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JAMES COOK IJSlvERSITYTownsville & CairnsQueensland Australia

ON-CAMPUSSTUDY PERIOD I EXAMINATIONS 2008

CAMPUS: Townsville

No of Pages including front page, r::lexam paper and any attachments. L.lU

YesRelease to Library

Paper MUST be handed,n at end of the exam. Yes G1 No 0

ri No 0SUBJECT CODE: BX2021 :03 / f- C.5P.0tr

STUDENT NAME:(block letters)STUDENT NUMBER:

SUBJECT NAME Managerial Economics (First Paper) Yes

Examiner: AfProf Zhangyue Zhou Phone No: 5890

Examiner I Contact Person for Enq uirieson 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) minutesTOTAL 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:

STANDARD MATERIALS PERMITTED IN ANEXAMINATION ROOM ARE:

ADDITIONAL MATERIALS STUDENTS MAY USE:

YesNo

Pencils, pens, erasers,whiteout, rulers

Any Calculator

Access to a dictionary: English Bilingual English translation

Yesg/Yes W'

oror

No 13'"NoD

BX2021:03/1(7

SECTION A - MULTIPLE-CHOICE QUESTIONSAnswer all the 15 questions (1 mark each, worth 15 marks in total)

h bl b IdRecor I your answers In t eta e eow:Question Answer Question Answer Question Answer

1 6 11.-

2 7 12--

_.

3 8 13..

--

4 9 145 10 15

. --_.

1. Which of the following would be included as an economic cost but not as an accounting cost?a) The lease payments on business premisesb) The interest component of the business's mortgage repaymentsc) The electricity used in the production processd) 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 home-builders to the right?a) A fall ,n the price of new homes.b) An increase in the price of new homesc) 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 thatwipes 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, thena) 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 marginalcosts are.

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

a) There are few firms in the industryb) Market entry and exit is difficuijc) Products are homogenousd) Long-run prof~s are zeroe) 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 decreasingb) The long-run is considered to be a part of a manager's planning horizonc) 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 pricemaximizes profits?

a) 30b) 40c) 50d) 60e) 70

Use the information below to answer question 8

High PFirm B

LowP

Firm A

High P Low PFirm A: +$ 4m Firm A: +$ 3mFirm B: +$ 4m CeliA Firm B: - $ 1m Cell B

Firm A: -$1m Firm A: 0Firm B: +$ 5m CeliC Firm B: 0 Cell D

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

a) Firm A's dominant strategy is to charge a high price, firm B's dominant strategy isto charge a low price, so the expected outcome is in cell C.

b) Firm A's dominant strategy is to charge a low price, firm B's dominant strategy isto charge a high price, so the expected outcome is in cell B.

c) Firm A's dominant strategy is to charge a low price, firm S's dominant strategy isto charge a low price, so the expected outcome is ,n cell D.

d) Firm A's does not have a dominant strategy, firm S's dominant strategy IS tocharge a low price, so the expected outcome is in cell D.

e) Firm A's does not have a dominant strategy, so we cannot say what the expectedoutcome is.

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Use the diagram below to answer questions 9 and 10

P 2018 ---16141210 ,-r8 ,I6 I42 I0

0 1 2 3 4 5 6 7 8 9 \S9 At a price of 10, how much would the firm need to sell to break even?

a) 4b) 5c) 6d) 7e) 8

10. When the price is equal to 6

a) The profit maximizing finn will supply approximately 6 units, earningprofits of approximately 12.

b) The profit maXimizing finn will supply approximately 6 units, earningprofits of approximately -12.

c) The profit maXimizing finn will supply approximately 9 units, earningprofits of approximately 27.

d) The profit maximizing finn will supply approximately 9 units, earningprofits of approximately -27.

e) The profrt maximizing will not supply anything, since it cannot breakeven at that price.

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Use the diagram below to answer the following question.

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1\ f'\:'\ :":: /

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

a) $400b) $450c) $420d) $433e) None of the above

Use the diagram below to answer the following question.

K

q=30

=10

L14. 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 ofcapital and labour to produce 10 units of output. If the firm wishes to expandproduction to 30 units of output, then

a) in the short-run, it should move from point a to point d, and in the long run shouldmove from point d to point e.

b) in the short-run, it should move from point b to point c, and in the long run shouldmove from point c to point e.

c) in the short-run, it should move from point b to point f, and in the long run shouldmove from point f to point e.

d) in the short-run, it should move from point c to point f, and in the long run shouldmove from point f to point e.

e) in the short-run, it should move from point b to point a, and in the long run, itshould move from point a to point d.

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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 $ 500,000There 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 $ 250,000There 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 $1,000,000There 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) Ab) Bc) Cd) De) E

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SECTION B - SHORTANSWER QUESTIONSAnswer four (4) questions (worth 25 marks in total)

QUESTION 1: 5 marks

Briefly define and describe each of the following (giving 'real world' examples of their use)i. Cost-pius pricing

ii. Price discrimination (all three types)iii. Transfer pncing

QUESTION 2: 5 marks

A firm that seeks to maximise profits will always produce more than a firmthat seeks to maximise revenues

State whether you agree or disagree with this statement, and briefly explain why. Usediagrams to help explain why.

QUESTION 3: 5 marks

Briefly define and describe each of the following (giving 'real world' examples to helpexplain what they mean)

i. Diminishing marginal retumsIi. Decreasing retums to scaleiii. Economies of scope

Is it possible for all three of the above to exist within one firm? Why or why not?

QUESTION 4: 10 marksANSWER EITHER

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

OR4BSome firms operate in oligopolistic industries where a 'dominant firm' sets a price, whichfirms In the 'competitive fringe' simply follow Use a diagram to show (and explain) howthe dominant firm determines which price to set.

Copynght Reserved