University of Sri Jayewardenepura

Faculty of Graduate Studies

MBA/M.Sc. in Management Program 2019

Term End Examination/Year I/Term 1 — August 2019
MMS 5102 ECONOMICS FOR MANAGEMENT
Time: Three Hours

Answer five (5) questions.

Use separate books for each sections.

Section I

Question 01
1. Economics knowledge enhances the decision-making ability of managers. Explain this
‘statement using a suitable business application. (05 marks)

2. Taking a surprise move, MacDonald fast food chain introduced “Mac Rice” after few |

decision.
years’ operations in Sri Lankan market. Discuss the factors that influenced this
(05 marks)

3. Demand and supply functions for paddy in

a hypothetical economyis given below
(Quantities are in millions and prices are in rupees).
Demand Function: Qg = 100 — 2p
Supply Function: Q, = —60 + 6p
a) Find the equilibrium quantity and price. (02 marks)
b) Suppose that the government imposes a price floor on paddy at Rs.sell40at per
kilogram. The government will buy as much as farmers want to that price.
The amount allocated for this price support program is Rs. 1.5 billion. Discuss the
effectiveness of this policy. .
(08 marks)
(Total 20 marks)
Question 02
1. Consumers are
willing to pay more for a “Diamond Ring” than a “Bottle of Water.”
Explain this paradox using utility theory. (04 marks)
2. Explain the Law of diminishing marginal utility theory and its assumptions. Does
in business decision making? Explain.
it
apply
(06 marks)

3. Illustrate and explain the relationship between income and demand for “Margarine” in the
Sri Lankan market. (02 marks)

4. Assume that the consumers in a hypothetical economy consume two commodities, Rice
and Meat. These two commodities neither perfect substitute nor perfect complimentary.
Illustrate the following situations using indifference curve. You are required to mention
your assumptions, if
any.
a) Consumer equilibrium. (02 marks)
b) Changes in
the consumer equilibrium as a result of rice price increases by 50

percent. (02 marks)

c) Income and substitution effect of the price change in part (b) above assuming rice
as a normal good. (04 marks)
(Total 20 marks)

Question 03

1. Explain what do you mean by “Law of Diminishing Marginal Returns”. Illustrate the
stages of production over which this law is apparent. (05 marks)

2. Describe why a rational producer will not operate outside the economic region of
production in the long run? Explain your answer with a suitable diagram. (05 marks)

3. TIMA Ltd is a jobbing organization which produces sophisticated devices for use on
major building projects. The devices produced by the jobbing process usually made on
the TIMA Ltd’s factory and then moved to the customers’ sites where the building
projects are undertaken.

Following data is relevant to the recent survey carried out by TIMA Ltd’s Production
Manager with relation to the company’s monthly production in terms of end products of
the job.

Total Workers Total products

employed (N) from factory (Q)
1 10
2 22
 36
48
58
64
66
64
a) Calculate the marginal product of worker (MP) and average product per worker (AP)
using the given data. (03 marks)
b) Explain how you decide that TIMA Ltd is operating at maximum efficiency with
the aid of cost curve diagram. (03 marks)
c) Describe ways and means of achieving economies of scale and how would TIMA
Ltd could reach to optimum output level in the long-run. (04 marks)

(Total 20 marks)

Question 04
1. Explain in brief why itis important for a firm to understand under which market structure
within which it operates. Support your answer with relevant examples.
(05 marks)

2. “Perfect competitive firms generate more efficient outcomes for the society’s point of
view”. Do you agree with this statement? Use a diagram to explain this and justify your
answer. (05 marks)

3. Suppose the demand functions for two groups of consumers are D;: P = 360—40Q and
D2: P =240-40Q.

The marginal cost (MC ) is = 40.

a) Ifthe firm is able to price discriminate between the two groups, determine the
price and the quantity for each market and total profit for the firm.
(05 marks)
b) Calculate the profit maximizing price, quantity and total profit when the
monopolist is not willing to discriminate the price.

(05 marks)

(Total 20 Marks)
 Section II

Question 05

You are given the following macroeconomic data on a hypothetical economy. Based on the
given information answer the questions below. Round off
your answers into two decimals.
(All values are given rupees million).
in

C= 6800+ 0. 6Yd (Consumption Function)

I= 900 (Investment Expenditure)

Tx = 200 (Total Tax Function)

G = 1580 (Government Expenditure)

Tr = 660 (Transfer Payments)

X = 824 (Exports Income)

M = 1180+ 0.06Y (Import Function)

I) What is the equilibrium level of income in this economy?

(05 marks)
2), Calculate Balance
current BOT
of Trade (BOT)
this
at this equilibrium income. Discuss the effects of
on economy.
(05 marks)
3) Calculate injections and withdrawals at this equilibrium.
(05 marks)

4) Assume. that government has decided to impose income tax on income level in this
economy to increase government revenue. The new tax function is given below.
Calculate new equilibrium level of income

Tx = 200 + 0.04Y (Total Tax Function)

;

(05 marks)

(Total 20 Marks)
 Question 06

1) Why do the economists use the real Gross Domestic Product (GDP) rather than the
nominal GDP to
measure the economic well-being?
(04 marks)
2) Illustrate the effects of the followings on the consumption function.

a) The confidence with regard to the future level of income has increased due to job
security.
b) The bank has reduced the interest rate and the annual renewal fee on credit cards.
c) Government has decided to increase Pay As You Earn (PA YE) tax on employees
earnings.

(06 marks)
SQ

3) You
are given the following information. All values are given in rupees million

GDP
of a country = 12,000

Consumption expenditure = 7,500

Exports income = 1, S00

Import expenditure = 3,500,

Government expenditure = 3,500

Budget deficit = 700

You are required to calculate

y
a) Private Savings
b) Public Savings
c) Domestic Savings
(06 marks)
d) Is investment equals domestic savings in this economy? Explain your answer
using given information.
(04 marks)

(Total 20 Marks)
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