Weeks 13

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Weeks 13 Revision.
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Examination structure
 Consultation time 7 June 10-12 8 June 10-12
12 June (If Tissa can make it) See a notice on
Tissas or my door) Exam 13 June, 2 PM
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Examination structure
1.      Exam duration 120 minutes writing
time   2.      Reading time 10
minutes   3.      Total number of
questions 5   4.      Students must attempt all
the questions   5.      Use of calculators is
permitted
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Examination structure
   Section 1. (Problem solving) Q
1-4 No questions just on definitions. All the
questions are problem solving You must include
the most relevant definitions as well diagrams
where appropriate. Brief verbal explanation
should complement you numeric solution.
Section 2. (Research Question) "Further
reforming of the Australian taxation system is
back on the agenda. In particular, different
approaches to the restructuring of personal tax
rates are currently being debated in the media. 
Some advocate tax reduction targeting low to
medium income earners. Others say that the top
tax margin should be reduced because the gap
between the corporate and personal tax rate is
too high. High taxes are a reason for tax
minimisation schemes." Using relevant elements of
economic theory, discuss how each of the
approaches may affect companies operating in
Australia in the following industries Car
manufacturing and Food
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Topics examinable
Competition, market structures and business
decisions
Pricing strategies and practices
Q4
Q3
Production and Costs
Q2
Managerial Economics
Business and Government.
Week. 12 Research question Business and current
economic situation.
Demand analysis (and estimation)
Q1
Section 2
Section 1
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Sample questions. Section 1
. Question 1

• The demand for mini cassette players can be
  characterised by the following point
  elasticities price elasticity-2 cross-price
  elasticity with AA Alkaline batteries - 1.5,
  and income elasticity3. Indicate whether each of
  the following statements is true or false and
  explain your answer.
• A price increase for cassette players will
  decrease in both the number o units demanded and
  the total revenue of sellers.
• B. The cross price elasticity indicates that 2
  reduction in the price of cassette players will
  cause 3 increase in battery demand.
• C. Demand for cassette players is price elastic
  and they are cyclical normal goods.
• D. Falling battery prices will definitely
  increase revenues received by sellers of both
  cassette players and batteries.
• E. A 3 price reduction in cassette players would
  be necessary to overcome the effect of 2 decline
  in income.

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Sample questions. Section 1
. Question 1
The concepts involved and to be discussed price
elasticity cross-price elasticity Income
elasticity Normal good Cyclical good
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Sample questions. Section 1
. Question 1

• A price increase for cassette players will
  decrease in both the number o units demanded and
  the total revenue of sellers.
• True.
• A price increase will always decrease units sold,
  given a downward sloping demand curve.
• The negative sign on the price elasticity
  indicates that this is indeed the case here.
• The fact that the price elasticity is equal to
  2 indicates that demand is elastic with respect
  to price, and therefore that a price increase
  will also decrease total revenues.

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Sample questions. Section 1
. Question 1
b. The cross price elasticity indicates that 2
reduction in the price of cassette players will
cause 3 increase in battery demand. False.
The cross-price elasticity indicates that a 2
decrease in the price of batteries will have the
effect of increasing cassette player demand by
3.
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Sample questions. Section 1
. Question 1
c. Demand for cassette players is price elastic
and they are cyclical normal goods. True.
Demand is price-elastic (see part A). Since
the income elasticity is positive, cassette
players are a normal good. Moreover, since the
income elasticity is greater than one, cassette
players are also cyclical.
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Sample questions. Section 1
. Question 1
d. Falling battery prices will definitely
increase revenues received by sellers of both
cassette players and batteries. False. . A
negative cross price elasticity indicates that
cassette players and batteries are complements.
Therefore, falling battery prices will increase
the demand for cassette players and resulting
revenue for sellers. However, we have no
information concerning the price elasticity of
demand for batteries, and therefore dont know
the effect of falling battery prices on battery
revenues.
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Sample questions. Section 1
. Question 1
e. A 3 price reduction in cassette players would
be necessary to overcome the effect of 2 decline
in income. True A 3 reduction in price will
cause a 6 increase in the quantity of cassette
players demanded. A 2 decline in income will
cause a 6 fall in demand. These changes will be
mutually offsetting.
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Sample questions. Section 1
   Question 2
Communication Consultant Services Inc., advises
small to medium sized business on telephone
equipment and network configurations. CCS
employs skilled network consultants and
computers. Currently CCS employs 16 consultants
at 70 per hour and purchases 160 hours of
computer time each week at time-sharing cost of
280 per hour. Each consultant works 40-hour
week. This level of employment allows CCS to
complete 213 communications analyses per week,
for which firm receives 300 each. A. Assuming
that both returns to factors and return to scale
are constant, what are the marginal products for
(1)communication consultant and (2) computer
time (up to the full capacity level) B. Is CCS
employing labour and computers in an optimal
ratio, assuming that substitution of resources is
possible? Explain. C. Determine the marginal
revenue products for consultants and for the
computer services employed by CCS. (Assume
constant return to factors in part A.) D. Is CCS
employing an optimal (profit maximising) quantity
of labour and computer time? Explain.
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Sample questions. Section 1
   Question 2
Assuming that both returns to factors and return
to scale are constant, what are the marginal
products for (1)communication consultant and (2)
computer time (up to the full capacity
level) Since the return to factors and return to
scale are constant for CCS current operations,
the marginal and average products for each input
will be equal. Thus, MPL APL and MPC
APC Where, MPL( complete 213 communications
analyses)/(40 hours x 16 consultants) 0.33
analyses per planner hour MPC( complete 213
communications analyses)/(16 Computer Hours)
1.33 analyses per computer hour
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Sample questions. Section 1
   Question 2
b. Is CCS employing labour and computers in an
optimal ratio, assuming that substitution of
resources is possible? Explain. . Yes. For CCS
to be using inputs in their optimal ratios, then
MPL/ MPCPL/PC Here MPL/ MPC0.33/1.330.25 PL
/PC70/2800.25 Therefore, CCS is employing
factors in the optimal ratio.
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Sample questions. Section 1
   Question 2
C. Determine the marginal revenue products for
consultants and for the computer services
employed by CCS. (Assume constant return to
factors in part A.) MRPRLMPL x MR0.33 x 300
100 MRPRCMPC x MR1.33 x 300 400 This means
that an additional hour of consultant time will
increase CCS revenue by 100 and additional hour
of Computer time will increase revenue by 400
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Sample questions. Section 1
   Question 2
D. Is CCS employing labour and computers in an
optimal ratio, assuming that substitution of
resources is possible? Explain. . No. If CCS
were employing a profit maximising quantity of
labour and computer time, then MRPCPC and
MRPCPC Here MRPL100 PL70
MRPC400 PC28) Therefore, CCS is not
employing at optimal level and has a capacity to
expand its operations.
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Sample questions. Section 1
 Question 3
Rodent Resister, Inc., developed the first
electromagnetic device that used a home
electrical wiring to repel rodents instead of
exterminate them. However, the companys market
share has quickly eroded during the past years as
some important basic patents expired. Increased
competitor entry and downward pressure on both
prices and profits is expected during the coming
year. A. Use Rodent Resister price, output and
total cost data to complete the following table
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Sample questions. Section 1
 Question 3
B.Assuming cost conditions remain constant, what
is the monopolistically competitive
high-price/low-output long-run equilibrium?
C.What is the monopolistically competitive
low-price/high-output long-run equilibrium.
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 Illustrate your answers to (b) and (c) using
diagrams.
Price Costs
Price Costs
MC
MC
AC
AC
Pmc
Pac
D1
D
D2
MR
Quantity
Qac
MR1
Quantity
Qmc
MR2
Long-run equilibrium high output low price
decision (corresponds to perfect Competition)
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Sample questions. Section 1
 Question 3
The monopolistically competitive high price low
output long run equilibrium is at PAC 46
Q300(000) and Profit TR-TC0. MRMC4000
And there would be no incentive for either
expansion or contraction. The
monopolistically competitive low price high
output long-run equilibrium is at PAC36
Q700(000) and Profit TR-TC0. This is similar
to the perfectly competitive equilibrium.
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Sample questions. Section 1
  Section 1. Question 4
The Rainbo Luncheon Deli is considering offering
a home style dinner menu on weekends. Currently,
the deli only operates on weekdays, (four hours
every night). At an average price of 7 per
diner the manager projects that 100 dinners per
evening will be served per night.
Projected costs for each night the deli is opened
are
 A. Would the new service be profitable? B.
Calculate a break even price per dinner at a
projected attendance
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Sample questions. Section 1
  Section 1. Question 4
 A. Would the new service be profitable?
The breakeven price for evening Incremental
cost 220 Projected volume
100 breakeven price 220/1002.20
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Section 2

• Further reforming of the Australian taxation
  system is back on the agenda. In particular,
  different approaches to the restructuring of
  personal tax rates are currently being debated in
  the media.  Some advocate tax reduction targeting
  low to medium income earners. Others say that the
  top tax margin should be reduced because the gap
  between the corporate and personal tax rate is
  too high. High taxes are a reason for tax
  minimisation schemes." Using relevant elements of
  economic theory, discuss how each of the
  approaches may affect companies operating in
  Australia in the following industries
• Car manufacturing and
• Food

25
Taxation reform industry/companys perspective
Product/Sectoral specifics

• Will increase in purchasing power of a
  parvicellular group of population affect a
  particular industry/product?
• Will the expected inflation and interest rate
  hike affect a competitive position or cash flow
  of a particular company in a particular industry?

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Taxation reform industry/companys perspective
Macroeconomic perspective

• Increase in the purchase power
• Which group of population
• Discretionary spending vs necessities
• Inflationary impact interest rate consequence
• Will inflation and increase in interest rates
  offset tax reduction?

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Taxation reform industry/companys perspective
Product/Sectoral specifics

• Will increase in purchasing power of a
  parvicellular group of population affect a
  particular industry/product?
• Will the expected inflation and interest rate
  hike affect a competitive position or cash flow
  of a particular company in a particular industry?