.
Answer five (05) Questions only.

Question 01

a) Explain difference between microeconomics and macroeconomics.

(05 marks)
b) Law of demand explains the inverse relationship between price and quantity demanded for a
particular product. Explain the causes behind this inverse relationship.
(05 marks)
c) Explain the following cases by using the demand and supply curves.

i. The price of Apple computers goes down. What happens to the demand/ supply for
Windows-based computers?

ii. The price of olive oil goes up. What happens to the demand/supply for corn oil?

iii. The price of petroleum goes up. What happens to the demand /supply for natural
gas?

iv. The price of milk powder will go up next week. What will happen to demand /
supply?

v. The cost of producing rice decreases due to a drop in the price of fertilizer. What
happens to demand/supply?

(10 marks)

(Total 20 marks)

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Question Two

a) Demand and supply functions for rice in a hypothetical economy is given below (Quantities
are given in thousands and prices are given in rupees).
Demand Function:
Supply Function:

Find the equilibrium quantity and price.

(02 marks)
b) Suppose that the government imposes a price floor on rice at Rs. 240 per kilogram. The
government expected to buy as much as farmers want to sell at this price. The amount
allocated for this price support program is Rs. 60 million only.

i. Calculate consumer and producer surplus before and after this policy.

ii. What can you say about the effectiveness of this policy? Explain your answer using
calculations.

(08 marks)

c) Which of the following are likely to have elastic or inelastic demand? Explain reasons for
your answers.

i. Electricity consumption

ii. Chocolate

iii. Staple food items

iv. Heart medication

v. Household furniture

(05 marks)

d) “Income elasticity of demand for used motor vehicles is always negative.” Explain your
views on this statement.
(02 marks)
e) Assume a firm in an apparel industry sells 120 units per month when the price is Rs. 2160
per unit. Due to the low inflation, the firm has decided to decrease the price to Rs. 1660 per
unit and as a result the new quantity of purchase increased up to 180 units.

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 Give your suggestions to select a suitable pricing alternative.

(03 marks)

(Total 20 marks)

Question Three

a) Differentiate between Cardinal and Ordinal analysis of theory of consumer behaviour.

Why does the economist prefer ordinal analysis over cardinal analysis in explaining
consumer behaviour in the market?
(05 marks)
b) Assume that there is an increase in the price of vegetables in the market than the price of
other goods due to a decrease in supply of vegetables. Illustrate the income and
substitution effect of increase in price of vegetables and explain them in brief.
(05 marks)

c) XYZ Company has an assembly line of fixed size A. Total output is a function of the
number of workers as shown in the following schedule.

No. of Workers (L) 0 1 2 3 4 5 6 7 8

Total Output (Q) 0 10 30 50 56 59 60 60 58

i. Calculate and illustrate Marginal Product (MPL) of Labour and Average Product (APL) of
Labour.
(02 marks)
ii. Determine the range of workers that shows the three stages of production in the diagram
drawn in part “i” above.
(02 marks)

iii. Suppose the market price of the output $15 and the wage rate is $90, how many workers
would this firm hire? What if the market price increases by 100%?
(04 marks)

d) What is an isoquant? What are the properties of isoquants?

(02 marks)

(Total 20 marks)

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Question Four

a) “In the long run, a perfectly competitive firm makes abnormal profit or normal profits.” Do
you agree with this statement? Explain your answer using a diagram.

(05 marks)

b) Suppose there is a perfectly competitive industry. The market demand and market supply for
this industry are given by the equations; Pd = 2000 – 4Q and Ps = 200 + 2Q respectively.
Suppose that a representative firm’s total cost is given by the equation; TC = 200 + 2Q2 +
200Q.

i. What is the equilibrium quantity and price in this market?

(02 marks)
ii. What is the firm’s profit maximizing level of production, and profit at this output
level?
(03 marks)
iii. Based on your answer in part (ii), what do you anticipate to happen in this market in
the long-run?
(02 marks)
iv. What is the long-run equilibrium price and quantity for a representative firm to
operate? Explain your answer with relevant calculations.
(03 marks)
c) “Perfectly competitive firm is efficient than monopolistic competitive firm.” Explain this
statement.

(05 marks)

(Total 20 marks)

Question Five

a) Assume that Country “A” is located in the South Asia. “A” is a country full of natural
resources and beauty. Despite these facts, the country is heavily dependent on other
countries, resulting in a prolonged huge deficit in net export position. The country is now
considered as a “default nation”, due to its huge debt burden and foreign currency problems.
For more than two years, the country has been affected by a pandemic that has affected
almost all sectors in the country. Meantime, now country is experiencing economic crisis as

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 well. On top of these, the country is required to pay millions of dollars this year to service its
current obligations and authorities have started negotiations on debt restructuring.

i. What do you mean by net export position? Explain two (02) disadvantages of a deficit in net
export position on the overall economy of “A”.
(03 marks)

ii. Government of this country has admitted that they are lack of funds “to payback millions of
dollars this year to service its current obligations”. Briefly explain three (03) ways that
country could meet its current obligations.
(03 marks)

iii. Assume that the Minister for Economic Reforms and Transportation has highlighted the
importance of developing country’s infrastructure and seeking funds for light railway system
for a rapidly growing economy amid its economic crisis. Comment on this decision.
(03 marks)

iv. In your opinion, explain two (02) long-term remedial measures this country could
implement to come out of these issues.
(02 marks)
v. What do you mean by debt restructuring? Explain briefly available strategies for the debt
restructuring of this country.
(03 marks)

b) You are given the following information for a hypothetical economy. Assume that all values
are given in rupees million

GDP of a country = 18,000

Consumption expenditure = 11,250
Exports income = 2,250
Import expenditure = 5,250
Government expenditure = 3,500
Budget deficit = 1,050
You are required to calculate;

i. Private Savings
ii. Public Savings
iii. Domestic Savings
iv. Investment expenditure
v. Is investment equals domestic savings in this economy? Explain.
(06 marks)
(Total 20 marks)

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Question Six

a) State the main macroeconomic objectives and explain the role of the government in
achieving macroeconomic objectives.
(06 marks)

b) The following macroeconomic data are related to a hypothetical economy. Assume all
values are given in rupees million.

C = 126 + 0.76Yd (Consumption Function)

G0 = 145 (Government Expenditure)
T0 = 50 (Lump Sum Tax)
Tr0 = 25 (Transfer Payments)
I = 60-60i (Investment Function)
X0 = 80 (Export)
M = 60 + 0.2Y (Import Function)
MS = 600 (Nominal Money Supply)
P = 10 (General Price Level)
Md = 0.5Y -2375i (Money Demand Function)

i. Derive the Aggregate Expenditure (AE) function for this economy.

(03 marks)

ii. Derive the IS and LM equations.

(04 marks)
iii. Compute the equilibrium level of income and interest rate in the economy?
(03 marks)

iv. The government wishes to develop the infrastructure facilities and thus hopes to
increase the government expenditure by Rs.30 million. Calculate the new
equilibrium level of income and interest rate after implementing this policy.

(04 marks)

(Total 20 marks)

***End of the paper****