COURSE CODE : BMME 5103

COURSE TITLE : MANAGERIAL ECONOMICS

PROGRAM : MASTER OF BUSINESS ADMINSTRATION-MID TERM
TIME : TWO HOURS
DATE : 10/01/2007

SECTION A
Multiple choice questions. Mark answer by encircling most
appropriate option. (5 marks)

1. Use calculus to find the marginal profit function from the following profit
function:
Profit = -100 + 30Q + 10Q2 - 2Q3
Calculate the marginal profit when Q equals 2.
(a) Less than RM20

(b) RM40
(c) RM44
(d) RM46

2. Determine the optimum X for the function below. Is X a minimum or a

maximum?
Y=150 + 720X-3X2
(a) X = 120, which is a maximum.
(b) X= 120, which is a minimum.
(c) X = 240, which is a maximum.
(d) X = 240, which is a minimum.

3. A price increase tends to reduce purchases of a good. According to the model

of consumer choice, the primary reason for this reduction is:
(a) the substitution effect
(b) inferior goods
(c) luxury goods
(d) the income effect

4. Which of the following changes would NOT be expected to shift the demand
curve for palm oil?
(a) An increase in the price of palm oil.
(b) An increase in the price of soybean oil.
(c) An increase in income of the importing countries.
(d) A breakthrough research that indicates that palm oil can prolonged life
span.

5. If demand is elastic, a price cut will:

(a) lower total revenue but increases quantity sold.
(b) lower total revenue and lowers the quantity sold.
(c) increase total revenue but lowers the quantity sold.
(d) increase total revenue and raises the quantity sold.

6. Given a linear demand function of:

Qd = 0.4 - 0.2P + 0.3Y + 1.2A

Where: Q = quantity, P = price, Y = income, A = advertising What is the
income elasticity?
(a) -0.2
(b) 0.3
(c) 1.2
(d) depend on the income and the quantity
7. If the AVC = 120 - 9Q + .25Q 2 and fixed cost is RM180, the total cost at Q
= 5 is:
(a) 586.25
(b) 600.00
(c) 565:17
(d) 496.88.

8. Assume a demand equation of In Q = 3 In Y - 0.5 In P, where P is the price

and Y is income. Select the correct statement:
(a) A one-unit increase in P will decrease Q by 0.5 units.
(b) A 0.5 unit increase in P will decrease Q by one unit.
(c) A one percent increase in P will decrease Q by 0.5 percent.
(d) A 0.5 percent increase in P will decrease Q by one percent.

9. Marginal product is:

(a) a change in total output divided by one unit change in variable input.
(b) a change in total output divided by the output level.
(c) a change in input divided by a change in output.
(d) None of the above .
10. If TC=19+20Q-2Q2 , THE MARGINAL COST AT Q=3
(a) 3
(b) 5
(c) 8
(d) 20

SECTION B
Question 2 (5 marks )
(a) What is the Optimal Consumption Condition? Suppose MU1 = 200,
and MU2 = 100, and P1 = 20, and P2 = 10 , are you maximizing utility?
(2.5 marks )
(b) From your knowledge of the relationships among the various cost
functions, complete the following table: (2.5 marks )

Output Total Fixed Variable Average Average Average Marginal

(Q) cost cost cost (VC) total cost fixed cost variable cost (MC)
(TC) (FC) (ATC) (AFC) cost
(AVC)
0 125
10 5
20 10.50
30 110
40 255
50 3
60 3
70 5
80 295
Question 3 (5 marks )

Choose only two

(a) Determinant returns to Scale for Cobb-Douglas Production Functions . what is , & .Is this
function homogenous. . (2.5 marks )
(b) Determinant econometric problems . (2.5 marks )
(c) What are the four components for a time series ? (2.5 marks )

Question 4 Choose either a or b . (5 marks )

(a) (5 marks )

States of nature
Strategy Recession Economic boom
P = 0.4 P = 0.6
Expand plant -20 50
Don't Expand -5 25

For each strategy find :

1. The expected value.
2. Standard deviation .
3. what's your conclusion .

(b) (5 marks )
In a study of the demand for life insurance, Executive Insurers, Inc., is examining the factors that affect
the amount of life insurance held by executives. The following data on the amount of insurance and
annual incomes of a random sample of 12 executives were collected.
Observation Amount of Annual Income
life Insurance (X $1,000)
(X $1,000)
1 90 50
2 180 84
3 225 74
4 210 115
5 150 104
6 150 96
7 60 56
8 135 102
9 150 104
10 150 108
11 60 65
12 90 58

a. Given the nature of the problem, which would be the dependent variable
and which would be the independent variable?
b. Plot the data.
c. Determine the estimated regression line. Give an economic interpretation of the slope (b)
coefficient.
d. Test the hypothesis that there is no relationship (i.e., P = 0) between the
variables.
e. Calculate the coefficient of determination.
f. Perform an analysis of variance on the regression, including an F-test of the
overall significance of the results. use the given information:
f. Source of Sum of Degrees of Mean
Variation Squares Freedom Squares
Regression 13,088 1 13,088
Residual 18,787 10 1,879
Total 31,875 11 F.05,1,10 = 4.96
WITH BEST WISHES WAJDI HAMZA
The Answers
SECTION A
Multiple choice questions. Mark answer by encircling most appropriate
option. (30 marks)

1 d
2 a
3 a
4 a
5 d
6 d
7 a
8 c
9 a
10 c

Answer 2 (5marks )

(a) MUF / PF = MUE / PE is the Optimal Consumption Condition. (2.5 marks )

200/20 = 10 , 100/10 = 10.
MU1 / P1 = MU2 / P2 = 10 therefore they are maximizing utility.
(b) From your knowledge of the relationships among the various cost functions,
complete the following table: (2.5 marks )

Output Total Fixed Variable Average Average Average Marginal

(Q) cost cost cost (VC) total cost fixed cost variable cost (MC)
(TC) (FC) (ATC) (AFC) cost
(AVC)
0 125
10 5
20 10.50
30 110
40 255
50 3
60 3
70 5
80 295
(a) Determinant returns to Scale for Cobb-Douglas Production Functions . what is
, & .Is this
function homogenous. .
(2.5 marks )
(b) Determinant econometric problems .
(2.5 marks )
(c) What are the four components for a time series ?
(2.5 marks )
Answer 3

(a) (2.5 marks )

Q = A K L is a Cobb-Douglas Production Function.
Returns to Scale for Cobb-Douglas Production Can be CRS, DRS, or IRS
1. if + 1, then constant returns to scale
2. if + < 1, then decreasing returns to scale
3. if + > 1, then increasing returns to scale
, are Coefficients that mean elasticities .
is the capital elasticity of output, often about .67
is the labor elasticity of output, often about .33
Cobb-Douglas Production Functions are homogeneous of degree +

(b) (2.5 marks )

Econometrics problems are:
1. Autocorrelation.
2. Heteroscedasticity.
3. Specification and Measurement Error.
4. Multicollinearity.
5. Simultaneous equation relationships and the identification problem.
6. Nonlinearities.

(c) The four components for a time series are : (5 marks )

The data may offer secular trends, cyclical variations, seasonal
variations, and random fluctuations.

Answer 4 (5 marks )
(a)
1. The expected value(r). (2 marks )
r = ri pi = (-20)(0.40) + (50)(0.60) = -8 + 30 = 22 if Expand .
r = ri pi = (-5)(0.40) + (25)(0.60) = -2 + 15 = 13 if Dont Expand .

2. Standard Deviation = = (ri - r ) 2. pi . (2 marks )

expand = SQRT{ (-20 - 22) (0.4) + (50-22) (0.6)} = SQRT{(-42) (0.4)+(3)2
2 2 2

(0.6)} =SQRT{ 705.6 5.4 } = SQRT 700.2 = 26.46 .

dont = SQRT{(-5 - 13)2 (0.4)+(25 - 13)2 (0.6)} = SQRT{(-18)2 (0.4)+(12)2
(0.6) } = SQRT{ 129.6 86.4 } = SQRT 43.2 = 6.57 .

3. Expanding has a greater standard deviation, but also has the higher expected
return. (1 mark )

(b) (5 marks )
a. Dependent variable (Y) Amount of Life Insurance
Independent variable X Annual Income
b.
c. Y = 11.148 + 1.492X
The estimated slope coefficient (b = 1.492) indicates that the amount of life insurance
held by executives increases by 1.492 x $1000 = $1,492 for each $1000 increase in
annual income.
d. se = 43.34
sb = 0.565
t = (1.492 - 0)/.565 = 2.641

Since the calculated t-value is greater than the t-value from the table (t .025,10 = 2.228 or
+2.228), one rejects the hypothesis at the .05 significance level that there is no
relationship between the amount of life insurance held and annual income.

e. R2 = .41

f. Source of Sum of Degrees of Mean

Variation Squares Freedom Squares
Regression 13,088 1 13,088
Residual 18,787 10 1,879
Total 31,875 11

F.05,1,10 = 4.96
F = MSR/MSE = 13,087/1879 = 6.966

Since the calculated F-value is greater than the F-value from the table, one rejects at the .
05 significance level the hypothesis that there is no relationship between the amount of
life insurance held and annual income.