Final Exam 16 June 2017, answers PDF

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Great practice exam for Business Economics. Good luck! ...

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UWA Business School/Economics

FAMILY NAME: ____________________________ GIVEN NAMES: _____________________

STUDENT ID:

SIGNATURE: ________________________ This Paper Contains: pages Time allowed:

1. This examination consists of two sections (A and B). Section A consists of 20 multiple choice questions and is worth 10 marks. Section B is worth 30 marks and consists of eight short answer questions where students choose 6 to answer. The whole exam is worth 40 marks which is 40% of the final grade from this course. 2. Answer multiple choice questions in Section A by marking the computer cards provided. Unanswered, incorrect or multiple answers are given a mark of zero. questions from Section B in the booklet provided. 3. Answer 4. Only UWA Business School approved calculators are allowed. 5. You should start each question on a separate page. 6. This paper may be retained by the candidate.

Examination candidates may only bring authorised materials into the examination room. If a supervisor finds, during the examination, that you have unauthorised material, in whatever form, in the vicinity of your desk or on your person, whether in the examination room or the toilets or en route to/from the toilets, the matter will be reported to the head of school and disciplinary action will normally be taken against you. This action may result in your being deprived of any credit for this examination or even, in some cases, for the whole unit. This will apply regardless of whether the material has been used at the time it is found. Therefore, any candidate who has brought any unauthorised material whatsoever into the examination room should declare it to the supervisor immediately. Candidates who are uncertain whether any material is authorised should ask the supervisor for clarification. Supervisors Only – Student left at: 1

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A merger of two price-taking firms producing identical products will? A. Increase the level of competition in the market B. Lower the 5-firm concentration ratio C. Make the new firm’s demand curve less elastic than the unmerged firms’ demand curves. D. Make the new firm’s demand curve more elastic than the unmerged firms’ demand curves.

Which of the following is NOT included in Porter’s Five Forces model? A. the threat of potential entrants B. the threat of takeover C. the threat of substitute goods D. the threat of existing firms Which of the following best explains the principal agent problem? A. the divergence of two party’s interests B. the interests of managers differing to the owners of a company C. members of a board paying managers more than their benefit to the firm D. all of the above

The elasticity of demand for labour is NOT dependent on? A. the price elasticity of output B. the ability of a firm to use capital instead C. the proportion of labour costs to total costs D. the mobility of labour

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The demand curve below has been estimated for a home building company where quantity demanded is a function of price (P), house price expectations (Pe ), current house prices (Ph), average income (Y) and interest rates (r): Q = 84.12 – 1.41P + 0.35P e – 0.15Ph + 1.17Y - 2.25r Which of the following is best describes the demand curve for the home building company? A. Demand is price elastic and the good is normal B. Demand is price elastic and the good is a luxury C. Demand is price inelastic and the good is a luxury D. Demand is price inelastic and the good is normal Which of the following is not a limitation of forecasting demand methods? A. Past determinants of demand are not perfect predictors of future demand. B. The forecasts of demand are based on forecasts of the determinants. C. Forecasted estimates do not account for cyclical changes. D. No model for demand can fully capture all of its determinants.

Which statement about characteristics analysis is true? A. A good with equal quantities of both characteristics is likely to be the most popular choice in the market. B. Characteristics analysis can compare goods in different markets. C. A change in the price both goods results in a shift in the efficiency frontier. D. An increase in prices increases the feasibility frontier. Corporate governance refers to: A. The structure of decision making within a business. B. The misalignment of owners’ and managers’ interests. C. Owners entrusting managers with decisions about a firm. D. Managers making risky business decisions because they are not liable for the consequences.

A fundamental criticism of the traditional theory of the firm is that decision-makers in the firm may not aim to maximise profit. On which of the following ideas is this criticism based? A. Many shareholders do not want to maximise profit. B. Managers prefer to maximise profit because this is usually in their own interests. C. Shareholders are not the decision-makers and have different interests from the decision-makers. D. Owners of firms are not rational

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Suppose firms X and Y have similar production methods but firm X faces elastic demand and firm Y inelastic demand. An increase in the minimum wage will: A. Impact firm X more than firm Y. B. Impact firm Y more than firm X. C. Impact firm X and Y the same. D. Need more information. A minimum efficiency score above one suggests: A. Firms should try to export their product. B. A domestic market for the product does not exist. C. The market is perfectly competitive. D. In a closed economy, the good will not be produced.

Pepsi and Coca Cola decide on what price to set in order to maximise profit based on the payoff matrix below. Pepsi

Charge $2.50

Coca Cola

Charge $2.50

Charge $3.50 $500

$3,000

$5,000

$8,000

Charge $3.50

$4,500

$4,500

$4,000

$7,000

What is the equilibrium position of this game? A. Pepsi and Coke both charge $2.50 B. Pepsi and Coke both charge $3.50 C. Pepsi charges $2.50 and Coke charges $3.50 D. Pepsi charges $3.50 and Coke charges $2.50

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A monopsony labour market is best described as: A. Where an employee union operates to increases wages and employment. B. Where the equilibrium wage is above the market wage and there is unemployment. C. Where an employer has market power over its employees. D. Where the minimum wage is set below the market clearing wage. The market share of luncheon spots at UWA/Crawley is shown below: Guild Village 40% Broadway Shopping Centre 30% The UWA Tavern 15% Matilda Bay Tearooms 9% UWA Business School Cafe 6% What is the HHI for this market? A. 0.1402 B. 0.2725 C. 0.2806 D. 0.2842 The introduction of Subway in the Guild Village increases their market share to 70%, while halving the market share of the other luncheon spots. What is the subsequent change to the HHI based on the table in Question 14? A. Increases, representing a decrease in competition. B. Increases, representing an increase in competition. C. Decreases, representing a decrease in competition. D. Decreases, representing an increase in competition. Governments may reduce the size of their intervention in markets through: A. Selling off publicly owned assets B. Increasing efficiency C. Subsidising goods with positive externalities D. None of the above A firm may continue to produce a good past its MES point because: A. It is profitable to do so. B. To decrease competition for their good. C. So they can export the good to different markets. D. All of the above.

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If marginal cost is zero and a monopolistically competitive firm faces the demand curve: P = 90 – 0.25Q; what is the profit maximising quantity? A. Q=45 B. Q=90 C. Q=180 D. Need information on fixed costs. A demand function would not include: A. Price of substitutes B. Future wage costs C. Future price expectations D. Income data

Assume Pots ‘R’ Us and E.B. Pans are two cookware suppliers to Perth and must decide whether to sell the new Wok2K17 wok at a high or low price. Pots ‘R’ Us being the dominant player in the market has the ability to move first in this game. Note: the decision tree below presents Pots ‘R’ Us payoff and then E.B. Pans payoff. (9, 4) (4, 9) Pots ‘R’ Us

(13, 1)

(6, 2)

What is the equilibrium payoff of this game if Pots ‘R’ Us moves first? A. (9, 4) B. (4, 9) C. (13, 1) D. (6, 2)

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Wages represent huge costs to business and labour is an essential production element of nearly every good and service. Using the ideas outlined in this course explain the following: A. The efficiency wage hypothesis and why firms may choose to pay workers above the market clearing rate? B. Why in high income professions (such as doctors), the supply curve may be backwards bending. C. The determinants of demand for labour.

A. Porter’s Five Forces Model of Competition outlines a framework to examine different threats that a firm faces. Outline the forces facing Smith’s Chips in Australia. B. Based on your discussion in Part A, how might Smith Chips use mergers and strategic alliances to mitigate these threats? C. The Australian Competition and Consumer Commission regulate mergers in Australia. What is their reason for doing this and outline why it is important that they do so?

Mr I Cantsleep loves energy drinks. He loves them for the caffeine hit they give him as well as the effervescent sweetness. There are two brands of drinks on the market (i) ‘Redcow’ drinks which are very sweet but don’t contain much caffeine and (ii) ‘Father’ drinks which contain a lot of caffeine but tastes awful. A. Using characteristics analysis, illustrate and explain the situation where Mr I Cantsleep doesn’t exclusively consume one energy drink. B. On a new diagram, illustrate the situation whereby Redcow cuts its price and Mr I Cantsleep switches from consuming both brands of energy drinks to exclusively consuming Redcow drinks. C. A new energy drink enters the market called ‘Vee’ which has similar amounts of sweetness to caffeine. Illustrate and explain the situation where Mr I Cantsleep now only drinks ‘Vee’ exclusively. 8

D. Using a diagram, explain the part of Vee’s product lifecycle where its pricing strategies would be most aggressive.

A. Large reductions in protectionism have been a large driving force in globalisation. What are the main benefits of reducing trade barriers and protection policies? B. Briefly outline the types of firms who lose as a result of trade barrier reduction.

Suppose Frozen Cow Ice-creamery is the only shop on Cottesloe beach (a popular beach in WA) which sells ice-creams. A. Based on your own knowledge and the concepts from this course, would you suggest demand for Frozen Cow is sensitive to changes in price? Justify your answer. B. In Perth, the beach is more popular in the summer; outline, illustrate and explain an obvious pricing strategy Frozen Cow might use to increase profits.

C. The large monopoly profits made by Frozen Cow incentivise Shivering Bull (another ice-cream company) to set up a shop on Cottesloe beach as well. Outline the characteristics about this market which make collusion likely.

A. Explain the concepts of adverse selection and moral hazard; outline and explain some examples of how an insurance company might combat this. B. How does the introduction of a tax impact on the behaviour of firms trying to compete in the business environment? C. How might a firm collect and use time series data to forecast demand? How might they collect and use cross-sectional data to assist in decision making?

A. Explain (using diagrams where appropriate) how trade unions can influence wages across different types of labour markets. B. Who are two losers when trade unions intervene in the labour market? 9

Daniel and Vivek are two rebelling economics honours graduates. After a night of heavy drinking, they thought it would be a good idea to steal UWA’s prized peacock “Susan”. After successfully stealing Susan and hiding her in Hackett Hall, the police stop Daniel and Vivek. They smell their breath and arrest them for street drinking. They also spot Susan and suspect Daniel and Vivek have stolen her but have no evidence of the crime. The police take Daniel and Vivek to the local police lock-up and interrogate them separately. Daniel and Vivek are told that they will face: A $200 fine for street drinking if they both do not confess to stealing Susan If one of them confess that they both stole Susan and the other does not, the person confessing will receive a $50 fine and other person will be punished for lying and receive a $2,000. If both of them confess to stealing Susan they will both receive a fine of $500. A. Set up a pay-off matrix to this Prisoner Dilemma. B. What should Vivek and Daniel do and why? C. Is this a Nash equilibrium? D. If Daniel and Vivek were not interviewed separately and had one day to prepare their answers for the police what would be the likely outcome? Theoretically what problem does this cause? E. Whist simple game theory models are useful for explaining the outcomes for the stealing of peacocks, they are limited for explaining business’s behaviour. Explain why this is the case

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