SCHOOL OF BUSINESS, ECONOMICS AND MANAGEMENT
EC300- MANAGERIAL ECONOMICS
END OF SEMESTER FINAL EXAMINATION
TUESDAY, , 2014
09:00-12:00 HOURS
Time allowed: 3 HOURS plus 5minutes reading time
Instructions to Candidates:
1. Check that you have the correct examination paper in front of you.
2. Answer Four (4) Questions only.
3. All questions must be answered in the answer booklet provided only.
4. Begin each question on a new page.
5. One mark will be awarded for neatness and clarity of presentation
6. Calculators are allowed.
7. There shall be no communication between students during
examination. Any students caught doing this will be disqualified.
DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO.
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QUESTION ONE (COMPULSORY)
a) The cement making-industry is a duoploly, with two firms, namely Pemba
Cement Company Inc. and Kasama Cement PLC and is operating under
conditions of Cournot competition. The demand curve for the industry is𝑃 =
200 − 𝑄, Where Q is total industry output in thousands of tons per day. Both
firms have a marginal cost of K50 per ton and no fixed costs.
i)
Determine the reaction function for each firm.
(2marks)
ii)
Calculate each firm’s equilibrium output
(2marks)
iii)
Calculate the market equilibrium price
(2marks)
iv)
Calculate the profit each firm earns in equilibrium
(2marks)
b) The estimated regression for good X, where Px=the price of the product X,
Po=the price of another product O and Y=real income, is as given;
𝑄𝑥 = 450 − 1.53𝑃𝑥 + 0.87𝑃𝑜 + 2.36𝑌
(t-ratios)
(2.53) (3.06)
(2.65)
(2.03)
(p-values)
(0.01) (0.00)
(0.06)
(0.05)
i)
𝑅 2 = 091
Are the signs of the coefficients in line with economic theory? justify your
answer.
(3 marks)
ii)
What is the relation between good X and good O
(2 marks)
iii)
Interpret the regression coefficients
(4marks)
iv)
Interpret the p-values for the t-statistics
(4 marks)
v)
If the price of good X increases by K100, estimate the effect on sales of
good X
(2marks)
vi)
Interpret the 𝑅 2
(2marks)
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[Total25marks]
QUESTION TWO
A monopolist’s total revenue and total cost functions are
𝑇𝑅(𝑄) = 𝑃𝑄 = 20𝑄 − 3𝑄 2
a. Determine the output level that will maximize profit.
(5marks)
b. Determine maximum profit
(5marks)
c. Determine the price per unit at which the profit-maximizing output is sold.
(3marks)
d. Explain the difference between the law of diminishing marginal product and
decreasing returns to scale
(4marks)
e. Following a price change for diet coke, explain how retailer use sales
information to learn if Doritos snack chips represent a complement or
substitute for diet coke.
(8marks)
[Total 25 Marks]
QUESTION THREE
a. Consider the demand equation Q = 25 - 3P, where Q represents quantity
demanded and P the selling price.
Calculate the arc-price elasticity of demand when P1 = $4 and P2 = $3.
(6marks)
b. Calculate the point-price elasticity of demand at these prices in (a) above. Is
the demand for this good elastic or inelastic at these prices?
(6marks)
c. Suppose that the demand equation for a product is QD = 100- 5P. If the price
elasticity of demand is -1, what are the corresponding price and quantity
demanded?
(7marks)
d. Suppose that the price and quantity demanded for a good are $5 and 20
units, respectively. Suppose further that the price of the product increases to
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$20 and the quantity demanded falls to 5 units. Calculate the arc price
elasticity of demand.
(6marks)
[Total 25 Marks]
QUESTION FOUR
Suppose that you are given the following production function:𝑄 = 25𝐾 0.5 𝐿0.5 .
a. Determine the marginal product of capital and marginal product of labour
given that K=25 and L=100.
(8marks)
b. Suppose Q=100, what is the equation of the corresponding isoquant in terms
of L?
(4marks)
c.
Does this firm’s production function exhibit constant, increasing, or
decreasing returns to scale?
(2marks)
d. Explain the difference between perfect and imperfect substitutability of factors
of production.
(5marks)
e. State whether the following statement is true or false and provide a
justification for your position; an increase in total utility or satisfaction following
an increase in income is inconsistent with the law of diminishing marginal
utility?
(6marks)
[Total 25 marks]
QUESTION FIVE
A restaurant owner has the following short-run production function:
𝑄 = 30𝐿 − 2𝐿2 . Where Q=number of meals served per day, and L=number of
workers.
a. Draw a table showing total, marginal and average product up to an input of
ten (10) worker and plot these on a graph.
(15 marks)
b. Show the range of labour where stages I, II, and III of production occur
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(5marks)
c. If workers can be hired for K40 per day and the average meal is K6, how
many workers should be hired?
(5marks)
END OF EXAMINATION PAPER
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