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JAMES COOK IJSlvERSITY

Townsville & Cairns


Queensland Australia

ON-CAMPUS
STUDY PERIOD I EXAMINATIONS 2008
CAMPUS: Townsville
No of Pages including front page,
exam paper and any attachments.

STUDENT NAME:

(block letters)
STUDENT NUMBER:

SUBJECT CODE: BX2021 :03 /

f- C.5P. 0tr

Paper MUST be handed


,n at end of the exam. Yes

G1

No

Release to Library

ri

No

Yes

SUBJECT NAME Managerial Economics

(First Paper)

Yes

Examiner: AfProf Zhangyue Zhou

Phone No:

5890

Examiner I Contact Person for Enq uiries


on day of exam: AfProf Zhangyue Zhou

Ext. work:
Mobile/a/h ph.

5890

DURATION OF EXAMINATION (hours):

Two (2) hours

PERUSAL TIME (minutes)

Ten (10) minutes

TOTAL NUMBER OF QUESTIONS:

Twenty (20)

INSTRUCTIONS TO STUDENTS:
Section A. Multiple choice questions. Answer all 15 questions (1 mark each, worth 15 marks total)
Section B: Short Answer questions. Answer 4 questions (worth 25 marks in total)
MATERIALS TO BE SUPPLIED BY EXAMINATIONS SECTION:
Examination Booklets required:
Scanner Sheets required:

Yes
No

STANDARD MATERIALS PERMITTED IN AN


EXAMINATION ROOM ARE:

Pencils, pens, erasers,


whiteout, rulers

ADDITIONAL MATERIALS STUDENTS MAY USE:

Any Calculator

Access to a dictionary:
English
Bilingual English translation

Yesg/
Yes W'

r::l
L.lU

or
or

13'"

No
NoD

BX2021:03/1(7

SECTION A - MULTIPLE-CHOICE QUESTIONS


Answer all the 15 questions (1 mark each, worth 15 marks in total)
I
RecordI your answers In t h eta bl e b eow:
Question
Answer
Question
1
6
2
7 _.
-3
8
4
9
5
10
. --_.

Answer

Question
11
12
13 ..
14
15

Answer
.-

--

1. Which of the following would be included as an economic cost but not as an accounting cost?
a)
The lease payments on business premises
b)
The interest component of the business's mortgage repayments
c)
The electricity used in the production process
d)
Business overheads (such as insurance).
e)
The time a business owner spends doing the books each night.

2. Ceteris paribus, which of the following would be likely to shift the demand curve for new homebuilders to the right?
a)
A fall ,n the price of new homes.
b)
An increase in the price of new homes
c)
An economic 'boom' (ie period of growth).
d)
An economic recession.
e)
A fall ,n the price of old homes
3. Assume that the market for coffee is in equilibrium. Ceteris paribus, an unexpected frost that
wipes out half the world's crop is likely to?
a)
shift the demand curve for coffee to the right, increasing equilibrium price
and quantity.
b)
shift the supply curve for coffee to the right, increasing equilibrium price
and quantity.
c)
shift the supply curve for coffee to the left, increasing equilibrium price and
quantity.
d)
shift the supply curve for coffee to the right, increasing equilibrium price
and decreasing equilibrium quantity.
e)
shift the supply curve for coffee to the left, increasing eqUilibrium price and
decreasing equilibrium quantity.
4. If the price elasticity of demand is equal to -2, then
a)
A 1 % increase in price will lead to a 2% fall in the quantity demanded, and
an increase In total revenue.
b)
A 1% increase in price will lead to a 1/2% fall in the quantity demanded,
and an increase in total revenue.
c)
A 1 % increase in price will lead to a 2% fall in the quantity demanded, and
a decrease in total revenue.
d)
A 1 % increase in price will lead to a 1/2% fall in the quantity demanded,
/ and a decrease in total revenue.
e)
A 1 % increase in price will lead to a 2% fall in the quantity demanded. We
cannot tell what will happen to revenue without knowing what marginal
costs are.

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Continued overleaf

8X2021 :0312f7

5. Which of the following is true of monopolistic competition?


a)
b)
c)
d)
e)

There are few firms in the industry


Market entry and exit is difficuij
Products are homogenous
Long-run prof~s are zero
All of the above

6. All of the follOWing describe or affect the behavior of long-run costs except:
a)
When the firm is encountering increasing returns to scale, long-run average cost
(LRAC) IS decreasing
b)
The long-run is considered to be a part of a manager's planning horizon
c)
Relatively high fixed costs in the long-run determine the shape of the LRAC
curve.
d)
If the firm is encountering constant retums to scale, LRAC IS constant over that
range of plant sizes.
e)
All of these describe or affect long-run costs
7. If the Marginal costs are equal to 30 and the price elasticity of demand is -2, then what price
maximizes profits?
a)
30
b)
40
c)
50
d)
60
e)
70

Use the information below to answer question 8


Firm A
High P
Firm A: +$ 4m
High P
Firm B

CeliA

Firm A: -$1m
LowP

8.

Firm B: +$ 4m

Low P
Firm A: +$ 3m

Firm B: +$ 5m

Firm B: - $ 1m

Cell B

Firm A: 0
CeliC

Firm B: 0

Cell D

Assume that this 'game' is played as a one-shot simultaneous move game (ie both firm A and
firm B have to decide what price to charge, simultaneously). Which of the following is true?
a)
b)
c)
d)
e)

Firm A's dominant strategy is to charge a high price, firm B's dominant strategy is
to charge a low price, so the expected outcome is in cell C.
Firm A's dominant strategy is to charge a low price, firm B's dominant strategy is
to charge a high price, so the expected outcome is in cell B.
Firm A's dominant strategy is to charge a low price, firm S's dominant strategy is
to charge a low price, so the expected outcome is ,n cell D.
Firm A's does not have a dominant strategy, firm S's dominant strategy IS to
charge a low price, so the expected outcome is in cell D.
Firm A's does not have a dominant strategy, so we cannot say what the expected
outcome is.

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Continued overleaf

BX2021 :031317

Use the diagram below to answer questions 9 and 10

P 20
18
16
14
12
10

---

,-r
,

4
2
0

I
0

1 2 3

4 5 6 7 8 9

\S

At a price of 10, how much would the firm need to sell to break even?
a)
b)
c)
d)

e)

4
5

6
7

10. When the price is equal to 6


a)
b)
c)
d)
e)

The profit maximizing finn will supply approximately 6 units, earning


profits of approximately 12.
The profit maXimizing finn will supply approximately 6 units, earning
profits of approximately -12.
The profit maXimizing finn will supply approximately 9 units, earning
profits of approximately 27.
The profit maximizing finn will supply approximately 9 units, earning
profits of approximately -27.
The profrt maximizing will not supply anything, since it cannot break
even at that price.

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Continued overleaf

BX2021 :03/417

Use the diagram below to answer the following question.


P 24
22

20
18

16

\i,

'\

:"::

~ 7,

\,

_. ..

8 .
I
6

1\

.I--S"---

'Q.=

17

'\

/i~I

\fill

12.

a)
b)
c)
d)
e)

P\:::

... _--

i .ot ~

~'

><

~'

r"
!

I.

N, 'I
9 '8
.

a)
b)
c)
d)
e)

1/

1\ ~~I

10

11.

/
1/

1\ f'\:

12

.....r'Tl!'"
. "'-I
:;
I

~ ,.
\~ 1\

14

-~

To maximize profits, the firm should set price equal to approximately


15, selling approximately 2.5 un~s, and earning a profit of approximately 37..
8, selling approximately 6 units, and earning a profit of approximately 48.
11, selling approximately 4.5 units, and earning a profit of approximately 36.
11, selling approximately 4.5 un~s, and earning a profit of approximately 49.5
11, selling approximately 4.5 units, and earning a profit of approximately 9.
You are comparing two potential, mutually exclusive projects. Both have an expected
net present value of 2000, but project A has a standard deviation of 2000, while
project B has a standard deviation of 3000.
A risk-averse manager would be indifferent between the two projects, while a
risk-neutral manager would prefer project A.
A risk-averse manager would prefer project A to project B, while a risk-neutral
manager would prefer project B.
A risk-averse manager would prefer project B to project A while a risk-neutral
manager would prefer project A.
A risk-averse manager would prefer project A, while a risk-neutral manager
would be indifferent between the two projects.
A risk-averse manager would prefer project B, while a risk-neutral manager
would be Indifferent between the two projects.

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Continued overleaf

BX2021 :03/517

13.

You are evaluating a potential project which has uncertain future cash flows. The
project will require an immediate outlay of $500. In year 1, cash flow will be $200 w~h
probability .5, and $700 with probability .5. In year 2, cash flows will be $200 with
probability .2, $400 with probability .6 and $700 w~h probability .2. In year three cash
flows will be either $200, $300, $400, $600 or $700 each with probability .2. What is
the expected value of cash flows in year 2?

a)
b)
c)
d)

$400
$450
$420
$433

e)

None of the above

Use the diagram below to answer the following question.

q=30
=10

L
14.

a)
b)
c)
d)
e)

A profit-maximizing firm has two factors of production: Cap~al (fixed) and labour
(variable). It is currently using the 'optimal' (ie profit maximising) combination of
capital and labour to produce 10 units of output. If the firm wishes to expand
production to 30 units of output, then
in the short-run, it should move from
move from point d to point e.
in the short-run, it should move from
move from point c to point e.
in the short-run, it should move from
move from point f to point e.
in the short-run, it should move from
move from point f to point e.
in the short-run, it should move from
should move from point a to point d.

Copyright Reserved

point a to point d, and in the long run should


point b to point c, and in the long run should
point b to point f, and in the long run should
point c to point f, and in the long run should
point b to point a, and in the long run, it

Continued overleaf

BX2021 :03/617

Use the information below to answer question 15


The Stoeckl Manufacturing Company has five opportunities available to it:
a. Spend nothing, and earn: $ 50,000.
b. Spend $400,000 to create a new brand of output, in which case,
There is a 50% probability of earning $ 500,000
There IS a 50% probability of earning $ 300,000
c. Spend $50,000 on additional advertising, in which case,
There is a 50% probability of earning $ 250,000
There is a 50% probability of earning $ 50,000
d. Spend $100,000 on new - but untested - technology, in which case,
There is a 50% probability that production costs will fall by $1,000,000
There is a 50% probability that production costs will rise by $1,000,000
e. Shut down operations, eaming $0
15. If the goal of the firm is to maximize the expected value of its eamings, what should it do?
a)
b)
c)
d)
e)

A
B
C
D
E

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Continued overleaf

BX2021 :031717
SECTION B - SHORTANSWER QUESTIONS
Answer four (4) questions (worth 25 marks in total)

QUESTION 1: 5 marks
Briefly define and
i.
ii.
iii.

describe each of the following (giving 'real world' examples of their use)
Cost-pius pricing
Price discrimination (all three types)
Transfer pncing

QUESTION 2: 5 marks
A firm that seeks to maximise profits will always produce more than a firm
that seeks to maximise revenues
State whether you agree or disagree with this statement, and briefly explain why.
diagrams to help explain why.

Use

QUESTION 3: 5 marks
Briefly define and describe each of the following (giving 'real world' examples to help
explain what they mean)
i.
Diminishing marginal retums
Ii.
Decreasing retums to scale
iii.
Economies of scope
Is it possible for all three of the above to exist within one firm? Why or why not?

QUESTION 4: 10 marks
ANSWER EITHER

4A
Sometimes firms produce more than one product/output using a single input (eg: farmers
that have cattle can produce cowhides and beef). Use a diagram to show how a firm
determines the optimal level of output for joint products made in fixed proportions. Will it
always be optimal for the firm to sell all of each product? Explain.

OR
4B
Some firms operate in oligopolistic industries where a 'dominant firm' sets a price, which
firms In the 'competitive fringe' simply follow Use a diagram to show (and explain) how
the dominant firm determines which price to set.

Copynght Reserved