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