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Managerial Economics Question Paper
Managerial Economics
Course:Bachelor Of Arts
Institution: Kenyatta University question papers
Exam Year:2010
KENYATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2009/2010
SECOND SEMESTER EXAMINATION FOR THE DEGREE OF
BACHELOR OF ARTS
MANAGERIAL ECONOMICS
DATE: Wednesday 7th April 2010 TIME: 11.00a.m – 1.00p.m
INSTRUCTIONS:
Answer QUESTION ONE and any other TWO QUESTIONS Question one carries 30 marks and the rest carry 20 marks each
QUESTION ONE
a)A managerial economist working for the Kijana Mdogo PLC is confronted with the following data:
Year Output price Quantity Unit cost Fixed cost
(KES) (KES) (KES)
2009 6,500 100 4,000 150,000
2010 7,400 250 4,500 150,00
If the firm’s share price at the Stock Market is KES 600, what is the investor’s
required rate of return? [6marks]
b)Compare and contrast, as clearly as possible, the innovation and the managerial
efficiency theories of profits. [4marks]
c)Gesso has a small chain of restaurant which specializes in fresh lobster dinners. The restaurant has branches in 24 towns in Kenya. The management of the restaurant wished to know the relationship between the number of dinners sold (Q) and the price per dinner (P). A market survey commissioned by the marketing manager has gathered information on prices and the average number of meals served per day for a fandom sample of eight restaurants in the chain. This information is enumerated below:
Town Q P
1 1000 150
2 900 180
3 850 190
4 1100 140
5 1200 130
6 900 190
7 1050 160
8 1000 140
The management of the restaurant seems to be aware that an understanding of demand for dinners and its determinants is key to effective decision making.
Required
i)Use regression analysis to estimate the demand function and fully interpret it.[5marks]
ii)Based on the estimated equation, compute the point price elasticity of demand at the mean values of the variables and interpret it. [5marks]
iii)Derive the total revenue function and determine the total number of dinners that will maximize the total revenue function. [5marks]
iv)Why do you think it is important for a management to understand the nature of demand facing lobster dinners. [5marks]
QUESTION TWO
Fatuma Siande Riaga, a manager at Suspected publishing Ltd, has been paying an annual premium of Kshs 1.5 million for fire insurance of the publishing plant. The net profit for suspected consistently is Ksh 15 million per year after deducting the insurance premium. An uninsured loss due to the fire would be an expense in computing net income. A study has shown that the probability of fire breaking out any year is only 0.004. (Assume a fire would destroy plant). A consultant suggests to Fatuma that Suspected Ltd should cancel its fire insurance contract. Evaluate this recommendation for each of the following assumptions.
a) The sole objective of the management is to maximize profit i.e. no consideration
is given to risk. [8marks]
b) Given the utility function above, compute and compare the expected utility of the
profit and utility of expected utility. What does this tell you concerning Fatuma
altitude towards risk? [4marks]
QUESTION THREE
Aquatic Fish limited is a water park in the Lake region. The firm has fixed cost of Kshs 36,000,000 per year, and a variable cost per customer of shs 500, receives an average of Kshs. 1,100 in revenue per admission and has 100,000 customers each year. At present, the firm is the only water park in the lake region, but the Aquatic Ltd management has learnt that another facility is being planned by Mt Kenya Mafia for nearby community. After the competing park opens, management expects to get 100,000 patrons to Aquatic fish Limited each year, prices would have to be reduced and the average revenue would drop to Ksh 90.
The management of Aquatic believes it immediately reduces prices and keeps them at a low level for two years, it can prevent the Mafias from opening. The necessary price cut would reduce average revenue to Kshs 600 but would increase attendance to 12,000
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