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Mbad 602: Managerial Economics Question Paper
Mbad 602: Managerial Economics
Course:Masters In Business Administration
Institution: Chuka University question papers
Exam Year:2013
CHUKA
UNIVERSITY
UNIVERSITY EXAMINATIONS
EXAMINATIONS FOR THE AWARD OF
DEGREE OF MASTERS IN BUSINESS ADMINISTRATION
MBAD 602: MANAGERIAL ECONOMICS
STREAMS: MBAD TIME: 3 HOURS
DAY/DATE: TUESDAY 23/4/2013 5.30 PM – 8.30 PM
INSTRUCTIONS:
Answer Question ONE and any other THREE Questions
Do not write on the question paper.
1. (a) Chemoji enterprises produces two products Q1and Q2 and estimates that its total
costs of production as TC=4Q_1^2+?5Q?_2^2-Q_1 Q_2 where Q_1 is the output per hour
of first product and Q_2 is the output per hour for the second output. Because of the
commitments to customers, the number produced of both products combined
should be equal to 30 per hour.
Find out the output levels of the two products that will minimize total costs for Chemosi Enterprises using:
(i) Substitution method [4 Marks]
(ii) Lagrangian multipliers method [6 Marks]
(b) Consider the following production function:
Q=56 K^0.38 ? L?^0.72
(i) Find the elasticity of production with respect to labour input. [2 Marks]
(ii) Establish the nature of returns to scale. [3 Marks]
(c) Suppose that a firm’s total cost function is TC=200-?2Q?_2 Q_2+Q_1^2 Q_2^2
Where Q_1 and Q_2 represents the number of units of good 1 and 2 respectively.
(a) If the firm produces 2 units of good 1 and 4 units of good 2, do cost
complimentaries exist? [2 Marks]
(b) Do economies of scope exist for this firm? [2 Marks]
(c) How will the firm’s total cost of production be affected if it decides to
discontinue the production of good 2? [1 Mark]
(d) Suppose that a perfectly competitive industry comprises 1000 identical firms.
Suppose further, that the market demand (Q_D ) and supply (Q_s ) functions are
Q_D=170,000,000-10,000,000P
Q_D=70,000,000+15,000,000P
(i) How much output will be produced by each firm in the industry?
[1 Mark]
(ii) How much output will be produced by each firm in the industry.
[1 Mark]
(iii) Suppose that one firms in the industry goes out of business . What will be
the effect on the equilibrium market price and quantity. [4 Marks]
(e) Using appropriate diagram, explain the term cardinal approach to consumer
demand theory. [3 Marks]
2. A company is considering the manufacture of two mutually exclusive products, product A and product B. Product A is a watch band and is specifically designed to fit only on the company’s watches. Product B is watch band that is designed to be adapted to a variety of watches including those produced by competitors. The expected investment for each product is Ksh 10,000. The expected cash flows for project A are Shs. 2,000,000 per year for 8 years. The coefficient of variation is expected annual cash flows are 10% for project a and 15% for B. the cost of capital for project A is 10% and it is 15% for B. if only one of the projects is to be selected, which project should we select? [15 Marks]
3. The total cost function given below was estimated for a certain company based on the Cobb Douglas production function.
Minimize TC=2L+0.15K
S.t
1.01L^0.75 K^0.25=sh 1,000
Where TC represents the total costs, L represents the number of labour hours used and k represents the number of hours of machine time used
Required:
(i) Determine the optimal combination of labour (L) and machine hours (K) that will minimize the total cost. [13 Marks]
(ii) Calculate the minimum total cost that can be incurred by the company at the optimal level of output. [2 Marks]
4. (a) Red Company sells its product in two separable and identifiable markets. The
company’s total cost equation is
TC=6+10Q
The demand equation for its product in the two markets are
Q_1=10-(0.2)P_1
Q_2=15-(0.5)P_2
Where Q=Q_1+Q_2
(i) Assuming that the second order conditions are satisfied, calculate the
profit maximizing price and output level in each market. [3 Marks]
(ii) Demonstrate that the demand for Red Company’s product is less elastic in
the market with the higher price. [2 Marks]
(iii) Find the firm’s total profit at the profit-maximizing prices and output
levels. [1 Marks]
(b) Suppose Gimzo Brothers, Inc, produces two types of hi – tech yo-yo; the Exterminator and Eliminator. Denoting Exterminator output as Q_1 and Eliminator output as Q_2, the company has estimated the following demand equations for its yo-yos.
Q_1=10-0.2P_1-0.4Q_2
Q_2=20-0.5P_2-2Q_1
The total cost equations for producing Exterminators and Eliminators are
?TC?_1=4+Q_1^2
?TC?_2=8+?6Q?_2^2
(i) If Gimzo Brothers is a profit – maximizing firm, how much should it
charge for Exterminators and Eliminators? [5 Marks]
(ii) What is the profit maximizing level of output for Exterminators and Eliminators? [3 Marks]
(iii) What is the Gimzo Brothers profit [1 Mark]
5. (a) The total cost of Chege’s workshop at Kibera Ayany area is
TC=100+4Q+?8Q?^2. What is Marginal cost when output is 10 and 20?
Calculate the average costs also when output is 10 and 20 respectively.
[5 Marks]
(b) Explain the concept of break even point using diagrams. If TFC=1.5 Million
shillings and the AVC is Ksh. 80 and the unit selling price is 250 shillings, calculate the break even quantity of output. [3 Marks]
(c) Explain the differences between price elasticity and income elasticity of demand and highlight their importance in managerial economics. [5 Marks]
(d) Using a well labeled diagram, explain the differences between shifts of demand curves and a movement along a demand curve. [7 Marks]
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