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Higher  Colleges  of  Technology    

ADMC  Campus      

EMBA  610:    Managerial  Economics  

 

FINAL  TAKE  HOME  EXAM  

Due  Date:  Sunday  January  27,  2013  

INSTRUCTOR:  Dr.  ALEX  PANANIS  

email:  alexandros.pananis@hct.ac.ae  

tel:  050  503  1730    

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EMBA  610  MGRL  ECON  FINAL  EXAM  

     EXPLANATION  OF  EXAMINATION    

You  should  be  prepared  to  answer  the  variety  of  the  questions  relying  on  course  materials,  lectures,  personal  experiences,  additional  information  about  the  content  etc.  to  arrive  at  your  own  views  on  the  subject.  Be  sure  to  justify  your  views.  

Please  note  that  wholly  or  partly  by  other(s),   ly  available  sources  and  collaborating  

   

constitutes  a  serious  violation  of  the  standards  for  this  exam  and  will  not  be  considered  for  grading.  

   CASE  HIGHLIGHTS    

Suppose  you  work  as  economist  for  over  four  years  in  the  Department  of  Economic  Planning.    You  are  concerned    that  you  stayed  in  the  same  post  for  too  long  and  decided  to  call  for  a  promotion  attempt.  policy  requires  all  potential  candidates  for  promotion  to  attend  a  number  of  seminars  and  take  an  exam  upon  completion  around  key  terms  and  concepts  required  to  be  mastered  in  order  to  cope  with  the  demands  of  the  new  supervisory  role.    The  success  for  promotion  relates  to  a  large  extent  on  the  quality  of  the  answers  you  will  provide  to  this  exam,  the  way  they  will  be  presented  and  the  justifications  (where  applicable)  of  own  views  put  forward.    

       

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QUESTIONS    

SECTION  I    Multiple  Choice  Questions  (Choose  one  answer  and  put  frwd  own  views  supporting  your  choice)  

 

MC1. An industry comprised of 40 firms, none of which has more than 3 percent of the total market for its products is an example of:

A) monopolistic competition. B) oligopoly. C) pure monopoly. D) pure competition.  

MC2. I f a firm in a purely competitive industry is confronted with an equilibrium price of $5, its marginal revenue:

A) may be either greater or less than $5. B) will also be $5. C) will be less than $5. D) will be greater than $5.  

MC3. A firm finds that at its current level of output, its TVC = $900, TFC =$300, and total revenue is $1000. This firm should:

A) shut down in the short run. B) continue to produce because the resulting loss is less than its TFC. C) continue to produce because it will realize an economic profit. D) liquidate its assets and go out of business. MC4. Which of the following is correct?

A) Both purely competitive and monopolistic firms are "price takers." B) Both purely competitive and monopolistic firms are "price makers." C) A purely competitive firm is a "price taker," while a monopolist is a

"price maker." D) A purely competitive firm is a "price maker," while a monopolist is a

"price taker."

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MC5. Oligopolistic industries are characterized by:

A) a few dominant firms and substantial entry barriers. B) a few dominant firms and no barriers to entry. C) a large number of firms and low entry barriers. D) a few dominant firms and low entry barriers.  

MC6. Suppose the Herfindahl Indexes for industries A, B, and C are 1,200 5,000, and 7,500 respectively. These data imply that:

A) market power is greatest in industry A. B) market power is greatest in industry B. C) market power is greatest in industry C. D) industry A is more monopolistic than industry C.

MC7. Given the data in the following table indicate if this industry comprised of 6 firms is characterized by:

A) an oligopoly. B) a monopolistically competitive industry. C) a purely competitive industry. D) a pure monopoly.

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MC8. Refer to the above data. I f all the firms in the above industry merged into a single firm, the Herfindahl Index would become:

A) 100. B) 1,000. C) 10,000. D) 100,000. MC9. Refer to the data given in the game theory matrix below, where the numerical data show the profits resulting from alternative combinations of advertising strategies for Ajax and Acme. Ajax's profits are shown in the upper right part of each cell; Acme's profits are shown in the lower left. Given these data indicate the cell of the outcome of the game in the case of no collusion.

A) A.

B) B.

C) C.

D) D.

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MC10. Refer to the same data given in the game theory matrix above. Given these data indicate the cell showing the outcome of the game in the case of collusion and no cheating.

A) A.

B) B.

C) C.

D) D.

MC11. Refer to the same data given in the game theory matrix above. I f Ajax and Acme agree to a Small-budget policy through collusion, the temptation to cheat on that agreement is demonstrated by the fact that: A) Ajax can increase its profit by increasing its budget furthermore. B) Both Acme and Ajax can earn even more profits if both agree to a low-

budget policy. C) Each Acme and Ajax would attempt to increase profits by increasing

their respective budgets. D) Acme can increase its profit by reducing its production costs. MC12.A monopolistically competitive industry combines elements of both competition and monopoly. I t is correct to say that the competitive element results from: A) a relatively large number of firms and the monopolistic element from

product differentiation. B) product differentiation and the monopolistic element from high entry

barriers. C) a perfectly elastic demand curve and the monopolistic element from low

entry barriers. D) a highly inelastic demand curve and the monopolistic element from

advertising and product promotion.

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MC13.The creation of a market for pollution rights would: A) reduce air and water pollution to zero. B) stimulate the search for pollution-reducing technologies. C) induce an increase in the supply of pollution rights. D) be in conflict with the concept of user charges.

MC14.Patent laws are controversial because: A) they are in legal conflict with the rules and provisions of the Free

Market Trade. B) they are at the core of the problem of whether monopoly is based on

industry structure or behavior. C) while patents encourage innovation, they are also a source of monopoly

power. D) any firm whose monopoly power is based on patents is automatically

exempt from the antitrust laws.

                     

   

 

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SECTION  II    Short  Essay  Questions    (Briefly  answer  the  following  questions  in  one  max  two  paragraphs    

   

SE-1: Briefly discuss the basic characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly. Under which of these market classifications does each of the following most accurately fit?

(a) a supermarket in your hometown; (b) the steel industry; (c) a wheat farm; (d) the commercial bank in which you or your family has an account; (e) the automobile industry. Note: In each case no need to justify your classification.  

SE-2: Why is the equality of marginal revenue and marginal cost essential for profit maximization in all market structures? Explain why price can be substituted for marginal revenue in the MR = MC rule when an industry is purely competitive.

 

SE-3: Briefly discuss the major barriers to entry into an industry. Explain how each barrier can foster monopoly or oligopoly. Which barriers, if any, do you feel give rise to monopoly that is socially justifiable?

 

. SE-4: In 2005 General Motors (GM) announced that is would reduce

employment by 30,000 workers. What does this decision reveal about how it viewed its marginal revenue product (MRP) and marginal resource cost

workers? By less than 30,000 workers?

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 SECTION  III  -­‐  Problems  

(Work out the numbers and provide concluding remarks for your findings) PR-1 Assume the following cost data are for a purely competitive producer:

Total Product

Average fixed cost

Average variable

cost

Average total cost

Marginal

cost 0 1 2 3 4 5 6 7 8 9 10

$60.00 30.00 20.00 15.00 12.00 10.00 8.57 7.50 6.67 6.00

$45.00 42.50 40.00 37.50 37.00 37.50 38.57 40.63 43.33 46.50

$105.00

72.50 60.00 52.50 49.00 47.50 47.14 48.13 50.00 52.50

$45 40 35 30 35 40 45 55 65 75

Q1a. At a product price of $56, will this firm produce in the short run? Why or why not? I f it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? Explain. What economic profit or loss will the firm realize per unit of output? Q1b. Answer the relevant questions of 4a assuming product price is $41. Q1c. Answer the relevant questions of 4a assuming product price is $32.

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PR-2: Given the sales and cost data at different levels of output in the table below for a pure monopolist, calculate:

Q2a. How many units would the above profit-maximizing monopolist produce? Q2b. The above monopolist should set its price at: Q2c. At its profit-maximizing output, would he above monopolist earn an

economic profit or incur a loss and how much (Hint: calculate TR at each output level

                                 

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PR-3: Ryan Imitations Co. makes flash drives that consumers perceive as identical to those produced by numerous other branded manufacturers. Recently, Ryan hired an expert econometrician to estimate its cost function for producing boxes of one dozen floppy disks. The estimated cost function is C = 24 + 2Q2 and marginal cost function is MC=4Q Suppose perfectly competitive market and other firms in the field sell the product at a price of $10. Q3a. How much should this firm charge for the product? Q3b. What is the optimal level of output to maximize profits? How much profit will be earned? Q3c. In the long run, should this firm continue to operate or shut down? Why?   Total Marginal Quantity Marginal Output cost cost demanded Price revenue Profit 0 $ 50 0 $60 $50 1 80 $30 1 55 $55 25 2 120 40 2 50 45 20 3 150 30 3 45 35 15 4 170 20 4 40 25 10 5 185 15 5 35 15 10 6 205 20 6 30 5 25 7 235 30 7 25 5 60 8 275 40 8 20 15 115 9 325 50 9 15 25 190 10 385 60 10 10 35 285

(4a) The firm will produce 5 units at a price of $35. At this price and output level, MC=MR. The firm will have a loss, or negative profit, of $10.

(4b) Demand for the product and the price of the product will increase as firms exit the market due to the incurred losses. This situation will ultimately increase the demand for the product until price equals average cost and firms receive normal profits.