BAFFOUR @ UCCABS FINANCIAL SECRETARY

18’19

Money Is a Spirit and Needs to Be Controlled.

BAFFOUR IS THE PILLAR BEHIND SUCCESSFUL ACTS
 BAFFOUR @ UCCABS FINANCIAL SECRETARY
18’19
University of Cape Coast
College of Humanities and Legal Studies
School of Business
Department of Finance Quiz one: 13/07 /2017
MANAGERIAL ECONOMICS
Instructions: Answer All Questions Time Allowed: 30 Minutes
Question One
The market demand and supply equations for a product of a perfectly competitive
industry.
QD = 50 -IOP
QS = 20+2.5P
Where Q is quantity and P is price
a. What is the equilibrium price and equilibrium quantity?
b. Compute the price of demand at the equilibrium price and quantity and interpret.
c. Suppose that an increase in consumer income resulted in the new demand
equation 75
QD= 75-10P
d. What are the new equilibrium price and quantity?
d. Compute the price elasticity at this new equilibrium price and quantity and interpret.
e. Suppose the government enacts legislation that imposes a price floor equivalent to
the new equilibrium price. what would be the quantity supplied and quantity
demanded of this product using the original market demand and supply
equations? What will be the implications of this legislation on the market?

Question Two
a. BG Cruises is a company that owns and manages a large fleet of ships used primarily for
cruises. Following a spike in tourist arrivals in Ghana, Lawrence, the firm's managing
director decided to increase the firm's fleet by acquiring another rival business. With the
short-term interest rate at 8%, BG Cruises used GHS9million of its retained earnings to
acquire the assets and settle the debts of the rival business, which is a local struggling
business providing similar services. Lawrence's acquisition was based on predicted
additional annual sales of GHS2 million over first five years. After close review of the
acquisition, the board of directors qualified Lawrence's performance as poor and decided
to immediately terminate his employment and appoint Michael, Lawrence's assistant
manager, as the acting managing director. Is the decision of the board of directors
of right!? Explain.

b. Suppose that the total benefit and total cost from an activity are, respectively, given by
the following equations:

Money Is a Spirit and Needs to Be Controlled.

BAFFOUR IS THE PILLAR BEHIND SUCCESSFUL ACTS
BAFFOUR @ UCCABS FINANCIAL SECRETARY
18’19
B(Q) = 150 + 28Q- 5Q2 and C(Q) = 100 + 8Q
I. Write out the net benefit equation?

Money Is a Spirit and Needs to Be Controlled.

BAFFOUR IS THE PILLAR BEHIND SUCCESSFUL ACTS
 BAFFOUR @ UCCABS FINANCIAL SECRETARY
18’19
UNIVERSITY OF CAPE COAST
COLLEGE OF HUMANITIES AND LEGAL STUDIES
SCHOOL OF BUSINESS
DEPARTMENT OF FINANCE

SBU 305: MANAGERIAL ECONOMICS 23rd October, 2015

INSTRUCTIONS: ANSWER ALL QUESTIONS

QUIZ ONE

TIME ALLOWED 1 HOUR

1. a. Enyonam operates a small shop at Makola specializing in party favours. She owns
the building and supplies all her own labour and money capital. Thus, Enyonam incurs
no explicit rental or wage costs. Before starting her own business Enyonam earned C
1,000 per month by renting out the store and earned €2,500 per month as a store
manageress for a large Melcom store. Because Enyonam uses her own money capital,
she also sacrificed C 1,000 per month in interest earned on Treasury bills. Enyonam
monthly revenue from operating her shop are C 10,000 and her total monthly expenses
for labour and supplies amounted to C 6,000. Calculate Enyonam's monthly accounting
and economic profits.
b. Explain any three (3) principles of Economics that are related to;

i. Individual decision making

ii. Economic interactions iii. How the economy as a

whole works
2. Suppose you are the manager of a chain of computer stores. For obvious reasons you
have been closely following developments in the computer industry, and you have just
learned that Parliament has passed a two-pronged program designed to further enhance
the Ghanaian computer industry's position in the global economy. The legislation
provides increased funding for computer education in primary and secondary schools,
as well as tax breaks for firms that develop computer software. As a result of this
legislation, what do you predict will happen to the equilibrium price and quantity of
software?

Suppose that the demand for the PAPAYE Company's products is:

Q=400-2P+3Pr+O.7M

where Q is quantity demanded, P is price, Pr is the price of PAPAYE's rival, and

M is income of consumers. Assume that P = CIO, Ø15, and M = Ø50.

a. Compute demand at these prices and this income.

Money Is a Spirit and Needs to Be Controlled.
BAFFOUR IS THE PILLAR BEHIND SUCCESSFUL ACTS
BAFFOUR @ UCCABS FINANCIAL SECRETARY
18’19
b. Find the price elasticity of demand (at a point) and interpret.
c. Find the income elasticity of demand (at a point) and interpret.
d. Find the cross elasticity of demand with respect to rival's price and interpret.

3. The market demand and supply equations for a product of a perfectly competitive
industry.

Qs = 20 + 2.5P

Where Q is quantity and P is price.

a. What is the equilibrium price and equilibrium quantity?
b. Suppose that an increase in consumer income resulted in the new demand
equation

What are the new equilibrium price and quantity?

c. Suppose the government enacts legislation that imposes a price ceiling
equivalent to the original equilibrium price. Calculate the Nonpecuniary
price and explain why such price legislation will be socially expedient but
economically inexpedient.

4. a. Kwaku Adongo buys only orange juice and yoghurt.

i. In 2015, Kwaku Adongo earns €100, orange juice is priced at €2 a carton and
yoghurt is priced at €4 a tub. Draw Kwaku Adongo's budget line and compute
its slope.

ii. Now suppose that all prices increase by 10 percent in 2016 and that Kwaku
Adongo's salary increases by 10 percent as well. Draw Kwaku Adongo's optimal
combination of orange juice and yoghurt in 2016 compare to her optimal
combination in 2016.
b. Explain with examples the following heuristics:
I. Representative
heuristics ii. Availability
heuristics iii. Simulation
heuristics
iv. Persuasive heuristics

Money Is a Spirit and Needs to Be Controlled.

BAFFOUR IS THE PILLAR BEHIND SUCCESSFUL ACTS
 BAFFOUR @ UCCABS FINANCIAL SECRETARY 18’19
Question One
Case Study: Interdependent Markets
Sometimes a great idea comes along that seems to hold the potential for solving a host of
problems. The idea receives publicity, is promoted as being the golden key and everyone jumps
on the bandwagon. Economists may be part of the problem in that some do take a narrow view
of a problem and support solutions that they happen to agree with or which their research tells
them has some benefit. However, economists will also tell you that any benefit has some costs
attached to it and it is imperative to look at those costs carefully to assess the true worth of the
'solution'. In economics, markets are highly dependent on one another; if circumstances change
in one market, they will affect other markets- and the people who both use and rely on them.

Take the case of biofuels. The development of biofuels has been heralded as an opportunity to
reduce the reliance on oil, to accelerate the change to renewable energy and to provide a cheaper
alternative to oil. Biofuels use crops- often cereal crops- to produce the biofuel. The very word
'biofuel' gives the impression that it is somehow 'good' through the use of the term 'bio'.
However, it seems that not everyone is quite so happy that biofuels are a 'good' thing.

The charity, Oxfam, has been running campaign, which presents a damning picture of the
impact that the move to biofuels is having on the most vulnerable people in the world. The
production of biofuel has been partly responsible for increases in basic commodity prices like
wheat in recent years. The demand for the raw materials for biofuels has encouraged farmers to
switch from the production of some crops to others. The resulting output has been diverted
between crops going for food and for production of ethanol. The result, say Oxfam, has resulted
in an increase in the number of people in poverty, worldwide, of some 30 million and costing
poor countries an extra USDI 00 billion in food bills. One of the reasons, say Oxfam, is a
shortage of crops (exacerbated by the disruption to supply as a result of bad weather and natural
disasters), which has forced food prices much higher. The people who are most affected by these
higher prices are the people who are poorest and on the margins of poverty. As food prices rise,
these marginal people are dragged into poverty.

Oxfam says that the value to farmers of growing crops for biofuel is higher than that for growing
it for food. As a result, farmers are diverting production to fuel and this reduces the supply of
crops available for food production. The situation is made worse by the subsidies and tax breaks
that rich countries have given to encourage growth in the production and use of biofuel.
Furthermore, the change in land use that is being driven by the move to biofuel is actually adding
to carbon emissions, offsetting the environmental benefits of using renewable fuel rather than
oil-based fuels. Oxfam suggests that the target that the European Union has set for the
production of biofuel will lead to carbon emissions rising 70 times by 2020.

The largest producer of bioethanol in Europe, Abengoa Bioenergy, has reacted angrily to the
claims and has branded the suggestion that the production of bioethanol can lead to world
poverty and extreme hunger as a 'manipulation' and as being 'false statements'. It suggests that
production of bioethanol benefits local economies, redistributes global income, creates jobs and
increases incomes. There is enough land in the world to make production of cereal-based
bioethanol sustainable, it says. In addition, it points out that in future, cereal-based bioethanol
production will be outstripped by ethanol produced from biomass.
Thus, where does the truth lie and where should our priorities lie in the production of this type
of fuel?

Money Is a Spirit and Needs to Be Controlled.

BAFFOUR IS THE PILLAR BEHIND SUCCESSFUL ACTS
BAFFOUR @ UCCABS FINANCIAL SECRETARY 18’19
Required:
a. In what way is the market for cereals, for food and for biofuel 'interdependent'?
(4 marks)
b. Explain two (2) factors that might influence the decisions of farmers about whether to
supply cereal crops for the food or the biofuel industries? (3 marks)
c. Use supply and demand diagrams to show how the growth in biofuels has led to a rise in
commodity prices like wheat. (7 marks)
d. Explain two (2) reasons for which Oxfam believes the switch from biofuels has caused
a rise in poverty? (3 marks)
e. Do you agree with the views of Abengoa Bioenergy that the long-term benefits of biofuel
will outweigh any short-term costs? Explain. (3 marks)
[Total Marks: 201

Question Two
a. Volta River Authority of Ghana is the largest provider of electricity in Ghana. To meet
the monthly demand for electricity in Ghana, which is given by the inverse demand
function, P =1000-5Q, the utility authority has set up two electric generating facilities;
QI kilowatts are produced at facility 1 and Q2 kilowatts are produced at facility 2 (so QI
+ Q2). The costs of producing electricity at each facility are given by Cl (QD = 10,050
+ 502 and (02) = 5,000 + 202 2 respectively.

Required:
Determine the profit-maximizing amounts of electricity to produce at the two facilities,
the optimal price, and the utility company's profits. (10 marks)

b. You are the general manager of a firm that manufactures personal computers (PCs). Due
to a soft economy, demand for PCs has dropped 50 percent from the previous year. The

sales manager of your company has identified only one potential client, who has
received several quotes for 10,000 new PCs. According to the sales manager, the client
is willing to pay €650 each for 10,000 new PCs. Your production line is currently idle,
so you can

easily produce the 10,000 units. The accounting department has provided you with the
following information about the unit (or average) cost of producing three potential
quantities of PCs:

10,000 PCs 15,000 PCs 20,000 PCs

Materials (PC component) GHC500 GHC500 GHC500

Depreciation 200 150 100

Labour 100 100 100

Total Unit cost GHC800 GHC750 GHC700

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BAFFOUR @ UCCABS FINANCIAL SECRETARY 18’19
Required:
Based on this information, should you accept the offer to produce 10,000 PCs at €650 each?
Explain. (5 marks)

c. You are the CEO of a major automaker. One of your division managers makes the
following statement regarding the firm's production plans: "In order to maximize
profits, it is essential that we operate at the minimum point of our average total cost
curve."

Required:
As the CEO of the automaker, would you praise or chastise the manager? Explain.
(5 marks)

[Total Marks: 201

Question Three
a. You are a manager in charge of monitoring cash flow at a company that makes
photography equipment. Traditional photography equipment comprises 40% of your
revenues, which grow about 2% annually. You recently received a preliminary report
that suggests consumers take three times more digital photographs than photos with
traditional film, and that the cross-price elasticity of demand between digital and
disposable cameras is -0.3. In 2012, your company earned about €600 million from sales
of digital cameras and about C400 million from sales of disposable cameras.

Required:
If the own price elasticity of demand for disposable cameras is -2, how will a 4 percent
decrease in the price of disposable cameras affect your overall revenues from both
disposable and digital camera sales? (5 marks)

b. Kilindo Plc supplies airplane manufacturers with sheet metals that are used on the
exterior of aircraft. Manufacturing these panels requires only five sheet-metal-forming
machines, which cost GHC400 each, and workers. These workers can be hired on an as-
needed basis in the labour market at GHC7,000 each. Given the simplicity of the
manufacturing process, the pre-formed sheet metal panel market is highly competitive.
Therefore, the market price for one of Kilindo Plc's panels is C50-

Table 3b

Semi-metal-Forming Workers Output

Machines

5 1 600
5 2 1,000
5 3 1,290
5 4 1,480
5 5 1,600
5 6 1,680

Required:
Money Is a Spirit and Needs to Be Controlled.
BAFFOUR IS THE PILLAR BEHIND SUCCESSFUL ACTS
BAFFOUR @ UCCABS FINANCIAL SECRETARY 18’19
Based on the production data in the Table 3b above, how many workers should Kilindo
Plc hire to maximise profits? (10 marks)

c. It is common for supermarkets to carry both generic (store-label) and brand name
(producer-label) varieties of sugar and other products. Many consumers view these
products as perfect substitutes, meaning that consumers are always willing to substitute
a constant proportion of the store brand for the producer brand. Consider a consumer
who is always willing to substitute three pounds of a generic store-brand sugar for two
pounds of a brand-name sugar.

Required:
I. Do these preferences exhibit a diminishing marginal rate of substitution between store-
brand and producer-brand sugar? (1 mark) ii. Assume that this consumer has GHØIO.OO
of income to spend on sugar, and the price of store-brand sugar is GHCI .00 per pound
and the price of producer-brand sugar is €2.00 per pound. How much of each type of
sugar will be purchased? (2 mark) iii. How would your answer change if the price of
store-brand sugar was €2.00 per pound and the price of producer-brand sugar was €1.00
per pound? (2 mark) [Total Marks: 201

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BAFFOUR @ UCCABS FINANCIAL SECRETARY 18’19
Question Four
a. You are the manager of a company that manufactures steel. One afternoon a friend
called you from a different country and had a discussion with you on how to set up a
subsidiary in that country. He was able to convince you into believing that having a
subsidiary in that country will end up increasing your company's profit margin. Thus,
you told your friend that you would present this proposal to the company's board for
consideration. However, before the presentation of the proposal, you decided to do a
proper assessment of the macro-environment of the said country.

Required:
Explain any five (5) factors you should consider in conducting this assessment.
(10 marks)

b. You are a manager for Herman Miller-a major manufacturer of office furniture. You
recently hired an economist to work with engineering and operations experts to estimate
the production function for a particular line of office chairs. The report from these
experts indicates that the relevant production function is

Q=2K 1/2 L1/2

where K represents capital equipment and L is labour. Your company has already spent
a total of GHCI 0,000 on the 4 units of capital equipment it owns. Due to current
economic conditions, the company does not have the flexibility needed to acquire
additional equipment. If workers at the firm are paid a competitive wage of GHCIOO
and chairs can be sold for GHC200 each:

Required:
i. What is your profit maximizing level of output and labour usage? (4 marks)
ii. What is your maximum profit? (1 mark)

c. Irene spends GHC20,000 per year on painting supplies and storage space. She recently
received two job offers from a famous marketing firm-one offer was for GHCI 00,000
per year, and the other was for GHC90,000. However, she turned both jobs down to
continue a painting career. If Irene sells 20 paintings per year at a price of GHCIO, 000
each:

Required:
i. What are her accounting profits? (2.5 marks) ii. What are her economic
profits? (2.5 marks)

Money Is a Spirit and Needs to Be Controlled.

BAFFOUR IS THE PILLAR BEHIND SUCCESSFUL ACTS
BAFFOUR @ UCCABS FINANCIAL SECRETARY 18’19

UNIVERSITY OF CAPE COAST

COLLEGE OF HUMANITIES AND LEGAL STUDIES
SCHOOL OF BUSINESS
DEPARTNIENT OF ACCOUNTING AND FINANCE
BUS 802S MANAGERIAL ECONOMICS
END OF SANDWICH SEMESTER EXAMINATION 2016 ACADEMIC YEAR
TIME: 3 HOURS

Instructions: Answer ANY 4 questions

Question I

The mark •ng department of TUTUGU Co. Ltd, a firm that supplies Waste
bins, has compiled the following data on the price and quantity of waste bins
sold last month at
10 outlets in the regional capitals of Ghana:
Outlets Quantity Price (GHÉ)

45 118.75
1
147.5 100
2

3 107.5 112.5

4 62.5 137.5

5 68.75 143.75

6 180 93.75

7 165 93.75

8 122.5 112.5
9 175 100
10 52.5
125

a. As a managerial economist, estimate the demand function for waste bins

based on the compiled data from the 10 outlets. Comment on the
economic relevance of
the estimated parameters. (7 marks) b. Predict the level of sales
of waste bins if the prices of waste bins are GHÉI 18.75,
GHØ137.5 and GHÉ 143.5 respectively. (1.5 marks)
c. Given that your consultants have estimated the supply function
for waste bins to be: Q = —103.13+1.4P, determine the market clearing price
and quantity sold
of waste bins. (2 marks)

Money Is a Spirit and Needs to Be Controlled.

BAFFOUR IS THE PILLAR BEHIND SUCCESSFUL ACTS
 BAFFOUR @ UCCABS FINANCIAL
SECRETARY 18’19
d. Estimate the price elasticity of demand for waste bins at the market
clearing price and quantity and interpret your answer. Based on the price
elasticity of demand, what will you advise management of TUTUGU to
do to the price of waste (4 marks) bins in order to increase sales?
e. Based on the price elasticity of demand can TUTUGU company limited
conveniently pass on a tax Of GHØ5•5 per unit of waste bins on
consumers of (2.5 marks) waste bins? Explain your answer.
f. If the government of Ghana orders that the price of waste bins is to be
pegged at GHÉ80.50, what type of price legislation will this be?
Determine the cost to society or government of such an action by
government. (3 marks)
[Total: 20 marks]
Question 2
(a) You are the manager of Kingsway Computers, a manufacturer of customized
computers that meet the specifications required by University of Cape Coast.
Over 90 percent of your clientele consists of university students. Kingsway
Computers is not the only firm that builds computers to meet this university's
specifications; indeed, it competes with many manufacturers online and
through traditional retail outlets. To attract its large student clientele,
Kingsway Computers runs a weekly ad in the student paper advertising its
"free service after the sale" policy in an attempt to differentiate itself from the
competition. The weekly demand for computers produced by Kingsway
Computers is given by Q ,000 - P, and its weekly cost of producing computers
is C(Q) = 2,000 + Q. If other firms in the industry sell PCs at GHØ600,

what price and quantity of computers should you produce to maximize your
firm's profits? What long run adjustments should you anticipate? Explain. (5
marks)

(b)Volta River Authority of Ghana is the largest provider of electricity in Ghana.

To meet the monthly demand for electricity in Ghana, which is given by the
inverse demand function, P =1000-5Q, the utility authority has set up two
electric generating facilities; QI kilowatts are produced at facility I and Q2
kilowatts are produced at facility 2 (so QI + Q). The costs of producing
electricity at each facility are given by
10,050 + 502 and 5,000 + 2Q22 respectively. Determine the profit
maximizing amounts of electricity to produce at the two facilities, the optimal
price, and the utility company's profits.
(10 marks)

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 BAFFOUR @ UCCABS FINANCIAL
SECRETARY 18’19
(c) According to an IEA Report by Mrs. Mensah,

i) Vfone's own price elasticity of demand for long distance services is -8.64.
Vfone needs to boost revenues in order to meet its marketing goals. To
accomplish this goal, should Vfone raise or lower its price? (1 mark)

ii) If Vfone lowered price by 3 percent, what would happen to the volume of
long distance telephone calls routed through Vfone? (2 marks)

iii) The report further states that Vfone's cross price elasticity of demand for
long distance services is 9.06. If competitors reduced their prices by 4 percent,
what would happen to the demand for Vfone's services? (2 marks)
[Total: 20marksl

Question 3

(a) An industry, said to be characterized by monopolistic competition, is the

apparel industry. Supposed you were hired as a consultant by a firm in this
industry. How would you advise the firm as to the levels of output, price,
input usage, and levels of' advertising? What problems might you
encounter? (10 marks)

(b) You are a manager in charge of monitoring cash flow at a company that
makes photography equipment. Traditional photography equipment
comprises 40% of your revenues, which grow about 2% annually. You
recently received a preliminary report that suggests consumers take three
times more digital photographs than photos with traditional film, and that
the cross-price elasticity of demand between digital and disposable
cameras is -0.3. In 2012, your company earned about GHÉ600 million
from sales of digital cameras and about GHÉ400 million from sales of
disposable cameras. If the own price elasticity of demand for disposable
cameras is -2, how will a 4 percent decrease in the price of disposable
cameras affect your overall revenues from both disposable and digital
camera sales? (5 marks)

(c) In a recent speech, the employment and labour relations' minister noted
that; "One of the biggest causes of social vices in Ghana is the high rate of
unemployment among the youth. The low wages offered by employers in
the country have given fewer youth the incentive to find employment.
Instead of working throughout the year, the way we used to, Ghanaian
youth slack off and cause trouble. To address this problem, the
government has proposed to raise the minimum wage by GHÉ20.50. This
will

Money Is a Spirit and Needs to Be Controlled.

BAFFOUR IS THE PILLAR BEHIND SUCCESSFUL ACTS
 BAFFOUR @ UCCABS FINANCIAL
SECRETARY 18’19
give Ghanaian youth the proper incentive to go out and find meaningful
employment." Evaluate the minister's plan to reduce social vices.

Question 4
(a) Kofi Selassie purchases food (measured in Y) and Clothing (measured in
X) and has the utility function = — He has a monthly income of GHØ6000.
The price of food and clothing are GHÉ200 and GHØ400 respectively. Use
the information above to answer the following questions.
I. Is the assumption that more is better satisfied for both goods? (2 marks)
ii. Does the diminish, remain constant or increase as the consumer buys
more
Y? Explain.(2 marks) iii. Find Kofi Selassie's optimal consumption
bundle, hence determine his utility.
(2 marks) iv.
If the price of food decreases to GHS200, what will be Kofi Selassie's
optimal consumption bundle and utility? (2 marks) v. Determine the
income and substitution effects of the increase in the price of food.
(2 marks) vi.
Calculate the compensation variation and equivalence variation. (2
marks)

(b) Prove that for two commodities, at equilibrium, the marginal rate of
substitution equals the ratio of the prices, thus MRS (8 marks)

Question 5
(a) Two months ago, the owner of a car dealership significantly changed his sales
manager's compensation plan. Under the old plan, the manager was paid a
salary of GHØ6,000 per month; under the new plan, she receives 2 percent
of the sales price of each car sold. During the past two months, the number
of cars sold increased by 40 percent, but the dealership's margins (and profits)
significantly declined. According to the sales manager, "Consumers are
driving harder bargains and I have had to authorize significantly lower prices
to remain competitive." What advice would you give the owner of the
dealership? (12 marks)

Money Is a Spirit and Needs to Be Controlled.

BAFFOUR IS THE PILLAR BEHIND SUCCESSFUL ACTS
 BAFFOUR @ UCCABS FINANCIAL
SECRETARY 18’19
(b) You are the manager of a large but privately held online retailer that
currently uses 34 unskilled workers and 12 semiskilled workers at its
warehouse to box and ship the products it sells online. Your company
pays its unskilled workers the minimum wage but pays the semiskilled
workers GHØ15.50 per hour. Thanks to government legislation, the
minimum wage will increase from GHß13.10 per hour to GHß14.50 per
hour in October, 2016. Discuss the implications of this legislation on
your company's operations and in particular the implications for your
optimal mix of inputs and long-run investment decisions. (8 marks)

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