# BPME7103 ADVANCED MANAGERIAL ECONOMICS SEMESTER MAY 2019 – OUM

__PART 1__

**PURPOSE**

The purpose of this assignment is to enhance the knowledge of the student on the importance of business objectives in guiding the performance of business organisations and knowing the effects of risk and uncertainty.

**REQUIREMENT**

**QUESTION 1**

State the operational objectives that OUM (or any other **private** university) seeks to pursue.

- How may success in achieving these objectives be measured?
- To what extent do the objectives of various sub-units of in the university complement (or contradict) each other?
- Who are the major constituencies served by the university? What role do they play in the formation of these objectives?
- Talk with some of the university’s administrators and compare their views on the university’s goals and objectives with your own.

** **(6 Marks)

**QUESTION 2**

Continuing with the above organization (Question 1), discuss the factors which have an influence on shareholders’ wealth. Identify managerial actions taken by the firm which are design to influence shareholder wealth.

(4 Marks)

**(TOTAL: 10 Marks)**

__PART 2__

**PURPOSE: **

The purpose of this assignment is to provide the learners with the skill to perform quantitative analysis in economics, in particular, the use of calculus and risk measurement.

**QUESTION 1**

**REQUIREMENT:**

A business manager faces the problem where he wants to produce an output which can maximise the firm’s profits. Similarly, the optimum use of resources requires that cost is minimised for producing a given level of output. The business manager approaches you, a lecturer in managerial economics, and asks you to teach him how to determine the quantity he should produce to obtain maximum profit. He also asks you to show him how to determine the quantity that will minimise cost. Assume he has all the data required to estimate profit and cost functions.

Show that the process of differentiation and the rules for differentiating functions can be used to find these optimal solutions. Using your own examples for each of the two cases (maximisation and minimisation), show how you can use calculus to determine the optimal solutions.

(5 Marks)

**QUESTION 2**

**REQUIREMENT:**

Suppose that a person is considering an investment in a new product. The cost of producing and marketing the product is estimated to be $6,000. Three possible outcomes can result from this investment:

The product can be extremely successful and yield a net profit of $24,000.

- The product can be moderately successful and yield a net profit of $12,000.
- The product can be unsuccessful, in which case the loss will be equal to the initial cost of producing and marketing the product (that is, $6,000).

Additionally, assume that if the person does not invest in the new product, the $6,000 can be invested in another venture that is certain to yield a net profit of $1,500. Furthermore, suppose that he or she has assessed the chances of the product being extremely successful, moderately successful, and unsuccessful at 0.10, 0.20, and 0.70, respectively.

- Determine the decision alternatives.
- Determine the possible outcomes for each decision alternative.

- Formulate the problem in a payoff table format showing the net profit that will result from each alternative action/state-of-nature combination.

- Determine the expected net profit of each decision alternative.
- Assuming that the objective is to maximise expected monetary payoff, which alternative should be chosen?

(5 Marks)

**(TOTAL: 10 Marks)**

__PART 3__

**PURPOSE: **

The purpose of this assignment is to provide the learners with the skill to evaluate demand based on selected information in the market place.

**QUESTION 1**

**REQUIREMENT:**

Because of the Malaysian love affair with driving the automobile, increases in the price of petrol will not affect consumption.” What type of demand curve is implied by this statement? Do you believe this is true? Why?

(4 Marks)

**QUESTION 2**

**REQUIREMENT:**

Some proposals for tax reform would eliminate the interest deduction for second homes. Explain the impact this would have on the disposable income of owners of second homes and on the price of second homes in the marketplace.

(3 Marks)

**QUESTION 3**

**REQUIREMENT:**

If the price of DVDs declines by 20 percent and the total revenue from the sale of DVDs rises, what can you say about the price elasticity of demand for DVDs? Will this price reduction necessarily lead to an increase in profits for DVD manufacturers?

(3 Marks)

**(TOTAL: 10 Marks)**

**(GRAND TOTAL: 30 MARKS)**

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