1. Managerial Economics uses economic concept
and decision science
techniques
to solve managerial problems. Discuss
2. What do you understand by Managerial
Economics and enumerate the
functions
of Managerial Economics.
3. What is the value of a firm, and briefly
state the constraints and
limitations
of the theory of firm.
4. Write short notes on the
following:
i.
Economic Concepts ii. Decision
Science Techniques
iii. Managerial
Problems iv. Optimal Solution
5. Managerial
Economics is sacrosanct to the development of your discipline.
Discuss.
6. Managerial
Economics is the discipline which deals with the application of
economic
theory of business management. Discuss.
7. Give
reasons for the emergence of managerial economics as a separate study
of
management study.
8. a. Distinguish between goal and objective of a
firm.
b. Outline strategies a firm could adopt to
attain growth.
c. SWOT Strategy is a reference point for sound
strategy in planning.
Discuss
9. a. Define Managerial Economics.
b.
State factors responsible for the emergence of Managerial Economics as
a separate course of
management studies.
10. Examine
at least three ways the knowledge of Managerial Economics has
been
useful in business decision.
11. Managerial
Economics is the integration of economic theory with
business
practices for the purpose of facilitating decision making and
forward
planning by management. Discuss
12.
a. What is forecasting?
b. Explain the Baumol Theory of sales revenue
maximisation.
c. In what way is this theory superior to the
conventional theory based on the profit maximisation hypothesis.
13. a. Justify your contribution as a manager in
relation to the controversy over profit maximisation objectives (Theory vs
Practice).
b. Outline some important objectives set by
management of business other than profit maximisation. At least five.
14. a.
Explain how Managerial Economics bridges the gap between economic theory and
economics in practice.
b. Differentiate between profit maximisation
objective and shareholders` wealth maximization objective of a firm.
15. Ajimatanrareje
Nigeria Limited provides the following information.
The
total revenue for the first three years is N100,000 while the total cost for
the the first three years is N80,000.
Due
to economic issues, both the total revenue and cost for the fourth year and
fifth year change as shown below:
Year
|
Total
Revenue
N
|
Total
cost
N
|
4
|
170,000
|
165,000
|
5
|
200,000
|
175,000
|
The interest rate for each of the year is given as
follow:
Year
|
Interest
Rates
|
1-3
|
10%
|
4
|
12%
|
5
|
15%
|
Required: Calculate the value of Ajimatanrareje
Nigeria Limited.
16. What is the
value of firm when in its first five years of its operation, it recorded a
total cost of N75,000 and total revenue of N85,000 at 15% interest rate for the
first year and for year 2 to year 5, it recorded the
following:
|
Year 2
N`000
|
Year 3
N`000
|
Year 4
N`000
|
Year 5
N`000
|
TR
|
70
|
80
|
90
|
100
|
TC
|
40
|
30
|
70
|
60
|
Interest Rate
|
14%
|
13%
|
12%
|
10%
|
17. What is the value
of firm when in its first three years of its operation, it recorded a total
cost of N75,000 and total revenue of N85,000 at 15% interest rate for the first
year and for year 2 to year 5, it recorded the following:
|
Year 2
N`000
|
Year 3
N`000
|
TR
|
70
|
80
|
TC
|
40
|
30
|
Interest Rate
|
12%
|
10%
|
18. The demand and
supply functions of Otisese Nigeria Limited are given
as:
Quantity Demand (Qd) = 20-3P
Quantity Supply (Qs) = 6P -16
Where P= Price in naira
a. Compute the
equilibrium price and quantity respectively.
b. If price
falls to N2 , determine the excess demand.
c. If price
rises to N6, what is the excess supply?
19. If the demand
and supply function of Ajiboluwasoro Product are:
QD =
4,000 + 100P
QS
= 6,000 + 20P
Where P = Price of the product QD = Demand
Function
QS= Supply Function
Required:
a. Compute the equilibrium price and quantity
respectively.
b.
If price falls to N20,what is the excess supply?
c.
If price rises to N30, determine the excess demand.
20. If
the demand and supply function of Sogbae Product are:
QD =
4,000 - 100P
QS
= 6,000 - 20P
Where P = Price of the product QD = Demand
Function
QS= Supply Function
Required:
a. Compute the equilibrium price and quantity
respectively.
b.
If price rises to N25,what is the excess supply?
c.
If price rises to N15, determine the excess supply.
21. With the aid of diagram,
explain the following cost concepts:
i. Fixed
Cost
ii. Average cost iii. Total cost
iv. Average cost v. Marginal cost
22. Distinction
between Economist`s view and Accountant`s view of cost.
23. The
following table relates the application of fertilizer to fixed hectare of land
in the production of yam. Use the table to answer the question that follow:
Tonnes of fertilizer applied
|
Hectare of land
|
Total product (Tubers)
|
Marginal Physical Product (MPP)
|
0
|
1
|
10,000
|
-
|
1
|
1
|
11,000
|
100
|
2
|
1
|
12,500
|
1,500
|
3
|
1
|
15,000
|
2,500
|
4
|
1
|
-
|
4,000
|
5
|
1
|
-
|
2,500
|
6
|
1
|
-
|
1,200
|
7
|
1
|
23,500
|
-
|
8
|
1
|
23,800
|
-
|
9
|
1
|
23,300
|
-
|
(a) What is the total product of yam when no
fertilizer is applied to the land?
(b) Calculate the total output after the
application of the following quantities of fertilizer:
i.
4 tonnes
ii. 5 tonnes
iii. 6 tonnes
(c) Calculate the marginal physical product
after the application of the following quantities of fertilizer:
i.
7
tonnes
ii. 8 tonnes iii. 9
tonnes
(d) After what level of application of fertilizer
does diminishing marginal returns set in?
24. Define the law of
diminishing marginal utility and state three relationship
between total utility and marginal utility.
25. Write short note on the
following:
i. Consumer
Surplus
ii. Utility Maximization
iii. Indifference
Map.
iv. Market
Demand Schedule
v. Demand Curve
26. In the production of
plastic, the average variable cost is N1.75 and the
total fixed cost is N50,000 while the price per unity of the product is
N2.
Determine the break-even quantity.
27. Ajimatanrareje &
Co. has information about the demand that would be
generated by certain
selling price as follow:
Selling Price
(N)
|
22
|
18
|
14
|
12
|
10
|
8
|
4
|
0
|
Demand
(`000)
|
0
|
4
|
8
|
10
|
12
|
14
|
18
|
22
|
The cost
of producing each unit is N6 and the company incurred annual fixed cost of N30,000.
Using the tabular approach to calculate the:
i. Optimal
Selling Price
ii. Optimal
Output
iii. Optimal
Profit
28. a.
What is production Function?
b.
Outline factors of production and their economic reward.
c. Using the table below:
Output
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
Total Cost
|
150
|
250
|
280
|
310
|
330
|
350
|
390
|
490
|
Required: Calculate:
i.
Marginal Cost ii. Average Total Cost iii. Average Fixed Cost
iv.
Total Fixed Cost v. Total Variable
Cost
29. Assume
a price function as P= 90- Q and a cost function as C= 10 + 0.5Q2.
Required:
a. Profit
maximizing output and price
b.
Maximizing Profit.
30. Assume a market consist of three people whose demand
for a product is as follows:
i. Q=
1,250 – 2.5P
ii. Q=
1,150 – 1.5P
iii. Q=
1,200 – 2P
if the industry supply is 1,400units.
Required:
a. Find the market demand and price that each
should be sold.
b. What is the share of each buyer.
31. a.
Define demand and carefully relates it to explain utility, total utility and
Marginal utility with the aid of
graphical illustration.
b. Suppose price and cost function of a
business firm is given as:
P= 400 – 2Q
T= 40 + 5Q2
Find:
i. Profit maximizing output and price
ii. Total revenue and average revenue
function and profit made.
32.
a. Suppose the demand for a commodity is given as:
Qd =
200 -4.5P
Find the price elasticity of demand when
price is N10
b. Given that a price of N612.50,
70units of commodity x was demanded but a rise in the price of commodity of N682.50
led to increase in quantity demanded to 78units. Calculate the price elasticity of demand for
the commodity x and interpret the nature of commodity.
33. No alternative hypothesis explain
and predict the behaviour of firm better than profit maximisation. Justify this
statement or otherwise.
34. Given a firm total cost function C=
4Q2 -8Q +450 and the product P= 30-Q.
You are required to show the output
which profit is maximised by the firm.
35.
a. State the law of demand
b. With
the aid of graph or diagram, differentiate between change in demand and
increase in demand.
c. Discuss five factors affecting
quantity demanded of a product.
d. Explain five types of demand.
36.
a. Briefly, explain ways the application of economic theories
facilitates business decision making.
b. Suppose the demand for a commodity x
is statistically estimated as:
Qx = 68- 1.6Px + 0.6Py + 0.08E
Where Px = N20, Py = N40 and E = N1,000
Required:
i. Calculate price elasticity of demand
for commodity x.
ii. The cross elasticity of demand for
commodity x to change in commodity y.
iii. The income elasticity of demand.
37. a. State the pre-requisites of a
perfect competitive firm.
b. Suppose a producer of beverage has
the following cost and sales expenditures.
Fixed cost = N500,000, Variable cost per
unit= N30, expected unit sales is 50,000 if the manufacturer decides to add a
30% mark-up on sales. Calculate the mark-up price.
38. a. Define and list types of
production isoquants.
b. Differentiate between the following:
i. Explicit cost and implicit cost
ii. Sunk cost and incremental cost
c. Given the short run cost function of
an investoral.
C= 0.1Q3 – 2 Q2 +
15Q + 10
Required: Calculate:
i. Average variable cost
ii. Marginal cost
39. Given the Cobb Douglas Production
Function
Q= 4K0.5L0.5,
where K= 64, P = N10 and W= N8 per hour.
Required:
a. Determine the profit maximizing level
of employment.
b. How many workers will be employed if
wages increase to N10 per hour?
40. a. Discuss the pre-requisite of the
existence of a perfectly competitive firm.
b. Outline differences between perfect
competitive firm and monopolistic competitive firm.
c. List operational problems of a
business firm.
d. Explain condition necessary and
sufficient for business profit to be maximized.
41. A project requires an initial
investment outlay of N10,000 and its generate cash flows of N4,000, N5,000 and
N6,000 in the first three years of operations. If the cost of capital is 10%.
Required: Calculate:
a. The Net Present Value
b. The Accounting Rate of Return
c. The Pay Back Period
d. The Internal Rate of Return
e. The Profitability Index
42. a. Define Capital Budgeting.
b. Consider an investment which has the
following cash flow:
Year
|
0
|
1
|
2
|
3
|
4
|
5
|
Cash Flow
|
(31,000)
|
10,000
|
20,000
|
10,000
|
10,000
|
5,000
|
Required: Calculate:
i. Pay Back Period
ii. Net Present Value at 14% cost of
capital
iii. internal Rate of Return and advice
if the project should be accepted or not.
43.
Calculate the net present value of two projects and suggest which of the
two projects should be accepted assuming a discount rate of 11.5%.
|
Project A
|
Project B
|
Initial
Investment
|
N35,000
|
N56,00
|
Estimated Life
|
5years
|
5years
|
Scrap Value
|
N2,000
|
N5,000
|
Cash flows are given as follow:
Year
|
Cash
Inflow
|
|
Project A
N
|
Project B
N
|
1
|
10,000
|
40,000
|
2
|
15,000
|
30,000
|
3
|
8,000
|
10,000
|
4
|
6,000
|
5,000
|
5
|
4,000
|
4,000
|
44.
a. State four assumptions of CVP Analysis
b. The following information as
extracted from the records of Fesojaiye Nigeria limited.
Fixed Cost N80,000
Selling Price/Unit N60
Variable Cost/Unit N46
You are required to:
i. Use the information above to prepare
a Break Even Chart.
ii. Indicate the Margins of Safety if
unit sold is 8,500
iii. Established the Break Even Point in
naira if fixed cost rises to N84,000 and selling price falls to N58 per unit.
45. Suppose a linear relationship exist
between students intake and sales of pocket calculators in Lagos City
Polytechnic.
Using Least Square Method (Y = a +bx)
forecast calculator`s sales if the admission intake for the next session would
be 2,500students.
Years
|
2011
|
2012
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
Calculator`s
Sales
|
200
|
200
|
300
|
400
|
500
|
600
|
800
|
1,00
|
Student
enrolment
|
800
|
1,000
|
1,200
|
1,400
|
1,600
|
1,800
|
2,000
|
2,200
|
46. a. Define demand forecasting
b. Distinguish between qualitative
forecasting and quantitative forecasting
47.
a. Explain how the concept of the theory of firm enhance productivity in
manufacturing companies.
b. Identify seven differences between
perfect competition and monopolistic competition.
c. Explain five factors to be considered
before fixing price in a firm.
48. a. Define Series
b. Explain how fluctuations in time
series data could be minimised.
c.
Estimate the sales for the year 2017 and 2018 from the data given below:
Years
|
2012
|
2013
|
2014
|
2015
|
2016
|
Sales
|
1,120
|
1,430
|
1,635
|
1,842
|
1,738
|
49. a. Differentiate between partnership
form of business and a Limited Liability Company.
b. Why is Limited Liability Company
preferred to partnership business?
c.
List internal and operational problems confronting managers of business
enterprises.
50. a. You are given the following data:
X
|
3
|
6
|
8
|
10
|
13
|
13
|
14
|
16
|
Y
|
8
|
6
|
10
|
12
|
12
|
14
|
14
|
20
|
Estimate the regression equation Y = a +
bx
b. Discuss properties of indifference
curve.
c.
Write short note on the following terms:
i. A Company and Firm
ii. A Partnership Business
iii. Public Corporation
51. Ajimaronu
embark on two projects and you are required to calculate the net present value
of two projects and suggest which of the two projects should be accepted
assuming a discount rate of 11.5%.
|
Project A
|
Project B
|
Initial Investment
|
N35,000
|
N56,00
|
Estimated Life
|
5years
|
5years
|
Scrap Value
|
N2,000
|
N5,000
|
Cash flows are given as follow:
Year
|
Cash
Inflow
|
|
Project A
N
|
Project B
N
|
1
|
10,000
|
40,000
|
2
|
15,000
|
30,000
|
3
|
8,000
|
10,000
|
4
|
6,000
|
5,000
|
5
|
4,000
|
4,000
|
52. Ojutonsoro
recently convinced her friends and relatives to grant her a loan of
N2,400,000 which she intends to invest in a farming project.
She estimates that the project will yield the following returns
annually as
follow:
Year N`000
1 100
2-5 300
6 400
7 700
8-10 1,000
Ojutonsoro`s cost of capital is 20%.
As a student of Lagos City Polytechnic, Ikeja, Lagos. You are
require to calculate using the following methods of capital budgeting
techniques under certainty:
a. Accounting
Rate of Return (ARR)
b. Payback
Period (DPBP), assumed the initial investment to be half of the loan granted to
Ojutonsoro.
c. Net
Present Value (NPV)
d. Advice
Ojutonsoro based on your results in (a-c) above.
53.Aiyegbaogbon Nigeria Limited provide the following data:
Year
|
Cashflow
|
0
|
(12,000)
|
1-6
|
4,500
|
7
|
3,000
|
8-10
|
2,500
|
The cost of capital is 20%.
Required: Calculate:
a. Net Present Value (NPV)
b. Internal Rate of Return (IRR)
c. Discounted Pay Back Period (DPBP)
54. SogbaeNigeria Limited provide the following data:
Year
|
Cashflow
|
0
|
(75,000)
|
1-3
|
10,000
|
4
|
15,000
|
5-8
|
5,000
|
The cost of capital is 12%.
Required: Calculate:
a. Net Present Value (NPV)
b. Internal Rate of Return (IRR)
c. Discounted Pay Back Period (DPBP)
55. Aiyele Nigeria Limited provide the following data:
Year
|
Cashflow
|
0
|
(12,000)
|
1-6
|
4,500
|
7
|
3,000
|
8-N
|
2,500
|
The cost of capital is 5%.
Required: Calculate:
a. Net Present Value (NPV)
b. Internal Rate of Return (IRR)
c. Discounted Pay Back Period (DPBP)
................................................................................................................................................
.................................................................................................................................................
PILOT ON MANAGERIAL ECONOMICS 1 (HBF 417/BAM412)
ILLUSTRATION 1
Ajimaronu embark on two projects and you are required to calculate the net
present value of two projects and suggest which of the two projects should be
accepted assuming a discount rate of 11.5%.
|
Project
A
|
Project
B
|
Initial
Investment
|
N35,000
|
N56,00
|
Estimated
Life
|
5years
|
5years
|
Scrap
Value
|
N2,000
|
N5,000
|
Cash
flows are given as follow:
Year
|
Cash Inflow
|
|
Project
A
N
|
Project
B
N
|
1
|
10,000
|
40,000
|
2
|
15,000
|
30,000
|
3
|
8,000
|
10,000
|
4
|
6,000
|
5,000
|
5
|
4,000
|
4,000
|
SUGGESTED
SOLUTION
Ajimaronu
Project A
Year
|
Cashflow
|
Dcf@11.5%
|
PV
|
|
N
|
|
N
|
0
|
(35,000)
|
1.000
|
(35,000)
|
1
|
10,000
|
0.897
|
8,970
|
2
|
15,000
|
0.804
|
12,060
|
3
|
8,000
|
0.721
|
5,768
|
4
|
6,000
|
0.647
|
3,882
|
5
|
4,000
|
0.580
|
2,320
|
5
|
2,000
|
0.580
|
1,160
|
Net Present Value (NPV)
|
(840)
|
Project B
Year
|
Cashflow
|
Dcf@11.5%
|
PV
|
|
N
|
|
N
|
0
|
(56,000)
|
1.000
|
(56,000)
|
1
|
40,000
|
0.897
|
35,880
|
2
|
30,000
|
0.804
|
24,120
|
3
|
10,000
|
0.721
|
7,210
|
4
|
5,000
|
0.647
|
3,235
|
5
|
4,000
|
0.580
|
2,320
|
5
|
5,000
|
0.580
|
2,900
|
Net Present Value (NPV)
|
19,665
|
Decision:
Accept
project B because it has the highest positive NPV of N19,665
ILLUSTRATION
2
If the
demand and supply function of Ajiboluwasoro Product are:
QD = 4,000 + 100P
QS = 6,000 +
20P
Where P = Price of the
product QD = Demand Function
QS=
Supply Function
Required:
a.
Compute the equilibrium price and quantity respectively.
b. If price falls to
N20, what is the excess supply?
c. If price rises to
N30, determine the excess demand.
SUGGESTED
SOLUTION
Ajiboluwasoro
a. The
equilibrium price and quantity respectively is calculated as follow:
QD = 4,000 + 100P
QS = 6,000 + 20P
Where P = Price of the
product QD = Demand Function
QS=
Supply Function
QD = QS
4,000 + 100P =
6,000 + 20P
100P-20P =
6,000 – 4,000
80P = 2,000
P
= 2,000 =
N25
80
QD = 4,000 + 100P
Since P= N25
QD = 4,000 + 100(25)
QD = 4,000 + 2,500 = 6,500
QS = 6,000 + 20P
QS = 6,000 + 20(25)
QS = 6,000 + 500 =
6,500
The equilibrium Price is N25
The equilibrium Quantity is 6,500 Units
b. If price falls to
N20, the excess supply is calculated thus:
Since price fall to N20, P= N20
QD = 4,000 + 100(20)
QD = 4,000 + 2,000 = 6,000
QS = 6,000 + 20P
QS = 6,000 + 20(20)
QS = 6,000 + 400 =
6,400
The excess supply = Quantity Supply – Quantity
Demand
The excess supply = 6,400 – 6,000 = 400 Units
c. If price rises to
N30, the excess demand is calculated thus:
Since price rises to N30, P= N30
QD = 4,000 + 100(30)
QD = 4,000 + 3,000 = 7,000
QS = 6,000 + 20P
QS = 6,000 + 20(30)
QS = 6,000 + 600 = 6,600
The excess demand = Quantity Demand - Quantity
Supply
The excess supply = 7,000 – 6,600 = 400 Units
ILLUSTRATION 3
(a) In the
production of plastic, the average variable cost is N1.75 and the total fixed
cost
is
N50,000 while the price per unity of the product is N2.
Determine
the break-even quantity
(b) Ajimatanrareje & Co. has information about
the demand that would be generated by
certain selling price as follow:
Selling Price
(N)
|
22
|
18
|
14
|
12
|
10
|
8
|
4
|
0
|
Demand
(`000)
|
0
|
4
|
8
|
10
|
12
|
14
|
18
|
22
|
The
cost of producing each unit is N6 and the company incurred annual fixed cost of
N30,000.
Using the tabular approach to calculate the:
i.
Optimal
Selling Price
ii.
Optimal
Output
iii.
Optimal
Profit
SUGGESTED
SOLUTION
(a) The break-even quantity = Total Fixed Cost
Contribution Margin
Contribution Margin = Selling Price per unit - average variable cost
Contribution Margin = N2 – N1.75
= N0.25
The break-even quantity = N50,000 =
200,000 Units
N0.25
(b) Ajimatanrareje & Co.
Demand
|
Price
|
Total Revenue
|
Total Fixed Cost
|
Total Variable Cost
|
Total Cost
|
Profit
|
0
|
22
|
0
|
30,000
|
0
|
30,000
|
(30,000)
|
4,000
|
18
|
72,000
|
30,000
|
24,000
|
54,000
|
18,000
|
8,000
|
14
|
112,000
|
30,000
|
48,000
|
78,000
|
34,000
|
10,000
|
12
|
120,000
|
30,000
|
60,000
|
90,000
|
30,000
|
12,000
|
10
|
120,000
|
30,000
|
72,000
|
102,000
|
18,000
|
14,000
|
8
|
112,000
|
30,000
|
84,000
|
114,000
|
(2,000)
|
18,000
|
4
|
72,000
|
30,000
|
108,000
|
138,000
|
(66,000)
|
22,000
|
0
|
0
|
30,000
|
132,000
|
162,000
|
(102,000)
|
Note:
Total Revenue = Demand x Price
Total Variable Cost = Unit Cost x Demand i.e 6X
Total Cost = Total Fixed Cost + Total Variable Cost
Profit = Total Revenue – Total Cost
i.
Optimal
Selling Price = N14
ii.
Optimal
Output = 8,000Units
iii.
Optimal
Profit = N34,000
ILLUSTRATION 4
a. Define demand and carefully relates it to
explain utility, total utility and Marginal utility with the aid of graphical
illustration.
b. Suppose price and cost function of a business
firm is given as:
P= 400 – 2Q
T= 40 + 5Q2
Find:
i. Profit maximizing output and price
ii. Total revenue and average revenue function and
profit made.
SUGGESTED
SOLUTION
a. Demand is defined as the amount or quantity of
goods and services which a consumer is willing to buy coupled with the ability
to pay at a given price and at a particular time.
Utility is defined as the ability of a commodity or
services to satisfy consumer`s wants.
Total Utility
is the total amount of satisfaction a consumer derives from the consumption of
a particular commodity at a point in time.
Marginal
utility is the additional satisfaction a consumer derives from the consumption
of additional unit of a particular commodity.
With the aid of graphical the above is illustrated.
Units of MU TU
Utility
Unit of commodity consumed
b. i. Profit maximizing output and price is
calculated thus:
P= 400 – 2Q
T= 40 + 5Q2
Profit = Total Revenue – Total Cost
Profit = (P x Q) – (40 + 5Q2)
Profit = (400 -2Q) x Q - (40 + 5Q2)
Profit = 400Q- 2Q2 -40 -5Q2
Profit = 400Q-7Q2 -40
d
(profit) = d (400Q-7Q2 -40) = 400
– 14Q
d Q d Q
Let d
(profit) = 0
d Q
0 = 400 –
14Q
14Q = 400
Q = 400 =
28.57142857 = 29 units
14
Profit maximizing output is 29 units
Profit maximizing price is:
P= 400 – 2Q
P= 400 -2(29)
P = 400 – 58 =
N342
ii. Total revenue and average revenue function and
profit made.
Total Revenue = 400Q- 2Q2
Total Revenue = 400 (29) – 2(29)2
Total Revenue = 11,600 – 1,682 = N9,918
Average Revenue Function = Total Revenue
Output
Average Revenue Function = 400Q- 2Q2 = 400
– 2Q
Q
Profit made
= 400Q-7Q2 -40
Profit = 400(29)-7(29)2 -40
Profit = 11,600
- 5,887 – 40 = N5,673
ILLUSTRATION 5
(a) Define
the law of diminishing marginal utility and state three relationship between
total utility and marginal utility.
(b) Write
short note on the following:
i.
Consumer Surplus ii. Utility
Maximization iii. Indifference Map.
iv.
Market Demand Schedule v. Demand Curve
SUGGESTED SOLUTION
(a) The Law of
Diminishing Marginal Utility is defined as a consumer consumes more and more
units of a particular commodity, utility will increase up to a certain point
when decrease in satisfaction or disutility will set in as a result of
continuous consumption of the same commodity.
Three relationship between total utility and marginal
utility are as follows:
i. When total utility is increasing, marginal utility
is also increasing but must be below total utility except when the first unit
is consumed.
ii. When total utility is maximized, marginal
utility is usually zero.
iii. When total utility is decreasing, marginal
utility is usually negative.
(b) i. Consumer Surplus: Consumer Surplus is
the difference between the amount a consumer budgeted to pay for a commodity
based on the anticipated level of satisfaction.
ii. Utility
Maximization: Utility Maximization is a point where a consumer derives
maximum satisfaction when his marginal utility equates the price of the
commodity consumed.
iii. Indifference
Map: Indifference Map is where two or more indifference curves are drawn on
single diagram.
iv. Market
Demand Schedule: Market Demand Schedule shows the relationship between the
quantity of goods demanded at a particular time and the given market price of
the same goods at the same time.
v. Demand
Curve: Demand Curve is a diagrammatical representation of the relationship
between price and quantity demanded at any point in time.
ILLUSTRATION 6
(a) Managerial Economics uses economic concept
and decision science techniques to
solve managerial problems. Discuss
(b) What is
the value of firm when in its first five years of its operation, it recorded a
total cost of N75,000 and total revenue of N85,000 at 15% interest rate
for the first
year and for year 2 to year 5, it recorded the following:
|
Year 2
N`000
|
Year 3
N`000
|
Year 4
N`000
|
Year 5
N`000
|
TR
|
70
|
80
|
90
|
100
|
TC
|
40
|
30
|
70
|
60
|
Interest Rate
|
14%
|
13%
|
12%
|
10%
|
SUGGESTED
SOLUTION
(a)
Managerial Economics uses economic concept and decision science
techniques to
solve managerial problems.
Managerial Economics is the application of economic
theory and methods to business and administrative decision making. It uses the
tools and techniques of economic analysis to solve managerial problems.
The Economic concepts which are the framework for
decisions include the following among others:
i. Theory of Consumer Behaviour ii.
Theory of the firm iii. Theory
of market structure and pricing.
The decision science techniques are tool and
techniques of analysis include:
i. Numerical Analysis ii. Statistical Estimation iii. Forecasting iv.
Game Theory
v. Optimization
vi. Simulation
The management decision problems include:
i. Product Price and Output ii. Make or Buy iii. Production Techniques iv. Stock Levels
v. Production
Techniques vi. Advertising Media and
Intensity vii. Labour Hiring and
Training viii. Investment and Financing.
Conclusively, based
on the above analysis, Managerial Economic uses Economic Concepts
and Decision
Science Methodology to solve Managerial Decision Problems
(b)
Year
|
Total Revenue
(TR)
|
Total Cost (TC)
|
Profit
|
Interest Rate
|
Present Value
|
|
N
|
N
|
N
|
%
|
N
|
1
|
85,000
|
75,000
|
10,000
|
15%
|
8,696
|
2
|
70,000
|
40,000
|
30,000
|
14%
|
23,084
|
3
|
80,000
|
30,000
|
50,000
|
13%
|
34,653
|
4
|
90,000
|
70,000
|
20,000
|
12%
|
12,710
|
5
|
100,000
|
60,000
|
40,000
|
10%
|
24,837
|
Value
of a firm
|
103,980
|
ILLUSTRATION 7
Ajimatanraeje recently
convinced her friends and relatives to grant her a loan of N2,400,000
which she intends to invest in a farming project.
She estimates that the project
will yield the following returns annually as follow:
Year
N`000
1
100
2-5
300
6
400
7
700
8-10
1,000
Ajimatanraeje `s cost of
capital is 20%.
As a student of Lagos City
Polytechnic, Ikeja, Lagos. You are require to calculate using the following
methods of capital budgeting techniques under certainty:
a. Accounting Rate of Return (ARR)
b. Payback Period (PBP), assumed the initial
investment to be half of the loan granted to Ajimatanraeje.
c. Net Present Value (NPV)
d. Advice Ajimatanraeje based on your
results in (a-c) above.
SUGGESTED
SOLUTION
a. Ajimatanraeje
Option 1:
Accounting Rate of Return
(ARR) = Average Profit x 100
Average Investment 1
Average Profit = 100,000 + 300,000 + 300,000 + 300,000 +
300,000 + 400,000 + 700,000
+ 1,000,000 +
1,000,000 + 1,000,000
10
Average Profit = 5,400,000 =
N540,000
10
Average Investment = Initial
Investment
2
Average Investment = 2,400,000 =
N1,200,000
2
Accounting Rate of Return
(ARR) = 540,000 x 100
=
45%
1,200,000 1
Option 2:
Accounting Rate of Return
(ARR) = Average Profit x 100
Initial Investment 1
Accounting Rate of Return
(ARR) = 540,000 x 100 =
22.5%
2,400,000 1
b. Ajimatanraeje
PayBack Period (PBP)
Year
|
Cash flow
|
Cumulative Cash flow
|
0
|
(1,200,000)
|
(1,200,000)
|
1
|
100,000
|
(1,100,000)
|
2-5
|
300,000
|
|
6
|
400,000
|
|
7
|
700,000
|
|
8-10
|
1,000,00
|
|
PayBack Period (PBP) = 4
years + 200,000 years
300,000
PayBack Period (PBP) =
4years + 0.7 years
PayBack Period (PBP) =
4.7years
Alternative solution:
PayBack Period (PBP) = 4
years + 200,000 x 12months
300,000
PayBack Period (PBP) =
4years + 8 months
PayBack Period (PBP) =
4years 8 months
c. Net Present Value (NPV)
Year
|
Cash flow
|
DCF@20%
|
PV
|
0
|
(2,400,000)
|
1.000
|
(2,400,000)
|
1
|
100,000
|
0.833
|
83,300
|
2-5
|
300,000
|
2.158
|
647,400
|
6
|
400,000
|
0.335
|
134,000
|
7
|
700,000
|
0.279
|
195,300
|
8-10
|
1,000,00
|
0.587
|
587,000
|
Net Present Value (NPV)
|
(753,000)
|
d. Based on the results in (a-c) above,
Ajimatanraeje accept the project using both accounting rate of return and
payback period but reject the project when using net present value because it
has negative NPV of N753,000.
ILLUSTRATION 8
The demand and supply functions of Otisese Nigeria Limited are given as:
Quantity Demand (Qd) = 20-3P
Quantity Supply (Qs) = 6P -16
Where P= Price in naira
a.
Compute the equilibrium price and quantity respectively.
b.
If price falls to N2, determine the excess demand.
c.
If price rises to N6, what is the excess supply?
SUGGESTED SOLUTION
. Otisese Nigeria Limited
Quantity Demand (Qd) = 20-3P
Quantity Supply (Qs) = 6P -16
Where P= Price in naira
a. The equilibrium price
and quantity respectively is calculated below:
Qd = Q s
20-3P
= 6P -16
20 + 16 = 6P
+ 3P
36 = 9P
P = 36 =
N4
9
Since P = N4
Qd = 20 – 3P
Qd = 20 – 3(4)
Qd = 20 – 12 = 8 units
Qs = 6P – 16
Qs = 6(4) -16
Qs = 24 - 16 = 8 units
The equilibrium price is N4
The equilibrium quantity is 8units
b. If price falls to
N2, the excess demand is calculated thus:
Since P = N2
Qd = 20 – 3P
Qd = 20 – 3(2)
Qd = 20 – 6 = 14 units
Qs = 6P – 16
Qs = 6(2) -16
Qs = 12 - 16 = -4
units
The excess demand = quantity
demanded - quantity supply
The excess demand = 14 –( -4)
The excess demand = 14 + 4 = 18
units
c. If price rises to
N6, the excess supply is calculated thus:
Since P = N6
Qd = 20 – 3P
Qd = 20 – 3(6)
Qd = 20 – 18 = 2 units
Qs = 6P – 16
Qs = 6(6) -16
Qs = 36- 16 = 20
units
The excess supply = quantity supply -quantity demanded
The excess supply = 20 –2 = 18
units
ILLUSTRATION 9
a. Define demand and carefully relates it to
explain utility, total utility and Marginal utility with the aid of graphical
illustration.
b. Suppose price and cost function of a business
firm is given as:
P= 400 – 2Q
T= 40 + 5Q2
Find:
i. Profit maximizing output and price
ii. Total revenue and average revenue function and
profit made.
SUGGESTED SOLUTION
a. Demand is defined as the amount or quantity of
goods and services which a consumer is willing to buy coupled with the ability
to pay at a given price and at a particular time.
Utility is defined as the ability of a commodity or
services to satisfy consumer`s wants.
Total
Utility is the total amount of satisfaction a consumer derives from the
consumption of a particular commodity at a point in time.
Marginal
utility is the additional satisfaction a consumer derives from the consumption
of additional unit of a particular commodity.
With the aid of graphical the above is illustrated.
Utility
Unit of commodity consumed
b. i. Profit maximizing output and price is
calculated thus:
P= 400 – 2Q
T= 40 + 5Q2
Profit = Total Revenue – Total Cost
Profit = (P x Q) – (40 + 5Q2)
Profit = (400 -2Q) x Q - (40 + 5Q2)
Profit = 400Q- 2Q2 -40 -5Q2
Profit = 400Q-7Q2 -40
d
(profit) = d (400Q-7Q2 -40) = 400
– 14Q
d Q d Q
Let d
(profit) = 0
d Q
0 = 400 –
14Q
14Q = 400
Q = 400 =
28.57142857 = 29 units
14
Profit maximizing output is 29 units
Profit maximizing price is:
P= 400 – 2Q
P= 400 -2(29)
P = 400 – 58 =
N342
ii. Total revenue and average revenue function and
profit made.
Total Revenue = 400Q- 2Q2
Total Revenue = 400 (29) – 2(29)2
Total Revenue = 11,600 – 1,682 = N9,918
Average Revenue Function = Total Revenue
Output
Average Revenue Function = 400Q- 2Q2 = 400
– 2Q
Q
Profit made
= 400Q-7Q2 -40
Profit = 400(29)-7(29)2 -40
Profit = 11,600
- 5,887 – 40 = N5,673
GET PREPARED!
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Odunaro B.J
08038454008
