ECO201e
Examination – July Semester 2015 Managerial Economics
Wednesday, 11 November 2015 10:00 am – 12:00 pm ____________________________________________________________________________________ Time allowed: 2 hours
____________________________________________________________________________________ INSTRUCTIONS TO STUDENTS:
1. This examination contains FOUR (4) questions and comprises FOUR (4)
printed pages (including cover page).
2. You must answer ALL questions.
3. This is a closed book examination.
4. All answers must be written in the answer book. At the end of the examination
Please ensure that you have written your examination number on each answer book
used.
Failure to do so will mean that your work cannot be identified.
If you have used more than one answer book, please tie them together with the string
provided. THE UNIVERSITY RESERVES THE RIGHT NOT TO MARK YOUR
SCRIPT IF YOU FAIL TO FOLLOW THESE INSTRUCTIONS. ECO201e Copyright © 2015 SIM University
Examination – July Semester 2015 Page 1 of 4 You must answer ALL the questions. (Total 100 marks) Question 1
(a) Use demand and supply graphs to show and explain the effects of the following
events on the price and quantity of cars. Analyse each incident separately.
(i) There is an improvement in the technology of producing cars.
(6 marks) (ii) The price of petrol decreases.
(6 marks) (b) Discuss whether the following statements are true or false. Justify your answers.
(i) Any point on the supply curve indicates the minimum price that a
producer must receive in order to supply a specific quantity of output.
(4 marks) (ii) Maximising producer surplus is the same as maximising profit.
(4 marks) (c) Suppose the demand schedule for a product X is as follows:
Price
$8
$10 Quantity Demanded
40
32 Use the midpoint method to calculate the price elasticity of demand for X as the
price of X increases from $8 to $10. Is it wise to decrease price of X in order to
earn more revenue?
(5 marks) ECO201e Copyright © 2015 SIM University
Examination – July Semester 2015 Page 2 of 4 Question 2
Consider a monopolist with a demand equation P = 60 - 2Q with a constant marginal
cost of $20 which is equals to the average total cost.
(a) Assume the monopolist charge a single price to all its customers. Identify the
price and quantity with the aid of a suitable monopolist diagram.
(10 marks) (b) Identify the profit and consumer surplus of the monopolist. What can you say
about the producer surplus of the monopolist?
(8 marks) (c) Assume that the government was to break up the monopoly, brings in
competition and transform this market to perfect competition.
Compare to monopoly, identify the price, quantity and efficiency gain when this
market becomes perfectly competitive.
(7 marks) Question 3
Consider two firms, Alpha and Beta, selling differentiated cars. Each firm is
contemplating whether to increase their prices or reduce their prices. If both firms raise
their prices, each can earn $3 million of profit. If both lower their prices, each can earn
$5 million profit. If one firm raises its price while the other firm reduces its price, the
firm that raises its price will suffer a loss of $2 million, while the firm that reduces its
price will earn $10 million profit.
(a) Describe and construct the payoff matrix for this game.
(10 marks) (b) Establish whether dominant strategy exist for this game. Hence or otherwise,
solve for the Nash equilibrium in this game.
(10 marks) (c) Explain whether this game is a prisoner’s dilemma game.
(5 marks) ECO201e Copyright © 2015 SIM University
Examination – July Semester 2015 Page 3 of 4 Question 4
Consider the education market of a country where the demand equation for education is
given by P = 14 - ½Q and the supply equation of education is given by P = 2 + Q,
where P is the price measured in thousand dollars and Q is the quantity of students
measured in millions of students.
(a) If there is no government involvement and the education market is competitive,
determine the equilibrium student enrollment and price of education. Use an
education market diagram to explain your answers.
(10 marks) (b) If education is able to generate positive externality, is the equilibrium quantity
in answer in (a) efficient? Discuss.
(5 marks) (c) Assume that the external benefit of education is $6000. If the government
provides a subsidy of $6,000 for every students, determine the student
enrollment and price of education after the subsidy. Explain your answers with
the aid of a diagram.
(10 marks) ----- END OF PAPER ----- ECO201e Copyright © 2015 SIM University
Examination – July Semester 2015 Page 4 of 4

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