# Practice Exam Questions with Solutions

THE UNIVERSITY OF MELBOURNE

DEPARTMENT OF ECONOMICS

SEMESTER 1 ASSESSMENT, 2007

316-660 MANAGERIAL ECONOMICS

Time Allowed: TWO (2) hours

Reading Time: 15 minutes

Writing Time: 2 hours

This examination contributes 70% to the assessment in 316-660.

This examination paper has nine (9) pages.

Section A consists of five (5) questions, each of which is worth 5 marks. The number

of marks attributed to the whole of Section A of the exam is 25 marks.

Candidates MUST answer all five (5) questions in section A of the exam.

Section B consists of six (6) questions. Each question is worth a total of 25 marks.

Marks for individual parts of questions are indicated on the exam booklet. The

number of marks attributed to the whole of Section B of the exam is 75.

Candidates MUST answer any three (3) questions in Part B of the exam.

The total number of questions to be answered is eight (8). The total number of

marks available in the exam is 100.

Materials allowed into the examination room:

Non-programmable calculators

Non-electronic Foreign language/English dictionaries.

This paper may NOT be removed from the exam room.

A copy of this paper will be held in the Baillieu Library.

Page 1 of 26

SECTION A:

STUDENTS MUST ANSWER ALL QUESTIONS IN THIS SECTION.

THIS SECTION IS WORTH A TOTAL OF 25 MARKS.

QUESTION A1

Consider the following market for telephones. There are fifty people, each of whom is

willing to buy one but only one telephone. Of the fifty people, forty people are each

willing to pay up to $50 for a telephone, but no more. The other ten people are each

willing to pay up to $20 for a telephone, but no more. There are no other people who

will buy telephones.

Suppose the seller of telephones is a monopoly. The average total cost and the

marginal cost of producing telephones are constant and both are equal to $10. Assume

that the monopoly can only set a single (uniform) price for telephones. What is the

profit-maximising monopoly price and quantity for telephones? What is the

deadweight loss associated with the monopoly outcome? Illustrate with a diagram.

(5 marks)

Solution

a)

$

$50

Perfect Competition

equilibrium

$20

$10

Q

40

50

The monopolist will either set price equal to $50 or equal to $20. It won’t set other

prices. First, it never pays to set a price above $20, but below $50. This is because at

any such price it will sell the same number of phones as at $50, but will earn a lower

profit per phone. A similar argument applies to price above $10 but below $20.

If it sets a price P = $50 then it sells 40 telephones and makes profit of $1600 (equal

to 40 telephones multiplied by $(50-10) for each phone). If it sets a price P = $20

Page 2 of 26

then it sells 50 telephones and makes a profit of $500 (equal to 50 telephones

multiplied by $(20-10) for each phone). Hence the monopolist will set a price P =

$50, and the quantity traded will be 40 phones. DWL equals $100. This is equal to

the difference between the number of phones sold in the competitive market and in

monopoly (10), multiplied by the loss of consumer surplus on each phone ($10).

QUESTION A2

You are the manager of a gym, and you have to decide how many customers to admit

each hour. Assume that each customer stays exactly one hour. Customers are costly

to admit because they inflict wear and tear on the exercise equipment. Moreover,

each additional customer generates more wear and tear than the customer before. As

a result, the gym now faces increasing marginal cost:

Qty of customers

per hour

0

1

2

3

4

5

6

7

MC per customer

0

$14

$14.50

$15

$15.50

$16

$16.50

$17

Suppose that each additional customer pays $15.25 for a one-hour work-out. What is

the optimal number of customers per hour you should admit? Explain your answer.

Solution

The marginal benefit (MB)/marginal cost (MC) rule says that the optimal level of an

activity occurs where any unit that has MB > MC is chosen, but any unit with

MB MC), but the fourth customer has a MC of $15.50 (so that MB