BMME5103/USTY/SEPT2019
ASSIGNMENT
BMME5103
MANAGERIAL ECONOMICS SEMESTER SEPTEMBER 2019
SPECIFIC INSTRUCTION
1. Answer in English.
2. Submit your assignment ONCE only in a SINGLE file.
3. Submit your assignment ONLINE.
4. Submission date: Xth XXX 2019 until XXnd XXX 2019.
5. This assignment accounts for 60% of the total marks for the course.
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BMME5103/USTY/SEPT2019
ASSIGNMENT QUESTION
PART 1
PURPOSE
The purpose of this assignment is to enable the students to enhance their knowledge on the fundamental economic concepts and tools, profits and value of the firm, and decision-making.
REQUIREMENT
QUESTION 1
There can be several or many firms in an industry for a country. Discuss why profit may vary across firms in the industry. Provide examples and justifications for your answers.
[5 Marks]
QUESTION 2
In the period following the invasion of Kuwait by Iraq, oil prices increased significantly, as did the profits earned by many oil companies. Some politicians argued that these profits are undeserved and called for price rollbacks and/or increased taxes. Discuss the pros and cons of these proposals in the context of the various theories of profit.
[5 Marks]
QUESTION 3
A woman managing a photocopying establishment for $25,000 per year decides to open her own duplicating place. Her revenue during the first year of operation is $120,000, and her expenses are as follows:
Salaries to hired help $45,000
Supplies $15,000
Rent $10,000
Utilities $1,000
Interest on bank loan $10,000
Calculate
i) explicit costs
ii) implicit costs
iii) business profit
iv) economic profit
v) normal return on investment in this business.
[5 Marks]
[Total: 15 Marks]
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PART 2
PURPOSE
The purpose of this assignment is to provide the student with the skill to estimate a demand function using statistical software and interpret the findings.
REQUIREMENT
QUESTION 1
The following table gives hypothetical data for the weekly purchase of sirloin steak by a college fraternity house. Compute all meaningful arc elasticity coefficients (price, cross, and income). Note that the effects of the other factors must be held constant when computing any of these elasticities.
| Week | Quantity, Q | Price, P | Income, M | Price of burger, S |
| 1 | 100 | 2.50 | 500 | 0.90 |
| 2 | 95 | 2.60 | 500 | 0.90 |
| 3 | 100 | 2.60 | 550 | 0.90 |
| 4 | 105 | 2.60 | 550 | 0.95 |
| 5 | 115 | 2.50 | 550 | 0.95 |
| 6 | 105 | 2.50 | 550 | 0.90 |
| 7 | 100 | 2.50 | 500 | 0.90 |
| 8 | 90 | 2.65 | 500 | 0.90 |
| 9 | 110 | 2.65 | 500 | 1.00 |
| 10 | 90 | 2.65 | 400 | 1.00
[5 Marks] |
QUESTION 2
a. Use the multiple regression packages such as SPSS or other regression packages to estimate the linear relationship between quantity as the dependent variable and price, income, and advertising as independent variables (use the table in Question 1). Write the linear equation.
[5 Marks]
b. What is the coefficient of determination? Explain.
[1 Mark]
c. Do the signs of the coefficients make economic sense? Which of the coefficients are significant? (alpha =
0.025, df = 6, critical t-statistic = 2.447)
[1 Mark]
d. Using the data in week 10 (Price = 2.65, Income = 400 and Price of burger = 1.0), what is the predicted quantity sold?
[1 Mark]
e. Find the price and income elasticities using the information in (d). Interpret the answers.
[1 Mark]
f. Compare your answers with the answers in Question 1 above.
[1 Mark]
[Total: 15 Marks]
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PART 3
PURPOSE
The purpose of this assignment is to provide the student with the skill to discuss fundamental issues in production and cost theory and evaluate production and cost problems so as to increase firms’ productivity and efficiency.
REQUIREMENT
QUESTION 1
Consider the following short-run production function (where X = variable input, Q = output)
Q= l0X – 0.5X2
Suppose that output can be sold for $10 per unit. Also assume that the firm can obtain as much of the variable input
(X) as it needs at $20 per unit.
a. Determine the marginal revenue product function and the marginal factor cost function.
b. Determine the optimal value of X, given that the objective is to maximise profits.
[2 Marks]
QUESTION 2
The table below is a production schedule of an ore-mining firm. Suppose labor (X) is a variable input and capital (Y) is a fixed input.
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Specifically, assume that the firm has a piece of equipment having a 500 horsepower rating. The per unit of X is $50.
a. Complete the table shown below.
Q X VC Y FC TC AVC AFC ATC MC
0 100 – – – –
__ __ __ __
1
__ __ __ __ __ __ __ __ __
2
__ __ __ __ __ __ __ __ __
3
__ __ __ __ __ __ __ __ __
4
__ __ __ __ __ __ __ __ __
5
__ __ __ __ __ __ __ __ __
6
__ __ __ __ __ __ __ __ __
7
__ __ __ __ __ __ __ __ __
8
__ __ __ __ __ __ __ __ __
[4 Marks]
b. Plot the variable cost, fixed cost, and total cost functions on one graph.
[2 Marks]
c. Plot the marginal, average variable, average fixed, and average total cost functions on another graph.
[2 Marks]
[Total: 10 Marks]
PART 4
PURPOSE
The purpose of this assignment is to provide the student with the skill to evaluate pricing strategies of firms in their effort to sustain competitive advantage in the market place.
REQUIREMENT
QUESTION 1
A firm operating in a purely competitive environment is faced with a market price of $250. The firm’s total cost function (short run) is as follows:
TC = 6000 + 400Q – 20Q2 + Q3
a. Should the firm produce at this price in the short run?
[2 Marks]
b. If the market price is $300, what will total profits (losses) be if the firm produce 10 units of output? Should the firm produce at this price?
[2 Marks]
c. If the market price is greater than $300, should the firm produce in the short run?
[1 Mark]
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QUESTION 2
You have been retained as an analyst to evaluate a proposal by your city’s privately-owned water company to increase its rates by 100 percent. The company has argued that at the present rate level, the firm is earning only a 2 percent rate of return on invested equity capital. The company believes a 16 percent rate of return is required in today’s capital markets.
Assume that you agree with the 16 percent rate of return proposed by the company.
a. What factors need to be considered when setting rates designed to achieve this objective? [1 Mark]
b. Would your analysis differ if you knew that individuals were prohibited by law from drilling their own wells?
What impact would this have on the price elasticity of demand? [1 Mark]
c. Water companies have a large proportion of fixed costs as compared with variable costs. How does this fact influence your analysis? [1 Mark]
d. Do you believe this firm (a monopolist) can earn its required 16 percent rate of return even if the public utility commission agrees this is a reasonable rate of return? [2 Marks]
[Total: 10 Marks]
PART 5
PURPOSE
The purpose of this assignment is to enhance the ability of the students to use their knowledge in economic theory to discuss market structure and analyse the output and price determination strategies of firms.
REQUIREMENT
QUESTION 1
Price Fixing Example: The Canadian Bread Industry
In 2018, Loblaws Companies Ltd., Walmart Canada Corp., Sobeys Inc., Metro Inc., and Giant Tiger Stores Ltd., among others, confessed to being involved in a bread price-fixing scheme. The firms allegedly agreed to increase the price of bread by at least $1.5 over the years 2001 and 2015.
Analysts often refer to bread as a loss leader – bread is typically sold at supermarkets at a price lower than its cost to entice consumers to shop at the supermarket and ultimately purchase profit-generating items. The firms worked together to raise the price of bread; the consumer price index for bread, rolls, and buns rose 96% between 2001 and 2015.
The investigation started when Loblaw publicly admitted to its wrongdoing. Loblaw offered a $25 gift card as compensation for their involvement in fixing bread prices. The company captured the positive light of consumers as social media buzz share the arrival of their card. The gift card strategy helped shift the narrative in Loblaw’s favor.
a. What is price fixing?
[2 Marks]
b. Why is price fixing illegal in the United States of America, Canada and other countries?
[2 Marks]
c. Examine the literature on the price-fixing agreements in your country. Select only one.
i. Explain the agreement. [3 Marks]
ii. If you were the CEO of one of the parties of the agreement, what would you do? [3 Marks]
[Total: 10 Marks]
[GRAND TOTAL: 60 MARKS]
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