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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. d
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 I ndexes 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 I ndex 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: I n 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: I n 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
(MRC)? Why didn't CM reduce employment by more than 3,
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 I mitations 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 + 2Q
2
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. I n 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.