Professional Documents
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Managerial Economics
GSM5000
Assignment 1
Prepared By:
Wan Nur Farhah binti Wan Leeh (PBS1311097)
Muhammad Muza Muhayen (PBS1311194)
Mohd Zarulsyafiq Mustafa (PBS1312142)
Cheah Wei Keng (PBS1311103)
Badlina Iziyani binti Badrol Hisham (PBS1311098)
Prepared For:
Pensyarah Prof. Dr. Mohd Shahwahid Haji Othman
Due Dates:
04th October 2013
Q1. In the context of the shareholder wealth-maximization model of a firm, what is the
expected impact of each of the following events on the value of the firm? Explain why.
The goal of shareholder wealth-maximization model is to maximize the net present value of the
expected future cash flow for the equity owners (shareholder). It implies a long term business goal
whereby the amount, timing and risk of the firms expected future profits being the determinants of the
value of the firm. This relationship can be represented by the following equation:
V0 . (Shares Outstanding)
[1]
e. A major technological breakthrough is achieved by the firm, reducing its cost of production.
Based on the innovation theory of profit, a successful innovation would reward in better generation of
profit. As the technological breakthrough reduces its cost of production, the company is expected to
gain more profit and forced other competitors to compete or alternatively tend to easily adopt the new
technology. The firm gains the upper hand and therefore the value of the firm increases as a result of
the growth in the shareholders wealth maximization.
Reference:
th
Economics for Managers, 12 Edition (Canada: South-Western CEngage Learning, 2011), pp. 8
19.
Chapter 2
Problem 1:
The Managerial Challenge example in the Chapter discussed the rationale for a checked
baggage charge on airlines. As a result of the new surcharge, what would you expect to
happen to the number of checked bags, as well as the average weight of checked bags? Why?
Both number of checked baggage and average weight will expected to drop. Airline industry is
industry that its elasticity fall under elastic region which mean it is very sensitive with price increased.
Although new surcharge is not direct charges on air-ticket fee but it will still impact overall sales due to
baggage fee is cost of complementary, especially if you are sportsmen who do skiing. Such
equipment only can be bring along if it is checked baggage. Therefore, demand curve for airline
traveller will shift to left and demand will drop respectively because of over price increased and
ultimately will causing number of checked baggage drop.
Number of checked baggage and average weight will be influenced by its replacement on board
baggage. Customer will try to make use of on board baggage to avoid paying extra for checked
baggage surcharge.
Although number of checked baggage will expected to drop but it also foresee there will be regain
after short amount of period due to airline industry is fixed cost industry which also means that other
airline operator will face similar issue and expected to resolve similar issue with similar way.
Figure 1 shows demand and supply of the oil cleanup wage rate which is denoted by Price p
Legend
P1: original wage rate
P2
Figure 2 shows the Supply curve shifts to left and demand curve shifts to the right for the
labour in the oil cleanup market
Figure 3 shows a shift to the left of demand curve for the skilled labour services
Supply is deduced to decrease, causing the curve to shift to the left. The increase of wage in the
unskilled labour service as illustrated in figure 2 affect the supply of skilled Labour inversely because
they are substitutes to each other.
Yes, we do think that there will be an increase in workers migrating there to assist with the cleanup.
This may be done in order to revive the Skilled Labour Services which sees a decrease in overall
quantity. Lower expectations of salary by the migrating labour may be able to set a lower equilibrium
price for the demand and supply for the oil cleanup market.