OUM BMME5103 - MANAGERIAL ECONOMICS SEPTEMBER 2016

BMME5103/AOU/SEPT16/A-KK OUM BUSINESS SCHOOL
ASSIGNMENT SUBMISSION AND ASSESSMENT
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BMME5103
MANAGERIAL ECONOMICS
SEPTEMBER 2016
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INSTRUCTIONS TO STUDENTS 1. This assignment contains question that is set in English.
2. Answer in English only.
3. Your
our assignment should be typed using 12 point Times New Roman font and 1.5 line spacing.
4. You must submit your hard copy assignment to your Fasilitator according
ccording to the due date.
5. Your assignment should be prepared individually. You should not copy another person’s
assignment. You should also not plagiarise another person’s work as your own. EVALUATION
This assignment accounts for 60% of the total marks for the course. BMME5103/AOU/SEPT16/A-KK ASSIGNMENT QUESTION PART 1
PURPOSE:
The purpose of PART 1 of this assignment is to enable the students to learn how to estimate a
demand function, to analyse the demand function and to use the results for making decisions.
REQUIREMENT:
Use the data in the following table to answer the questions at the end of this Part 1.
Market segment Sales (‘000 units) 1
2
3
4
5
6
7
8
9
10 160
220
140
190
130
160
200
150
210
190 Advertising
expenditure
($’000)
150
160
50
190
90
60
140
110
200
100 Selling Price
($ per unit)
15.00
13.50
16.50
14.50
17.00
16.00
13.00
18.00
12.00
15.50 Disposable
Income
($’000)
19.0
17.5
14.0
21.0
15.5
14.5
21.5
18.0
18.5
20.0 a) Develop a regression model that determines the relationship between Sales and Selling Price.
I. What is the estimated regression equation?
II. Is selling price of a significant determinant of sales? At what level(s) of significance?
III. What is the price elasticity of demand at a selling price of $12.00 per unit?
b) Add disposable income as an independent variable and regress sales on both selling price and
disposable income.
I. What is the estimated regression equation?
II. Is the co-efficient on selling price in (a) and (b) the same? Why or why not?
III. What is the income elasticity according to the model at a disposable income level of
$18,500 and at a selling price of $12.00 per unit? BMME5103/AOU/SEPT16/A-KK c) Add advertising expenditure as another independent variable and regress sales on selling price,
disposable income and advertising expenditure.
I. What is the estimated regression equation?
II. How “good” is the estimated model?
III. Discuss the implication of the results of the estimated regression equation.
d) Using the estimated regression equation in (c), demonstrate how you would use the equation to
make a sales forecast in any particular region.
(25 Marks) PART 2
PURPOSE:
The purpose of this assignment question is to enhance the skill of the students to estimate a
production function and to apply its use in any relevant industry.
REQUIREMENT:
Economists at the CCM Company are interested in developing a production function for fertilizer
plants. They collected data on 15 different plants that produce fertilizer (see the following table). Output
(‘000
Plants tonnes)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15 605.3
566.1
647.1
523.7
712.3
487.5
761.6
442.5
821.1
397.8
896.7
359.3
979.1
331.7
1064.9 Capital
($’000)
18891
19201
20655
15082
20300
16079
24194
11504
25970
10127
25622
12477
24002
8042
23972 Labour
(‘000
worker
hours)
700.2
651.8
822.9
650.3
859
613
851.3
655.4
900.6
550.4
842.2
540.5
949.4
575.7
925.8 BMME5103/AOU/SEPT16/A-KK a) Estimate the Cobb-Douglas production function Q = ? L?1 k ?2 , where Q = output; L = Labour
input; K = capital input; and ?, ?1 and ?2 are the parameters to be estimated.
b) Test whether the coefficients of capital and labour are statistically significant.
c) Determine the percentage of variation in the output that is being “explained” by the regression
equation.
d) Determine the labour and capital estimated parameters, and give an economic interpretation of
each value.
e) Determine whether this production function exhibits increasing, decreasing or constant returns
to scale.
(30 Marks) PART 3
PURPOSE:
The purpose of this assgnment question is to ensure that the students know how to differentiate
economics and accounting profits and to apply the concept of opprtunity cost.
REQUIREMENT:
Hamid Oil (HOSB) is a sole proprietor, producing oil palm in a large scale. The land and machinery he
owns has a current market value of $4 million. HOSB owes a local bank $3 million. Last year HOSB
sold $5 million worth of oil palm. Its variable operating cost were $4.5 million; accounting
depreciation was $40,000, although the actual decline in value of HOSB macinery was $60,000 last
year. Hamid paid himself a salary of $50,000, which is not considered as part of HOSB variable
operating costs. Interest on the bank loan was $400,000. If Hamid worked for another oil palm
producer or a local manufacturer, his annual income would be about $30,000. Hamid can invest any
funds that would be derived, if the farm were sold, to earn 10 percent annually. (Ignore taxes)
a. Compute Hamid’s accounting profits.
b. Compute Hamid’s economics profits.
c. Based on the answers above, what would be the better option for Hamid, financially?
(15 Marks) BMME5103/AOU/SEPT16/A-KK PART 4
PURPOSE:
The purpose of this assignment question is to enable the students to evaluate levels of
competitiveness in various market structures and to introduce the correct strategies in order to
obtain competitive edge in a selected market. REQUIREMENT:
You have been hired as an economic consultant to assess the potential of profitably entering the
market for gourmet coffee (examples are Starbucks and Coffee Bean). The firm that has hired you
would like for you to make your recommendations on what are the most important factors that
must be considered in order to successfully penetrate the market. The firm also wants your advice
(in addition to production of the coffee itself) on its interest in opening several distribution or sales
points. It would like to have your recommendation on the factors that would be most beneficial to
determining the correct location and size for the outlets.
Determine and discuss the most probable market structure of the coffee industry; then prepare a
proposal which will be presented to the firm that is hiring you as consultant.
(30 Marks)
(TOTAL: 100 MARKS)