MBA824 (Managerial Economics) PAST QUESTIONS & ANSWERS SOLUTION

2019_1 EXAMINATION

QUESTION 1A
State the conditions for profit maximization 6 Marks

Answer
There are two major conditions that must be fulfilled for maximum profit: (i) the first-order (or
necessary) condition, and (ii) the second-order (or supplementary) condition.

To maximise profit, certain conditions must be met, the first being that at optimum profit
maximising point, the firm’s marginal revenue must equal marginal cost. Second, to ensure that
maximum profit is attained, the second derivative of the profit function is expected to be less
than zero.

The second-order condition requires that the first-order condition must be satisfied under the
condition of decreasing marginal revenue (MR) and increasing marginal cost (MC). Fulfillment of
this two conditions makes the second-order condition the sufficient condition for profit
maximizations.

QUESTION 1B
Given that P = 300 – 3Q and TC = 80 + 2Q2, find
I. Profit maximizing level 2 Marks
II. Maximum profit 2 Marks
III. Unit price 2 Marks
Using first order condition, profit is maximized when MR = MC
△𝑇𝑅
MR = △𝑄
TR = P*q
2
TR = (300 - 3Q)Q = 300Q - 3𝑄
△𝑇𝑅
△𝑄
= 300 - 6Q

△𝑇𝐶
MC = △𝑄
MC = 4𝑄
Profit maximum qty : 300 - 6Q = 4Q Collect like terms
10Q = 300, Q = 300/10
Q = 30 units
Unit Price: P = 300 - 3Q, where Q = 30
P = 300 - 3(30)
P = 300 - 90 = 210
Maximum Profit = TR - TQ
2 2
= 300Q - 3𝑄 - (80 + 2𝑄 )
2 2
= 300Q - 3𝑄 - 80 - 2𝑄 , where Q = 30
2 2
= 300(30) - 3(30 ) − 80 − 2(30 )
= 9000 - 2700 - 80 - 1800
= 4420

QUESTION 1C Prove that MR = P (1 - ) 5.5 Marks

QUESTION 2
Using the Lagrangian Multiplier method, optimize the profit function z = 4X2 -2XY + 6Y2,
subject to the constraint X + Y = 72 17.5 Marks
Solution:
2 2
Z = 4𝑥 − 2𝑥𝑦 + 6𝑦 - - - - - - (i)
Subject to: 𝑥 + 𝑦 = 72 - - - - (ii)
From eqn (ii)
: 𝑥 + 𝑦 − 72 = 0 ; Add this to the from equation and add a lambda
2 2
Z = 4𝑥 − 2𝑥𝑦 + 6𝑦 + λ(𝑥 + 𝑦 − 72)
δ𝑧
δ𝑥
= 8𝑥 − 2𝑦 + λ - - - - - - -(iii)
δ𝑧
δ𝑦
= − 2𝑥 + 12𝑦 + λ - - - - (iv)
δ𝑧
δλ
= 𝑥 + 𝑦 − 72 - - - - - - - (v)
From (iv) : 𝑥 + 𝑦 − 72 = 0, x = 72 - y
Substitute in eqn (iii) and (iv)
8(72 − 𝑦) − 2𝑦 + λ = 0
576 − 8𝑦 − 2𝑦 + λ = 0
576 − 10𝑦 + λ = 0
− 10𝑦 + λ = − 576 − − − − (𝑣𝑖)

− 2𝑥 + 12𝑦 + λ = 0
− 2(72 − 𝑦) + 12𝑦 + λ = 0
− 144 + 2𝑦 + 12𝑦 + λ = 0
− 144 + 14𝑦 + λ = 0
14𝑦 + λ = 144 − − − − − (𝑣𝑖𝑖)

Solve simultaneously (𝑣𝑖) − (𝑣𝑖𝑖)

− 24𝑦 = − 432 Divide both side by - 24
𝑦 = 18 𝑢𝑛𝑖𝑡𝑠

From (v): x = 72 - y where y = 18

X = 72 - 18, x = 54 units
 2 2
Maximum Profit: Z = 4𝑥 − 2𝑥𝑦 + 6𝑦 where x = 54, y = 18
2 2
Z = 4(54) − 2(54)(18) + 6(18)
Z = 4(2, 916) − 2(972) + 6(324)
Z = 11, 664 − 1, 944 + 1, 944
Z = ₦ 11,664

QUESTION 3A
What are the properties of the Cobb – Douglas Production Function? 8.5 Marks

𝑎 𝑏
The Cobb-Douglas production function is of the following general form: Q = A𝐾 𝐿 where a and
b are positive fractions.
The Cobb-Douglas production function is often used in its following form:
𝑎 (1−𝑏)
Q = = A𝐾 𝐿
Properties of the Cobb-Douglas Production Function
A power function of the Cobb-Douglas type has the following important properties:
𝑎 𝑏
1. The multiplicative form of the power function A𝐾 𝐿 can be transformed into its log-linear
form as: log Q = log A + a log K + b log L . In its logarithmic form, the function becomes
simple to handle and can be empirically estimated using linear regression techniques.

2. Power functions are homogeneous and the degree of homogeneity is given by the sum
of the exponents a and b as in the Cobb-Douglas function. If a + b = 1, then the
production function is homogeneous of degree 1 and implies constant returns to scale.

3. a and b represent the elasticity coefficient of output for inputs, K and L, respectively. The
output elasticity coefficient (ε) in respect of capital can be defined as proportional change
in output as a result of a given change in K, keeping L constant.
Thus,
δ𝑄/𝑄 δ𝑄 𝐾
εk = δ𝐾/𝐾
= δ𝐾
.𝑄
By differentiating the production function, Q = AKaLb, with respect to K and substituting
the result into equation, the elasticity coefficient, εk, can be derived:
δ𝑄/𝑄 (1−𝑏) 𝑏)
δ𝐾/𝐾
= aA𝐾 𝐿
Substituting the values for Q and ∂Q/∂K into equation , you get:
(𝑎−1) 𝑏
𝑎 𝐴𝐾 𝐿 𝐾
εk = 𝑎 𝑏
𝐴𝐾 𝐿
=a
4. Fourth, the constants a and b represent the relative distributive share of inputs K and L
in the total output, Q. (Study manual page 100 - 103)
𝑎 (1 − 𝑎)
5. Finally, the Cobb-Douglas production function in its general form,Q = 𝐾 𝐿 , implies
that at zero cost, there will be zero production.

QUESTION 3B
Given the Cobb Douglas Production Function as Q = AKaLb calculate the following
a) Marginal Products of Labour (MPL) 3 Marks
𝑄
Marginal Products of L (M𝑃𝐿) = a( 𝐿 )
b) Marginal Products of Capital (MPK) 3 Marks
𝑄
(M𝑃𝐾) = (1 – a) 𝐾
c) Marginal Rate of Technical Substitution of Labour for Capital (MRTSL,K) 3 Marks
𝑀𝑃𝐿 𝑎.𝐾
MRT𝑆𝐿, 𝐾= 𝑀𝑃𝐾
= (1 − 𝑎) 𝐿

MRT𝑆𝐿, 𝐾 is the rate at which a marginal unit of labour, L, can be substituted for a
marginal unit of capital, K (along a given isoquant) without affecting the total output.

QUESTION 4
i. A firm faces the Cobb Douglas production function of Q = 12K0.4L0.4, and can buy
inputs [Capital (K) and Labour (L)] at interest and wage of N40 and N5 per hour
respectively. If the firm has a budget of N800, what combination of K and L should he use
in order to produce maximum output. 14 marks

To determine the optimal combination of capital (K) and labor (L) that maximizes output given
the firm's budget constraint, we need to use the method of Lagrange multipliers.

Given:
0.4 0.4
● Production function: Q=12𝐾 𝐿
● Cost of capital (K) per hour: 𝐶𝐾= ₦40,
● Cost of labor (L) per hour: 𝐶𝐿= ₦5
● Budget: B= ₦800

Step 1: Set up the budget constraint

40K + 5L = 800

Step 2: Set up the Lagrangian function

0.4 0.4
F(K, L,λ) = 12𝐾 𝐿 + λ(800 - 40K - 5L)

Step 3: Take partial derivatives and set them to zero

δ𝑓(𝐾,𝐿, λ) −0.6 0.4
δ𝐾
= 4.8𝐾 𝐿 - 40 λ = 0 - - - - - (i)

δ𝑓(𝐾,𝐿, λ) 0.4 − 0.6

δ𝐿
= 4.8𝐾 𝐿 - 5 λ = 0 - - - - - (ii)
δ𝑓(𝐾,𝐿, λ)
δλ
= 800 - 40K - 5L = 0 - - - - - - - - (iii)

Step 4: Solve the system of equations

From equation i:

−0.6 0.4
4.8𝐾 𝐿 - 40 λ = 0

−0.6 0.4
4.8𝐾 𝐿 = 40 λ
−0.6 0.4
4.8𝐾 𝐿
λ= 40

From equation ii:

0.4 − 0.6
4.8𝐾 𝐿 -5λ=0

0.4 − 0.6
4.8𝐾 𝐿 = 5λ
0.4 − 0.6
4.8𝐾 𝐿
λ= 5

Set the two expressions for λ equal to each other:

−0.6 0.4 0.4 − 0.6
4.8𝐾 𝐿 4.8𝐾 𝐿
40
= 5
Cross multiply

−0.6 0.4 0.4 −0.6

(4. 8𝐾 𝐿 )5 = (4. 8𝐾 𝐿 ) 40

−0.6 0.4 0.4 − 0.6

24𝐾 𝐿 = 192𝐾 𝐿 divide both side by 24

−0.6 0.4 0.4 − 0.6

𝐾 𝐿 = 8𝐾 𝐿
0.4 0.4
𝐿 8𝐾
0.6 = 0.6
𝐾 𝐿

0.4 0.6 0.4 0.6

𝐿 .𝐿 = 8𝐾 . 𝐾

L = 8K

Step 5: Substitute L=8K into the budget constraint

40K + 5(8K) = 800
40K + 40K = 800
80K=800
K=10
L= 8K
L = 8× 10 = 80
Conclusion: To maximize output given the budget constraint, the firm should use:

● Capital (K): 10 hours

● Labor (L): 80 hours

With this combination, the firm will produce the maximum output within the budget of N800.

ii. At this equilibrium level of employment, what is the level of output and the production
scale? 3.5 marks

0.4 0.4
Q=12𝐾 𝐿 where K = 10, L = 80

0.4 0.4
Q=12(10) (80)

Q = 12(2.51189)(5.7709)

Q = 173.95 = 174 units

QUESTION 5A
What is Demand forecasting 5 Marks

Answer
Demand forecasting is the process of estimating or predicting future customer demand for a
product or service over a specific period. It involves analyzing historical data, market trends,
economic indicators, and other relevant factors to make informed predictions about the quantity
of products or services that customers will likely purchase in the future. Businesses use demand
forecasting to optimize production, inventory management, pricing strategies, and resource
allocation.

There are many techniques employed in demand forecasting, but of most important in our
discussions are the Survey and Statistical methods.

Survey techniques are used where the purpose is to make short-run demand forecasts. This
technique uses consumer surveys to collect information about their intentions and future
purchase plans. It involves: (i) survey of potential consumers to elicit information on their
intentions and plans; (ii) opinion polling of experts, that is, opinion survey of market experts and
sales representatives.

The statistical techniques of demand forecasting use historical (or time-series), and
cross-section data for estimating long-term demand for a product. The techniques are found
more reliable than those of the survey techniques. They include: (i) the Trend Projection
techniques; (ii) the Barometric techniques; and, (iii) the Econometric techniques.
QUESTION 5B
Explain the following group of consumer’s goods and services in relation to
income-demand analysis

I. Essential Consumer Goods 2.5 mark

II. Inferior Goods 2.5 marks
III. Normal Goods 2.5 marks
IV. Luxury and Prestige Goods 2.5 marks
V. Giffen Goods 2.5 marks

Answer
I. Essential Consumer Goods: Goods and services in this category are referred to as ‘basic
needs’, and are consumed by all persons in a society. Such goods and services include food
grains, salt, vegetable oil, cooking, fuel, housing, and minimum clothing. The demand for such
goods and services increase with increases in consumer’s income, but only up to a certain limit,
even though the total expenditure may increase in accordance with the quality of goods
consumed, all things being equal.

II. Inferior Goods: Inferior and superior goods are widely known to both buyers and sellers.
Economists define inferior goods as goods in which their demands decrease as consumer’s
income increases, beyond a certain level of income. Demand for such goods rises only up to a
certain level of income, and declines as income increases beyond this level.

III. Normal Goods: In economic terms, normal goods are goods demanded in increasing
quantities as consumer’s income rises. Examples of normal goods are clothing, furniture, and
automobiles.

IV. Luxury and Prestige Goods: All such goods that add to the pleasure and prestige of the
consumer without enhancing his or her earning fall in the category of luxury goods. Prestige
goods are special category of luxury goods, examples, rare paintings and antiques, prestigious
schools, and the like. Demand for such goods arises beyond a certain level of consumer’s
income. Producers of such goods, while assessing the demand for their product, need to
consider the income changes in the richer section of the society.

V. Giffen Goods: are a rare category of goods that defy the standard law of demand, exhibiting
an upward-sloping demand curve. For these goods, as the price increases, the demand also
increases, typically because they are staple goods consumed by low-income households, e.g
bread, rice, or potatoes.

2019_2 EXAMINATION

Question 1
Suppose that the unit price of a commodity is defined by 𝑃 = 100 − 2𝑄 and the total cost
is given as: 𝑇𝐶 = 100 − 0.5𝑄2. Apply the first-order condition for profit maximization and
determine the profit-maximizing level of output. (25 marks)
Solution:
Profit is maximize where MR = MC
δ𝑇𝑅
MR = δ𝑄
where TR = P*Q
2
TR = (100 - 2Q)Q = 100Q - 2𝑄
δ𝑇𝑅
MR = δ𝑄
= 100 − 4𝑄

δ𝑇𝐶
MR = δ𝑄
=-Q

100 − 4𝑄 = -Q
100 = 4Q - Q
100 = 3Q
100
Q= 3
= 33.333 = 33 units
Question 2
Discuss critically, the major types of demand encountered in business decisions. (15
marks)

Answer

The major types of demand encountered in business decisions are outlined below.
1. Individual and Market Demand: The quantity of a commodity an individual is willing and
able to purchase at a particular price, during a specific time period, given his/her money income,
his/her taste, and prices of other commodities, such as substitutes and complements, is referred
to as the individual demand for the commodity. The total quantity which all the consumers of the
commodity are willing and able to purchase at a given price per time unit, given their money
incomes, their tastes, and prices of other commodities, is referred to as the market demand for
the commodity.

2. Demand for firm’s and Industry’s Product: The quantity of a firm’s product that can be sold
at a given price over time is known as the demand for the firm’s product. The sum of demand for
the products of all firms in the industry is referred to as the market demand or industry demand
for the product.

3. Autonomous and Derived Demand: An autonomous demand or direct demand for a

commodity is one that arises on its own out of a natural desire to consume or possess a
commodity. This type of demand is independent of the demand for other commodities.
Autonomous demand may also arise due to demonstration effect of a rise in income, increase in
population, and advertisement of new products. The demand for a commodity which arises from
the demand for other commodities, called ‘parent products’ is called derived demand. Demand
for land, fertilizers and agricultural tools, is a derived demand because these commodities are
demanded due to demand for food. In addition, demand for bricks, cement, and the like are
derived demand from the demand for house and other types of buildings. In general, demand
for producer goods or industrial inputs is a derived demand.

4. Demand for Durable and Non-Durable Goods: Durable goods are those goods for which
the total utility or usefulness is not exhaustible in the short-run use. Such goods can be used
repeatedly over a period of time. Durable consumer goods include houses, clothing, shoes,
furniture, refrigerator, and the like. Durable producer goods include mainly the items under ‘fixed
assets’, such as building, plant, machinery, and office furniture. The demand for durable goods
changes over a relatively longer period than that of the non-durable goods. The demand for
non-durable goods depends largely on their current prices, consumers’ income, and fashion. It
is also subject to frequent changes. Durable goods create replacement demand, while
non-durable goods do not. In addition, the demand for non-durable goods change linearly, while
the demand the demand for durable goods change exponentially as the stock of durable goods
changes.

5. Short-term and Long-term Demand: Short-term demand refers to the demand for goods
over a short period. The type of goods involved in the short-term demand are most fashion
consumer goods, goods used seasonally, inferior substitutes for superior goods during
scarcities. Short term demand depends mainly on the commodity price, price of their substitutes,
current disposable income of the consumers, the consumers’ ability to adjust their consumption
pattern, and their susceptibility to advertisement of new products. The long-term demand refers
to the demand which exists over a long period of time. Changes in long-term demand occur only
after a long period. Most generic goods have long-term demand. The long-term demand
depends on the long-term income trends, availability of better substitutes, sales promotion,
consumer credit facility, and the like.

Question 3
Critically explain the determinants of Market Demand. (15 marks)

Answer
Though there are several factors affecting market demand for a product, the most important are:

1. Price of the product or the own price (Po). This is the most important determinant of
demand for a product. Generally, there is an inverse relationship between price and quantity
demanded, which is explained by the law of demand. As the price of a commodity increases,
the quantity demanded tends to decrease, and vice versa, assuming other factors remain
constant.

2. Price of the related goods, such as substitutes and complements (Ps and Pc). When
two goods are substitutes for each other, the change in price of one affects the demand for the
other in the same direction. If goods X and Y are substitute goods, then an increase in the price
of X will give rise to an increase in the demand for Y. Note that changes in the price of related
goods cause shifts in the demand for the goods.

When two goods are complements for each other, one complements the use of another. Petrol
and car complement goods. If an increase in the price of one good causes a decrease in
demand for the other, the goods are said to be complements.

3. Consumer’s Income. This is the major determinant of demand for any product since the
purchasing power of the consumer is determined by the disposable income. Managers need to
know that income-demand relationships are of a more varied nature than those between
demand and its other determinants.

Other determinants of demand for commodities include Consumer-Credit facility, the population
of consumers, income distribution and seasonal factors and climate.

4. Consumer credit facilities refer to the availability and ease with which consumers can
access loans or credit to finance their purchases. When consumer credit is readily available with
favorable terms (e.g., low interest rates, flexible repayment options), demand for commodities
tends to increase, as consumers can afford to make purchases that they otherwise might have
delayed. Conversely, if credit becomes more difficult to access or interest rates are high,
demand for goods may fall as consumers are less likely to borrow money for purchases.

5. Population of Consumers. An increase in population generally leads to an increase in

demand for goods and services because more people need basic necessities like food, housing,
clothing, healthcare, and education. The composition and demographic structure of the
population (e.g., age, income levels, and preferences) also influence demand. For instance, a
younger population might increase demand for technology products, while an aging population
might boost demand for healthcare services.

6. Income Distribution. Income distribution refers to how income is spread across different
groups within a population. If income is evenly distributed, a larger portion of the population may
have the purchasing power to buy more goods, leading to increased demand for a wide range of
products.

In cases of high income inequality, demand may vary significantly between high-income and
low-income groups. The wealthy may drive up demand for luxury goods and services, while the
lower-income groups may only be able to afford basic necessities.

7. Seasonal Factors and Climate. Demand for certain commodities is affected by seasonal
changes or climate conditions. Some goods are highly demanded during specific seasons or
under certain weather conditions. Demand for products like winter clothing or air conditioners
fluctuates depending on the time of year. Also, regional climate can affect the demand for
certain goods, such as ice cream in warmer areas or heating appliances in colder regions.
Question 4
Write short notes on:
i. Arc Elasticity (5 marks)
ii. Point Elasticity (5 marks)
iii. Cross Elasticity (5 marks)

Answer
1. Arc Elasticity: An arc elasticity measures the elasticity of demand between any two finite
points on a given demand line or curve. It is used to calculate the responsiveness of quantity
demanded to changes in price over a range, rather than at a specific point.

It is important to note that one problem associated with the use of arc elasticity is that the
elasticity coefficient changes along the demand line or curve as the direction of price
change is reversed.

2. Point Elasticity: Point elasticity is the elasticity of demand at a finite point on a demand line
or a demand curve. It is used when the change in price is infinitesimally small, allowing for an
exact measure of responsiveness at that point. The formula for point elasticity is: (P/Q)(dQ/dP)

3. Cross Elasticity: The cross-elasticity (or cross-price elasticity) can be defined as the degree
of responsiveness of demand for a commodity to the changes in price of its substitutes and
complementary goods.

The cross-elasticity of demand can be used to identify substitute and complementary goods for
a given commodity. If the cross-price elasticity between two goods is positive, the two goods
may be considered as substitutes to one another. The greater the cross price elasticity
coefficient, the closer the substitute. Similarly, if the cross-price elasticity is negative, the two
goods may be considered as complements. The higher the negative cross-elasticity coefficient,
the higher the degree of complementarity.

The concept of cross-elasticity is important in pricing decisions. If the cross-elasticity in

response to the price of substitutes is greater than 1, it would not be advisable to increase the
price. Reducing the price, instead may prove beneficial. If the price of the complementary good
is rising, it would be beneficial to reduce the price of the commodity.

Question 5
Discuss with relevant examples, the determinants of Price-elasticity of demand. (15
marks)

Answer
The price-elasticity of demand varies between zero and infinity (0 ≤ ep≤ ∞). The price-elasticity
of demand for a product within this range will depend on the following factors:
1. Availability of Substitutes for the product. This is one of the most important determinants
of the price-elasticity of demand for a product. The higher the degree of closeness between the
commodity and its substitutes, the greater the price-elasticity of demand for the commodity.

2. Nature of the Commodity. Commodities can be grouped as luxuries, comforts, and

necessities. The demand for luxury goods is more price-elastic than the demand for necessities
and comforts. This is so because the consumption of luxury goods can be dispensed with or
postponed when their prices rise. On the other hand, the consumption of necessities cannot be
postponed and hence, their demand is price-inelastic. Comforts have more elastic demand than
necessities, and less elastic demand than luxuries.

3. Weightage in the Total Consumption. The proportion of income which consumers spend on
a particular commodity influences the elasticity of demand for such commodity. The larger the
proportion of income spent on a commodity, the greater will be the elasticity of demand for such
commodity, and vice versa.

4. Time factor in adjustment of Consumption pattern. Price-elasticity of demand depends on

the time consumers need to adjust their consumption pattern to a new price. The longer the
adjustment time, the greater the price-elasticity of demand.

5. Range of Commodity Use. The range of uses of a given commodity can affect the elasticity
of demand for such a commodity. The wider the range of use of a product, the higher the
elasticity of demand for such product. Electricity, for example, has a wide range of use including,
lighting, cooking, and industrial activities. The demand for electricity therefore has greater
elasticity.

Question 6
Forecast the demand for sugar using the data present in table 2.2 and given that the
regression equation Y = a + bX (a) (15 marks)

Where: Y represents the quantity of sugar to be demanded; and, X represents the single
variable, population, and a and b are constants

Table 2.2: Demand for Sugar

Year Population (millions) Quantity of Sugar

demanded (000’s)

2000 10 40

2001 12 50
 2002 15 60

2003 20 70

2004 25 80

2005 30 90

2006 40 100

Suppose the population for the year 2008 is projected to be 100 million, what will be the
demand for sugar?

2020_1 EXAMINATION

Question 1
1(a) Define Total Revenue (TR). (5Marks)
1(b) Define Marginal Revenue (MR). (5Marks)
1 (c) Find the level of quantity for which revenue will be maximized if the price function is
given by P= 100-5Q. (10Marks)
1 (d) Obtain the maximum Total Revenue (TR) from the maximum quantity obtained from
1 (c) above. (5Marks)

Answer
1(a) Total Revenue: Total Revenue (TR) is the total income a firm receives from selling a given
quantity of goods or services. It is calculated as the product of the price (P) per unit and the
quantity (Q) of the goods sold: Total Revenue (TR)=P×Q

1(b) Marginal Revenue: Marginal Revenue (MR) is the additional revenue a firm earns by
selling one more unit of a good or service. It is the change in total revenue (TR) that results from
a one-unit increase in quantity sold.

1 (c) Find the level of quantity for which revenue will be maximized if the price function is
given by P= 100-5Q. (10Marks)
Solution: TR = P*Q
2
TR = (100 - 5Q)Q = 100Q - 5𝑄
δ𝑇𝑅
δ𝑄
= 100 - 10Q equate to zero to get the maximum output
100 - 10Q = 0
10Q = 100
Q = 10 units
1 (d) Obtain the maximum Total Revenue (TR) from the maximum quantity obtained from
1 (c) above. (5Marks)
2
TR = 100Q - 5𝑄 where Q = 10
2
TR = 100(10) - 5(10)
TR = 1000 - 500 = ₦500

Question 2
The scope of managerial economics extends to those economic concepts, theories, and
tools of analysis used in analysing the business environment, and to find solutions to
practical business problems. In line with this concept, outline the scope of Managerial
Economics in relation to internal and external issues. (15 marks)

Answer
Managerial economics comprises both micro- and macro-economic theories. Generally, the
scope of managerial economics extends to those economic concepts, theories, and tools of
analysis used in analysing the business environment, and to find solutions to practical business
problems. In broad terms, managerial economics is applied economics. The areas of business
issues to which economic theories can be directly applied is divided into two broad categories:
1. Operational or internal issues; and,
2. Environment or external issues.

Operational problems are of internal nature. These problems include all those problems which
arise within the business organization and fall within the control of management. Some of the
basic internal issues include:
(f) choice of business and the nature of product (what to produce);
(g) choice of size of the firm (how much to produce);
(h) choice of technology (choosing the factor combination);
(i) choice of price (product pricing);
(j) how to promote sales;
(k) how to face price competition;
(l) how to decide on new investments;
(m) how to manage profit and capital; and,
(n) how to manage inventory.

The microeconomic theories dealing with most of these internal issues include, among others:
1. The theory of demand, which explains the consumer behaviour in terms of decisions on
whether or not to buy a commodity and the quantity to be purchased.
2. Theory of Production and production decisions. The theory of production or theory of
the firm explains the relationship between inputs and output.
3. Analysis of Market structure and Pricing theory. Price theory explains how prices are
determined under different market conditions.
4. Profit analysis and profit management. Profit making is the most common business
objective. However, making a satisfactory profit is not always10 guaranteed due to
business uncertainties. Profit theory guides firms in the measurement and management
 of profits, in making allowances for the risk premium, in calculating the pure return on
capital and pure profit, and for future profit planning.
5. Theory of capital and investment decisions. Capital is the foundation of any business.
Its efficient allocation and management is one of the most important tasks of the
managers, as well as the determinant of the firm’s success level. Some of the important
issues related to capital include: choice of investment project; assessing the efficiency of
capital; and, the most efficient allocation of Capital.

Environmental issues are issues related to the general business environment. These are
issues related to the overall economic, social, and political atmosphere of the country in which
the business is situated. The factors constituting economic environment of a country include:
1. The existing economic system
2. General trends in production, income, employment, prices, savings and
investment, and so on.
3. Structure of the financial institutions.
4. Magnitude of and trends in foreign trade.
5. Trends in labour and capital markets.
6. Government’s economic policies.
7. Social organizations, such as trade unions, consumers’ cooperatives, and producer
unions.
8. The political environment.
9. The degree of openness of the economy.

Managerial economics is particularly concerned with those economic factors that form the
business climate. In macroeconomic terms, managerial economics focus on business cycles,
economic growth, and content and logic of some relevant government activities and policies
which form the business environment.

Question 3
With the aid of a diagram explain the Short Run Monopoly Equilibrium with Positive Profit
(15 mark)

Answer

Question 4
a) Distinguish between certainty and uncertainty in decision analysis (5 marks)
b) A simple macroeconomic model is given as Y = C + I + G + X; where, Y= Gross
National Product (GNP); C = Total consumption expenditure; I = Gross Private;
Investment; G = Government expenditure; X = Net Export (X – M), where X represents
Export, and M, Import. Subscript t represents a given time unit. Such as: C = a + bY; I =
20; G = 10; X = 5.
Find;
i. the value of Gross National Product (GNP) (6 marks)
ii. total consumption expenditure (4 marks)
Answer
a) Distinguish between certainty and uncertainty in decision analysis
When the state of nature, si, whether known or unknown, has no influence on the outcomes of
given alternatives, we say that the decision maker is operating under certainty. Otherwise,
he/she is operating under uncertainty.

Decision making under certainty appears to be simpler than that under uncertainty. Under
certainty, the decision maker simply appraises the outcome of each alternative and selects the
one that best meets his/her objective. If the number of alternatives is very high however, even in
the absence of uncertainty, the best alternative may be difficult to identify.

Decision making under uncertainty is always complicated. It is the probability theory and
mathematical expectations that offer tools for establishing logical procedures for selecting the
best decision alternatives. Though statistics provides the structure for reaching the decision, the
decision maker has to inject his/her intuition and knowledge of the problem into the
decision-making framework to arrive at the decision that is both theoretically justifiable and
intuitively appealing. A good theoretical framework and commonsense approach are both
essential ingredients for decision making under uncertainty.

b) The formula provided is: Y=C+I+G+XY = C + I + G + X

Given:

● I = 20
● G = 10
● X=5

We also have the consumption function: C = a + bY

To solve for Y, we need the values of a and b. Since these values are not provided, we can only
represent the GNP in terms of these parameters.

Y = (a + bY) + 20 + 10 + 5

Y = a + bY + 35

Solving for Y:

Y - bY = a + 35
Y(1 - b) = a + 35
𝑎 + 35
Y= 1−𝑏

So, the value of Gross National Product (GNP), Y, depends on the values of a (autonomous
consumption) and b (marginal propensity to consume).
Question 5
a) Derive and explain the relationship between the price elasticity of demand and
marginal revenue. (10 marks)
b) What factors determine the price elasticity of demand for a product? (5 marks)

Answer
a) The relationship between the price elasticity of demand and marginal revenue

b) Factors that determine the price elasticity of demand for a product

(Check answer to Q5 year 2019_2)

Question 6
Explain briefly and distinguish between
a) Opportunity Costs and Explicit Costs (4 marks)
b) Short-run Cost and Long-run Costs (4 marks)
c) Fixed Costs and Variable Costs (4 marks)
d) Private Costs and Social Costs (3 marks)

Answer

a) Opportunity Costs: Opportunity cost refers to the value of the next best alternative that is
foregone when making a decision. It represents the benefits that could have been gained if
resources were used in an alternative way. For instance, if a company uses its funds to invest in
a new project instead of upgrading machinery, the opportunity cost is the benefit it could have
received from upgrading the machinery.

Explicit Costs: Explicit costs are actual, out-of-pocket expenses that a business incurs when it
pays for resources like wages, rent, materials, and utilities. These costs are clearly recorded
and measurable in a firm's financial statements.

Distinction: While explicit costs are direct, monetary outlays for resources, opportunity costs
represent the potential gains from alternative uses of those resources, even though no cash
outlay is made.

b) Short-run Cost: Short-Run Costs are costs which change as desired output changes, size of
the firm remaining constant. In the short run, at least one factor of production (e.g., capital or
equipment) is fixed. Firms cannot change all inputs, so they face both fixed and variable costs.
As a result, short-run costs include both fixed and variable costs.

Long-run Costs: In the long-run, all costs become variable costs as the size of the firm or scale
of production increases.There are no fixed costs in the long run since everything can be
changed to optimize production.
Distinction: The key difference is that short-run costs include fixed and variable costs due to
some fixed factors, while long-run costs only involve variable costs since all factors of
production are adjustable.

c) Fixed Costs: Fixed costs are those costs that are fixed in volume for a certain level of output.
They do not vary with output. They remain constant regardless of the level of output. Fixed
costs include: (i) Cost of managerial and administrative staff; (ii) Depreciation of machinery; (iii)
Land maintenance, and the like.

Variable Costs: Variable costs are those that vary with variations in output. These include: (i)
Cost of raw materials; (ii) Running costs of fixed capital, such as fuel, repairs, routine
maintenance expenditure, direct labour charges associated with output levels; and (iii) the Costs
of all other inputs that may vary with the level of output.

Distinction: Fixed costs remain constant regardless of output levels, while variable costs
fluctuate depending on the amount of production.
d) Private Costs: Private costs are the costs borne directly by the individual or firm producing
goods or services. These costs are internal and include expenses like wages, raw materials,
and utilities.

Social Costs: Social costs include both private costs and any external costs that arise from
production or consumption, such as pollution or environmental damage, which affect society as
a whole. Examples of such social costs include: water pollution from oil refineries, air pollution
costs by mills and factories located near a city, and the like.

Distinction: Private costs are borne by the producer, while social costs include both private
costs and externalities that impact society at large.

2021_1 EXAMINATION

1. Suppose that the unit price of a commodity is defined by: P = 100 – 2Q and the total
cost of producing this commodity is defined by the cost function: TC = 100 + 0.5Q 2. You
are required to apply the first-order condition for profit maximization and determine the
profit maximizing level of output as well as the maximum profit. (17 marks)

Answer

(b) Consumer’s income is a major determinant of market demand. Discuss the four broad
categories of consumer goods and services and how income affects their demand (8
marks)

Answer
Regarding income-demand analysis, consumer goods and services are grouped under four
broad categories:

i. Essential Consumer Goods (ECG). Goods and services in this category are referred to as
‘basic needs’, and are consumed by all persons in a society. Such goods and services include
food grains, salt, vegetable oil, cooking, fuel, housing, and minimum clothing. The demand for
such goods and services increase with increases in consumer’s income, but only up to a certain
limit, even though the total expenditure may increase in accordance with the quality of goods
consumed, all things being equal.

ii. Inferior Goods (IG). Inferior and superior goods are widely known to both buyers and sellers.
Economists define inferior goods as goods in which their demands decrease as consumer’s
income increases, beyond a certain level of income.

iii. Normal Goods (NG). In economic terms, normal goods are goods demanded in increasing
quantities as consumer’s income rises. Examples of normal goods are clothing, furniture, and
automobiles.

iv. Luxury and Prestige Goods. All such goods that add to the pleasure and prestige of the
consumer without enhancing his or her earning fall in the category of luxury goods. Prestige
goods are a special category of luxury goods, examples, rare paintings and antiques,
prestigious schools, and the like. Demand for such goods arises beyond a certain level of
consumer’s income. Producers of such goods, while assessing the demand for their product,
need to consider the income changes in the richer section of the society.

2. Use the table below to estimate the regression equation and forecast the quantity of
sugar demanded in 2008 if the population increases to 100 million (15 marks)

Year Population (millions) Quantity of Sugar

demanded (000’s)

2000 10 40

2001 12 50

2002 15 60

2003 20 70

2004 25 80

2005 30 90

2006 40 100

Answer
3. Explain Baumol’s sales revenue maximization as a business objective (15 marks)

Answer
William J. Baumol proposed the Sales Revenue Maximization Model as an alternative to the
traditional profit-maximization objective of firms. Baumol argued that, in many large firms,
managers prioritize maximizing sales revenue rather than profit due to various personal and
organizational reasons. According to Baumol, while shareholders and owners might be focused
on maximizing profit, managers, who often run the day-to-day operations, are more concerned
with sales revenue because their compensation, status, and job security may be closely tied to
it. Baumol lists the factors that explain the managers’ pursuance of this goal as follows:

First, salary and other monetary benefits of managers tend to be more closely related to sales
revenue than to profits.
Second, banks and other financial institutions look at sales revenue while financing business
ventures.
Third, trend in sales revenue is a readily available indicator of a firm’s performance.
Fourth, increasing sales revenue enhances manager’s prestige while profits go to the business
owners.
Fifth, managers find profit maximisation a difficult objective to fulfill consistently over time and at
the same level. Profits fluctuate with changing economic conditions.
Finally, growing sales tend to strengthen the competitive spirit of the firm in the market, and
vice versa.

4. Explain in detail extensively the survey forecasting techniques (15 marks)

Answer
Survey techniques are used where the purpose is to make short-run demand forecasts. This
technique uses consumer surveys to collect information about their intentions and future
purchase plans. It involves:

(i) survey of potential consumers to elicit information on their intentions and plans;
(ii) opinion polling of experts, that is, opinion survey of market experts and sales
representatives;

The methods used in conducting the survey of consumers and experts include:

1. Consumer Survey Methods (direct interviews). Direct interview of the potential consumers
may be in the form of:
(a) Complete Enumeration. In this case, almost all the consumers or users of the product in
question are contacted to ascertain their future of purchasing the product. The quantities
indicated by the consumers are added together to obtain the probable demand for the product.
(b) Sample Survey. In a sample survey, only few potential consumers and users of the products
are selected as respondents from the relevant market. The survey may take the form of either
direct interview or mailed questionnaire to the sample consumers.
(c) The End-Use Method. This method of forecasting demand has a considerable theoretical
and practical importance, especially in forecasting demand for inputs.

2. Opinion Poll Methods. These methods aim at collecting opinions of those possessing
knowledge of the market, such as the sales representatives, sales executives, professional
marketing experts, and marketing consultants. The opinion poll methods include:
(a) The Expert-Opinion method; This method involves the use of sales representatives in the
assessment of demand for the product in the areas, States or cities they represent. The sales
representatives are expected to know the future purchasing plans of consumers they transact
business with.

(b) Delphi method; This method of demand forecasting is an extension of the simple expert
opinion poll method. It is used to consolidate the divergent expert opinions and to arrive at a
compromise estimate of future demand.

In the Delphi method, the experts are provided with some information on estimates of forecasts
of other experts, along with the underlying assumptions. It will then be the consensus of the
experts about the forecasts that will become the final forecast for the future demand.

(c) Market Studies and Experiments: This method requires that firms first select some areas of
representative markets, about four cities with similar features in terms of population, income
level, cultural and social background, occupational distribution, and consumer preferences and
choices. This is followed by market experiments involving changing prices, advertisement
expenditures, and other controllable variables in the demand function, all things being equal.
These variables are changed over time, either simultaneously in all the markets or in selected
markets. Having introduced these changes, the consequent changes in demand over a period
of time are then recorded. Based on these data, elasticity coefficients are then computed, and
these coefficients are used to assess the forecast demand for the product.

5. With the use of appropriate diagram, show how price is determined in the long run
under monopoly

Answer
The decision rules guiding optimal output and pricing in the long-run are the same as in the
short-run. In the long-run however, a monopolist gets an opportunity to expand the size of its
firm with the aim of enhancing the long-run profits. Expansion of the plant size may, however, be
subject to such conditions as:
(a) the market size;
(b) expected economic profit; and,
(c) risk of inviting legal restrictions.
All things being equal, the equilibrium monopoly price and output determination in the long-run
is illustrated by figure 3.3.1 below. According to the figure 3.3.1, the AR and MR curves show
the market demand and marginal revenue conditions facing the monopolist. The long-run
average cost (LAC) and the long-run marginal cost (LMC) curves indicate the long-run cost
conditions. As you can observe from figure 3.3.1, the monopolist’s LMC and MR intersect at
point P, where output is represented as Q*. This represents the profit-maximising level of output.
Given the AR curve, the price at which the output, Q* is represented by P*. It follows that, in the
long-run, the monopolist output will be Q* and price, P*. This output-price combination will
maximise the long run profit. The total profit is shown by the shaded area.

2021_2 EXAMINATION

1(a) Where X and Y represent two products. The sum of X and Y yields 30 units of output.
Find the maximum number of X and Y that can be produced and the maximum profit. (15
marks)

Answer

1(b). Explain Clark’s Dynamic Theory of profit (10 marks)

Answer
The J. B. Clark’s theory is of the opinion that profits arise in a dynamic economy, not in a static
economy. A static economy is defined as the one in which there is absolute freedom of
competition; population and capital are stationary; production process remains unchanged over
time; goods continue to remain homogeneous; there is freedom of factor mobility; there is no
uncertainty and no risk; and if risk exists, it is insurable. In a static economy therefore, firms
make only the ‘normal profit’ or the wages of management. A dynamic economy on the other
hand, is characterized by the following generic changes:
(i) population increases;
(ii) increase in capital;
(iii) improvement in production technique;
(iv) changes in the forms of business organizations; and,
(v) multiplication of consumer wants.

The major functions of entrepreneurs or managers in a dynamic environment are in taking

advantage of the generic changes and promoting their businesses, expanding sales, and
reducing costs. The entrepreneurs who successfully take advantage of changing conditions in a
dynamic economy make pure profit.

From Clark’s point of view, pure profit exist only in the short-run. In the long-run, competition
forces other firms to imitate changes made by the leading firms, leading to a rise in demand for
factors of production. Consequently, production costs rise, thus reducing profits, especially when
revenue remains unchanged.

2. Assume: Demand function: Q = 100 – 0.2P

Price function: P = 500 – 5Q
Cost function: C = 50 + 20Q + Q2
Determine the profit-maximizing level of output and price (15 marks)

Answer
Profit is Maximized where MR = MC
δ𝑇𝑅
MR = δ𝑄
TR = P * Q

TR = (500 – 5Q)Q
2
TR = 500Q - 5𝑄
δ𝑇𝑅
MR = δ𝑄
= 500 - 10Q
δ𝑇𝐶
MC = δ𝑄
= 20 +2Q
⁖ 500 - 10Q = 20 + 2Q
2Q + 10Q = 500 - 20
12Q = 480
Q = 40 units

P = 500 - 5Q, where Q = 40

P = 500 - 5(40)
P = 500 - 200 = ₦300

3(a) List 5 factors that affect the advertisement-elasticity of sales (5 marks)

Answer
Some of the important factors affecting the advertisement-elasticity of sales can be outlined as
follows:
(i) The level of total sales. As sales increase, the advertisement-elasticity of sales decreases.
(ii) Advertisement by rival firms. In a highly competitive market, the effectiveness of
advertisement by a firm is determined by the relative effectiveness of advertisement by the rival
firms
(iii) Cumulative effect of past advertisements. Additional doses of advertisement expenditures
do have cumulative effect on the promotion of sales, and this may considerably increase the
advertisement-elasticity of sales.

Other factors affecting the advertisement-elasticity of sales are those factors demand for the
product, including change in product’s price; consumer’s income; growth of
substitute goods and their prices.

3(b) Discuss the determinants of Price-elasticity of demand (10 marks)

(Check answer to Q5 year 2019_2)

4. Explain in detail econometric technique as a technique of statistical demand

forecasting (15 marks)

Answer
The Econometric techniques include: (i) Regression method; and, (ii) Simultaneous Equation
method

The Regression Method.

Regression analysis is found to be the most popular method of demand estimation and/or
forecasting. It combines economic theory and statistical techniques of estimation. The economic
theory specifies the determinants of demand and the nature of the relationship between the
demand for a product and its determinants. It helps in ascertaining the general form of demand
function.
In regression models, the quantity to be forecast in the demand function is the dependent
variable, and the determinants of demand are the independent or explanatory variables.

4The Simultaneous Equations Method

This method of demand forecasting involves the estimation of several simultaneous equations.
These equations are, generally, behavioural equations, mathematical identities, and
market-clearing equations. Demand forecasting using econometric models of simultaneous
equations enables the forecaster take into account the simultaneous interaction between
dependent and independent variables.

The simultaneous equations method is a complete and systematic approach to forecasting in

general. It uses sophisticated mathematical and statistical tools which are beyond the scope of
the present discussions. In effect, our discussions here will be restricted to the basic steps in the
application of this method of forecasting.

(Read more on page 81-86)

5. With the use of appropriate diagram, explain how price is determined in the short run
for a perfectly competitive firm (15 marks)

Answer
Pricing in the Short-Run. By definition, a short-run refers to the period in which firms can
neither change their size nor quit, nor can new firms enter the industry. While in the market
period, supply is absolutely fixed, in the short-run, it is possible to increase or decrease the
supply by increasing or decreasing the variable inputs. In the short-run, therefore, supply curve
is elastic.

The determination of market price in the short-run is illustrated by figures 3.1.3 (a) and 3.1.3 (b).
Figure 3.1.3 (a) shows the determination of output based on market-determined price in figure
3.1.3 (b). This market price is fixed for all the firms in the industry.

2023_1 POP EXAMINATION

QUESTION ONE
(1a) Minimise C=50x +
Subject to x (20 Marks)

Answer

(1b) Discuss Williamson’s hypothesis of maximisation of managerial utility function (5

Marks)

Answer
O. E. Williamson propounded the hypothesis of maximisation of managerial utility function. He
argues that managers have the freedom to pursue objectives other than profit maximisation.
Managers seek to maximise their own utility function subject to a minimum level of profit.
According to Williamson, manager’s utility function can be expressed as: U = f(S, M, ID)

where S = additional expenditure on staff

M = managerial emoluments
ID= discretionary investments

According to the hypothesis, managers attempt to maximise their utility function subject to a
satisfactory profit. A minimum profit is necessary to satisfy the shareholders or else the
manager’s job security will be at stake.

QUESTION TWO
(2a)Explain briefly and distinguish between
i. Fixed Costs and Variable Costs (3 Marks)
ii. Private Costs and Social Costs (4 Marks)
(Check answer to Q6 year 2020_1)

(2b) With the aid of a diagram explain the short run monopoly equilibrium with positive
profit (8 Marks)

Answer

QUESTION THREE
(3a) In setting the market price for a product, corporate managers should make inputs
about the factors that affect the demand for the company’s products. Outline these
various factors. (7 Marks)

Answer
(Check answer to Q3 year 2019_2)
(3b) With the aid of symbols, analyse the five (5) properties of the Cobb-Douglas
Production Function (8 Marks)

Answer
(Check page 92-93 of the manual)

QUESTION FOUR
(4a) Apart from the profit maximization objective, there are other important objectives of
the firm to be maximized. Outline them. (6 Marks)

Answer
Apart from profit maximisation, as you all know, business firms have the following objectives:
1. Maximisation of Sales revenue
2. Maximisation of the growth rate
3. Maximisation of manager’s utility function
4. Making satisfactory rate of profit
5. Long-run survival of the firm
6. Entry-prevention and risk-avoidance.
(4b) Define market demand and explains the various types of market demand (9 marks)

Answer
Definition of Market Demand: The market demand of any product is the sum of individual
demands for the product at a given market price in a given time period.

To explains the various types of market demand (Check answer to Q2 year 2019_2)

QUESTION FIVE
(5a) Discuss the main ideas behind the following school of thoughts on the theories of
profit in economics.
i. Schumpeter’s Innovation Theory of Profit (3 Marks)
ii. Knight’s Theory of Profit (2 Marks)
iii. Walker’s Theory of Profit (2 Marks)

Answer
(Check page 14-16 of the manual)

(5b) How do incremental and sunk costs differ from marginal costs? (8 marks)

Answer
Incremental Costs and Sunk Costs. Conceptually, incremental costs are closely related to the
concept of marginal cost, but with a relatively wider connotation. While marginal cost refers to
the cost of extra or one more unit of output, incremental cost refers to the total additional cost
associated with the decision to expand output or to add a new variety of product. The concept of
incremental cost is based on the fact that, in the real world, it is not practicable to employ factors
for each unit of output separately due to lack of perfect divisibility of inputs. Incremental costs
also arise as a result of change in product line, addition or introduction of a new product,
replacement of worn out plant and machinery, replacement of old technique of production with a
new one, and the like.

The Sunk costs are those costs that cannot be altered, increased or decreased, by varying the
rate of output. For instance, once management decides to make incremental investment
expenditure and the funds are allocated and spent, all preceding costs are considered to be the
sunk costs since they accord to the prior commitment and cannot be reversed or recovered
when there is a change in market conditions or a change in business decisions.

2023_2 EXAMINATIONS

Question One
(a) Define the concept of elasticity of demand, and with appropriate graphical illustration,
list and explain the two different types of price-elasticity of demand that are mostly used
in business decisions. (5 Marks)
Answer

The concepts of price-elasticities of demand mostly used in business decisions are:

(i) Own- Price Elasticity,
(ii) Cross-Price Elasticity

(b) Define the income-elasticity of demand.

For all normal goods, economists believe that the income-elasticity is positive. However, the
degree or magnitude of income –elasticity varies in accordance with the nature and type of
commodities. List and explain the three categories of consumer goods. Identify and explain the
magnitude of income-elasticity for each of the different categories of consumer goods.
(20 Marks)

Question Two
(a) Explain briefly what economists refer to as constrained optimization. (2 Marks)
(b) List and explain the mostly used constrained optimization techniques (3 Marks)
(c) Let the profit function of a firm be given by: Π = f(X,Y) = 100X – 2X2 – XY + 180Y -4Y2
where X and Y are two different products or commodities. You are required to maximize the
profit function subject to the constraint that the sum of the output of the products X and Y equal
to 30 units, so that X + Y = 30.
(10 Marks)

Solution:
a) Constrained optimization is a technique used to maximize or minimize a function subject
to a constraint.
b) The three common techniques of optimisation include:
(a) Linear Programming,
(b) Constrained optimisation by substitution, and
(c) Lagrangian multiplier.

2 2
C) Given: Π = f(X,Y) = 100X – 2𝑋 – XY + 180Y - 4𝑌
Subject t0: X + Y = 30

From: X + Y = 30,
Y = 30 - X - - - - -eqn (i)
Substitute the for Y in the Profit equation
2 2
Π = f(X,Y) = 100X – 2𝑋 – X(30 - X) + 180(30 - X) - 4(30 − 𝑋)
2 2 2
Π = f(X,Y) = 100X – 2𝑋 – 30X + 𝑋 + 5,400 − 180𝑋 - 4(900 − 60𝑋 + 𝑋 )
2 2 2
Π = f(X,Y) = 100X – 2𝑋 – 30X + 𝑋 + 5,400 − 180𝑋 - 3600 + 240𝑋 − 4𝑋 )
2
Π = f(X,Y) = 130X − 5𝑋 + 1,800 Find the first derivate
δΠ
δ𝑋
= 130 − 10𝑋
130 - 10X = 0
10X = 130, X = 13 units

Y = 30 - X - - - - -eqn (i)
Y = 30 - 13 = 17 units

2 2
Maximum Profit Π = f(X,Y) = 100X – 2𝑋 – XY + 180Y - 4𝑌
2 2
Π = f(X,Y) = 100(13) – 2(13) – (13)(17) + 180(17) - 4(17)
Π = f(X,Y) = 1300 - 338 - 221 + 3060 - 1156
Π = f(X,Y) = ₦2,645

Question Three
(a) List and explain the major types of demand often encountered in business decisions
(7 Marks)
(b) Enumerate and explain the factors affecting the market demand for a product (8 Marks)

Question Four
(a) Explain what demand forecasting is all about and the reason for demand forecasting as an
entrepreneur. (7 Marks)
(b) Enumerate and explain the techniques of demand forecasting. (8 Marks)

Question Five
Explain graphically:
(a) Competitive pricing in the short run. (8 Marks)
(b) Monopoly pricing and output in the short run. (7 Marks)

2024_1 EXAMINATION

Question 1
a. Discuss the following features of business decision making
i. Expected monetary value decision 8 marks
ii. Decision making involving sample information 8 marks
iii. Time perspective in business decision 4 marks
b. By recording the daily demand for a perishable commodity over a period of time, a retailer
was able to
construct the following probability distribution for the daily demand levels:

Si P(Si)

1 0.5
 2 0.3

3 0.2

4 or more 0.0
The opportunity loss table for this demand inventory situation is as follows:

State of nature, Demand

Action, Inventory s₁(1) s₂(2) s₃(3)

a₁(1) 0 4 7

a₂(2) 3 0 4

a₃(3) 5 3 0

You are required to find the inventory level of the expected opportunity loss 5 marks
Question 2
a₁(1) = 0(0.5) + 4(0.3) + 7(0.2) = 0 + 1.2 + 1.4 = 2.6
a₂(2) = 3(0.5) + 0(0.3) + 4(0.2) = 1.5 + 0 + 0.8 = 2.3
a₃(3) = 5(0.5) + 3(0.3) + 0(0.2) = 2.5 + 0.9 + 0 = 3.4
The level of inventory that will minimize the expected opportunity loss is a₂(2)

a. Differentiate between certainty and uncertainty in decision analysis 5 marks

(Check answer to Q4a year 2020_1)
b. How does the study of managerial economics help a business manager in decision-making?
10 marks

Question 3
a. Briefly explain the End-Use Method of survey 3 marks
b. What are the stages involved in the end-use method 8 marks
c. With examples, differentiate between endogenous and exogenous variables 4 marks

Question 4
With the aid of graph, discuss price determination under perfectly competitive market condition
under the following time periods
i. The market period or very short-run; 5 marks
ii. Short-run; and, 5 marks
iii. Long-run. 5 marks

Question 5
Explain the following categories of survey methods
i. Opinion survey method 4 marks
ii. Expert opinion method 4 marks
iii. Delphi method 4 marks
iv. Consumers interview method 3 marks