BMME5103/JAN16/A-NK

MASTER OF BUSINESS ADMINISTRATION

SEMESTER 01 / 2016

BMME5103
MANAGERIAL ECONOMICS

MATRICULATION NO:

CGS01344001

IDENTITY CARD NO.

881201-01-5325

TELEPHONE NO.

+6012-7472098

E-MAIL

nv8703311@oum.edu.my

LEARNING CENTRE

JOHOR LEARNING CENTER

BMME5103/JAN16/A-NK

Table of Contents
1

PART 1

1.1

REQUIREMENT NO. 1

1.2

REQUIREMENT NO. 2 (QUESTION NO.1)

1.3

REQUIREMENT NO. 2 (QUESTION NO.2)

1.4

REQUIREMENT NO. 2 (QUESTION NO.3)

1.5

REQUIREMENT NO. 2 (QUESTION NO.4)

PART 2

2.1

REQUIREMENT NO. 1

2.2

REQUIREMENT NO. 2

2.3

REQUIREMENT NO. 3

11

PART 3

12

3.1

REQUIREMENT NO. 1

3.2

REQUIREMENT NO. 2 (QUESTION A)

15

3.3

REQUIREMENT NO. 2 (QUESTION B)

17

PART 4

12

18

4.1

REQUIREMENT NO. 1

18

4.2

REQUIREMENT NO. 2 (I) 20

4.3

REQUIREMENT NO. 2 (II) 22

4.4

REQUIREMENT NO. 2 (II) 24

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PART 1
1.1

No. 1

Investment Project A
Expected Return = RM 50,000
Standard Deviation = RM 40,000

40,000
50,000

0.8

Investment Project B
Expected Return = RM 250,000
Standard Deviation = RM 150,000

150,000
250,000

0.6

Cash flow for Investment Project A have a larger coefficient of varian that is 0.8 compare
with cash flow for Investment Project B coefficient of varian 0.6. Therefore, Investment
Project A is more risky even though the standard deviation is smaller.

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1.2

No. 2(1)
8,000 10.000
8,000 10,000

100,000 89,500
100,000 89,500

Price Elasticity =

1.3

=-

0.222
0.111

- 2.003

No. 2(2)

Income Elasticity =

=
=

1.4

8,000 10.000
8,000 10,000

650 B 610 B
650 B 610 B

-3.4966
- 3.5

No. 2(3)

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Ed

% Q
% P

-3.5

Q1 Q0
Q1 Q0

2
P1 P0
P1 P0

-3.5

Q1 Q0
P P0
X 1
Q1 Q0
P1 P0

-3.5

Q1 10,000 650 610

X
Q1 10,000 650 610

-3.5

Q1 10,000 1260
X
Q1 10,000
40

-3.5

Q1 10,000

= 31.5
Q1 10,000

3.5 Q1 10,000 = 31.5 Q1 10,000

= 31.5Q1 315000

3.5Q1 35,000
31.5Q1 3.5Q1

35 Q1

= 315,000 -35,000

= 280,000
Q1 = 8,000

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1.5

No. 2(4)

Ed

%Y
%P

-2

Y1 Y0
Y1 Y2

2
P1 P0
P1 P0

-2

Y1 Y0
P P0
X 1
Y1 Y0
P1 P0

-2

Y1 10,000 109.5 89.5

X
Y1 10,000 109.5 89.5

-2

Q1 10,000 199
X
Q1 10,000
20

-2

Q1 10,000

= 9.95
Q1 10,000

2 Q1 10,000

= 9.95 Q1 10,000

2Q1 20,000

= 9.95Q1 99500

9.95Q1 2Q1

11.95 Q1

= 99,500 - 20,000
= 79,500

Q1 = 6652.7

BMME5103/JAN16/A-NK

PART 2
2.1

No. 1

GDP as the dependent variable and Labour & Capital as the independent variables
Variables Entered/Removeda
Variables
Variables
Model
Entered
Removed
Method
1
Capital,
. Enter
Labourb
a. Dependent Variable: GDP
b. All requested variables entered.

Model Summary
Adjusted R Std. Error of
Model
R
R Square
Square
the Estimate
1
.998a
.995
.995
.0122857
a. Predictors: (Constant), Capital, Labour

ANOVAa
Sum of
Model
Squares
df
Mean Square
F
1
Regression
.519
2
.259 1719.231
Residual
.003
17
.000
Total
.522
19
a. Dependent Variable: GDP
b. Predictors: (Constant), Capital, Labour

Sig.
.000b

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Coefficientsa
Unstandardized
Standardized
Coefficients
Coefficients
Model
B
Std. Error
Beta
1
(Constant)
-.718
.263
Labour
.340
.186
.168
Capital
.846
.093
.832
a. Dependent Variable: GDP

t
-2.726
1.830
9.062

Sig.
.014
.085
.000

Conclusion:
Log Q = Log + 1 Log L + 2 Log K
Log Q = Log -0.718 + 0.340 Log L + 0.846 Log K
Therefore,
Q = 0.1914 L0.340 K 0.846

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2.2

No. 2

GDP as the dependent variable and Labour as the independent variable

Variables Entered/Removeda
Variables
Variables
Entered
Removed
Method
Model
b
Labour
. Enter
1
a. Dependent Variable: GDP
b. All requested variables entered.

Model Summary
Adjusted R Std. Error of
Model
R
R Square
Square
the Estimate
a
1
.986
.971
.970
.02883117
a. Predictors: (Constant), Labour

ANOVAa
Sum of
Model
Squares
1
Regression
.507
Residual
.015
Total
.522
a. Dependent Variable: GDP
b. Predictors: (Constant), Labour

df

Mean Square
1
.507
18
.001
19

F
609.450

Sig.
.000b

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Coefficientsa
Unstandardized
Standardized
Coefficients
Coefficients
Model
B
Std. Error
Beta
1
(Constant)
-2.744
.326
Labour
1.993
.081
.986
a. Dependent Variable: GDP

t
-8.409
24.687

Sig.
.000
.000

Conclusion:
Log Q = Log + 1 Log L
Log Q = Log (-2.744) + 1.993 Log L
Therefore,
Q = 0.00180 L98.401

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GDP as the dependent variable and Capital as the independent variable

Variables Entered/Removeda
Variables
Variables
Model
Entered
Removed
Method
1
Capitalb
. Enter
a. Dependent Variable: GDP
b. All requested variables entered.

Model Summary
Adjusted R Std. Error of
Model
R
R Square
Square
the Estimate
a
1
.997
.994
.994
.01306217
a. Predictors: (Constant), Capital

ANOVAa
Sum of
Model
Squares
1
Regression
.518
Residual
.003
Total
.522
a. Dependent Variable: GDP
b. Predictors: (Constant), Capital

df

Mean Square
F
1
.518 3038.842
18
.000
19

Coefficientsa
Unstandardized
Standardized
Coefficients
Coefficients
Model
B
Std. Error
Beta
1
(Constant)
-.269
.101
Capital
1.014
.018
.997
a. Dependent Variable: GDP

t
-2.653
55.126

Sig.
.000b

Sig.
.016
.000

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Conclusion:
Log Q = Log + 1 Log K +
Log Q = Log -0.269 + 1.014 Log K
Therefore,
Q = 0.5382 K 10.3273

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2.3

No. 3

If GDP is dependent variable and Labour/Capital independent,

Q L 1 K 2 , where 1 0.340 and 2 0.846

= 1 2
= 0.340 + 0.846
= 1.186

1 2 > 1, therefore its is increasing return to scale.

Capital / Cost

P
1

Q
1

Quantity

Figure 2.3.1: Increasing return to scale graph

Figure 2.3.1 is a graph for increasing return to scale. It happen when the inputs are
doubled and output is increase at faster rate than double. Graph above shows that when
quantity increase from Q to Q1, output also increases from P to P1 which is higher that the
factor of production (Quantity).

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PART 3
3.1

REQUIREMENT NO. 1

Figure 3.1.1: Porters Five Force Strategic Model

Porter regarded understanding both the competitive forces and the overall industry
structure as crucial for effective strategic decisin-making. In Porters model, the five
forces that shape industry comptition are:
Potential Entrants. This forc examines how easy or difficult it is for competitors
to join the marketplace in the industry being examined. The easier it is for a competitor to
join the marketplace, the greater the risk of a businesss market share being depleted.
Barriers to entry include absolute cost advantages Access to inputs, economies of scale
and well-recognized Brand. For example, larger capital cost are required for brannding,
advertising and creating product demand, and hence this limits the entry of newer players
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in the sports apparel market. However, existing companies in the sports apparel industry
could enter the performance apparel market in the future.
Buyer Power. This force looks at the power of the consumer to affect pricing and
quality. Consumers have power when there are not many of them but lots of sellers as
well as when it is easy to switch from one businesss producto r services to another.
Buying power is low when consumers purchase product in small amounts and the sellers
product is very different from any of its competitors. For example, Under Armours
customers include both wholesale customers as well as end customers. For Wholesale
customers, like Dicks Sporting Goods and the Sport Authority, hold a certain degree of
buyer power as they could substitute Under Armours products with other competitors to
gain higher margins. Meanwhile, buyer power of end customers is lower as Under
Armour enjoys string Brand recognition.
Supplier Power. This forc analyzes how much power a businesss supplier has
and how much control it has over the potential to raise its prices which in turn would
lower a businesss profitability. In addition, it looks at the number of suppliers available:
The fewer there are, the more power they have. Businesses are in a better position when
there are a multitude of suppliers. Sources of supplier power also include the switching
costs of firms in the industry, the presence of available substitutes, and the supply
purchase cost relative to substitutes. For example, in 2012, Under Armours products
were produced by 27 manufacturers located across 14 countries. Of these, the top 10
accounted for 49% of the product manufactured.
Intensity of Rivalry. This forc examines how intense the competition currently is
in the maket place, which is determined by the number of existing competitors and what
each is capable of doing. Rivalry competition is high when there are just a few businesses
equally selling product or services when the industry is growing and when consumers can
easily switch to a competitors offering for little cost. When rivalry competition is high,
advertising and Price wars can ensure which can hurt a businesss bottom line. Rivalry is
quantitatively measured by the Concentration Ration (CR), which is the percentage of
market share owned bt the four largest firms in an industry. For example, Under Armour
faces intense competition from Nike, Adidas and other company. Nike and Adidas which
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have considerably larger resources at their disposal are making a play within the
performance apparel market to gain market share in this up-and-coming product category.
While Under Armour does not hold any fabric or process patents and hence its product
portfolio could be copied in the future.
Substitutes and complements. This force studies how eeasy it is for customers to
switch from a business;s product or service to that of a competitor. It looks at how many
competitors there are how their prices and quality compare to the business being
examined and how much of a profit those competitors are earning which would
determine if they have the ability to lower their costs even more. The threat of substitutes
are informed by switching costs both immediate and long-term, as well as buyers
inclination to change. The demand for performance apparel, sports footware and
accessories is expected to continue and hence we think this forc does not threaten Under
Armour in the foreseeable future.

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3.2

No. 2 (A)

Total demand for polyglue is given by the following function:

P = 10,000 10QT

----------------------

(1)

Where, Total Output (QT) is the sum of Alchem (QL) and followers (QF) output.
QT QL QF --------------------- (2)

Alchems marginal cost function for manufacturing and selling polyglue is:
MCL = 100 + 3QL ----------------- (3)
The aggregate marginal cost function for the other manufacturers of polyglue is:
MCF= 50 + 2QF ----------------- (4)
To maximize profits is found at the point where,
MRL MC L --------------------(5)

Marginal Revenue function ( MR L ) is obtained by differentiating the firms Total

Revenue function ( TR L ) with respect to QL . Total Revenue ( TR L ) is given by the
following expression:
TR L P.Q L ----------------------(6)
QL is obtain form equation (2):

Q L QT Q F

Simplify equation (1) to find QT :

P
10QT
QT

= 10,000 10QT
= 10,000 P
10,000 P

10

QT 1,000 0.10 P --------------------- (7)

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To find Q F , known that Alchem lets the follower firms sell as much outputs as the wish
at the given Price (P). therefore, the follower firms are face with a horizontal demand
function. Hence,
MRF P ---------------- (8)

To maximixe profits, the follower firms will oprate where

MR F MC F ----------------- (9)
Substituting equations (4) and (8) into equation (9)
MRF P ----------------------- (8)

MCF= 50 + 2QF ------------- (4)

MR F MC F ----------------- (9)

Therefore,
P 50 2QF -------------------(10)

Simplify equation (8) to find QF ,

P 50 2QF

2QF = P 50
P 50

QF

QF 0.50 P 25 -------------------- (11)

To find QL , substitute equation (7) for QT and equation (11) for QF in equation (2)
QT 1,000 0.10 P ---------------- (7)

QF 0.50 P 25 -------------------- (11)

QT QL QF --------------------- (2)

Therefore,
Q L QT Q F

Q L (1,000 0.1P ) (0.50 P 25)

QL (1,025 0.60 P ) -------------------(12)

Solve equation (12) for to find P,

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Q L 1,025 0.60 P

0.60 P 1,025 QL
P

1,025
1

QL
0.60 0.60

P 1,708.3333 1.6667Q L ---------------- (13)

Substitute equation (13) to equation (6) to find total revenue yields.

TR L P.Q L ----------------------(6)

TR L (1,708.333 1.6667QL )Q L

TR L 1,708.333Q L 1.6667Q L2 -----------------(14)

Differentiate equation (14) with respect to QL, one obtains Alchem marginal revenue
function

MRL

d TR L
dQ L

1,708.333QL 1.6667QL2

1,708.333 2(1.6667Q L ) (2 -1)

1,708.333 3.3334Q L -------------------- (15)

Substituting equation (15) for MRL and equation (3) for MC L into equatiom (5) to find
QL
MCL = 100 + 3QL ----------------- (3)
MRL = 1,708.333 3.3334Q L -------------------- (15)
MRL MC L --------------------(5)
1,708.333 3.3334Q L

100 + 3QL

6.3334QL 1808.333
Q L 253.945 units

Therefore, Alchem must charge $1,285.083 per units.

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3.3

No. 2 (B)

Insert value of P into equation (7) to find total market demand for polyglue at the price
established by Alchem
QT 1,000 0.10 P --------------------- (7)

= 1,000 0.10(1,285.083)
= 871.49 units
Insert the value of P into equation (11), to find total demand do the follower firms supply,
where P = $ 1,285.083
QF 0.50 P 25 -------------------- (11)

= 0.50(1,285.08) - 25
= 617.542 units

Therefore, an optimal output of the follower is 617.5 units.

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PART 4
4.1

No. 1
Figure 4.1.1 is to explain the Price-output determination for a two-firm Cartel.

MCF

MCE
$20

P*
Cost and price

ATCE

ATCF

$12

P
S

Q*E

Firm E output (units)

Dm

$12

Eo

EF

EE
O

MC

$20

Q*F

Firm F output (units)

MR
O

Q*Total

Cartel output (units) = Qi

Given these assumptions and given the market demand curve and its corresponding
MR curve, joint profits will be maximixed when the industry MR equals the industrys
MC. Figure above shews the situation where Dm is the market or cartel demand curve and
MR is its corresponding marginal revenu curve. The aggregate marginal cost curve of the
industry MC is drawn by the lateral summation of the MC curves of firm E and firm F,
so the MC = MCE + MCB,.
The cartel solution that maximizes joint profit is determined at point where the
MC curve interscets the industry MR curve. Consequently, the total output is OQTotal
which will be sold at $20 = QTotalF price. As under monopoly, the cartel board will
allocate the industry output by equating the industry MR to the marginal cost of each
firm. The share of each firm in the industry output is obtained by drawing a straight line
from E0 to the vertical axis which passes throught the curve MC F and MCE of firms F and
E at the points EF and EE respectively.

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Thus the share of firm E is OQ*E and that of firm F is OQ*F which equal the total
output OQTotal = OQ*F + OQ*E. The price OP* and the output OQTotal distributed between E
and F firms in the ratio of OQ*F :OQ*E is the monopoly solution.
Firm F with the lower costs sells a larger output OQ F than the firm E with higher
costs so that OQF > OQE. But this does not mean that F will getting more profits that E.
The joint mximum profit is the sum of grey rea earn by firm E and F respectively. It
will be pooled into a fund and distributed by the cartel board according to the agreement
arrived at by the two firms at the time of the formation o fthe cartel.

Figure 4.1.2 is to explain the Price-output determination for a two-firm Cartel.

ATC = Average Total Cost

MR = Marginal Revenue
MC = Marginal Cost

When MC rises above MR, the firm would incur greater costs than it would receive in
additional revenue, which is why the firm maximizes its profit by producing only that quantity
where MR = MC, and charging the corresponding price.
1 Productive Efficiency: MC = Minimum ATC
2 Allocative Efficiency: MC = Market Price
Oligopoly Profit = (Price - ATC) Quantity
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Although there are many major industries dominated by oligopolies, there are rarely
prosecuted under antitrust laws. However, there are several factors that limit the pricing power
of oligopolies, including foreign competition and technological advances. Before extensive
world trade, oligopolies developed independently in many modern economies. As trade
barriers fall, oligopolies find they must compete with oligopolies from other countries, which
diminishes their pricing power. Technology can also diminish the pricing power of oligopolies
by producing better products, by lowering the fixed costs of developing a product, and by
opening markets to more competitors. For instance, brick-and-mortar retailers now have much
more competition from the Internet.
Many of the technological advances originate in oligopolies, because they have a greater
amount of money to invest in research and development (R&D). While monopolies also have
money for R&D, the need to conduct research is lessened by the fact that the monopoly has no
real competition. However, over time, technological advances eventually rode even a
monopoly's power. Hence, oligopolies invest heavily in research and development to maintain
their pricing power.

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4.2

REQUIREMENT NO. 2 (i)

Demand for the component is given by the following function:

P = 1000 QS QT -------------- (1)
Where, QS and QT are the quantities sold by the respective firms and P is the (market)
selling price. The total cost functions of manufacturing and selling the component for the
respective firms are:
TCs = 70,000 + 5QS+ 0.25QS ------------------- (2)
TCt = 110,000 + 5QT + 0.15QT --------------------(3)
Suppose that the two firms act independently with each firm seeking to maximize its own
total profit from the sale of the compenent. SAMSUNG total profits is equal to: S PQS TC S , insert equation (1) and (2)

= (1000 QS QT)QS (70,000 + 5QS+ 0.25QS)

2

= - 70,000 + 995QS QTQS 1.25 QS ------------------- (4)

SAMSUNG total profit depends on the amount of output produced and sold by HYNIX
(QT). Differentiate of equation (4) with respect to QS
S - 70,000 995Q S QT QS 1.25QS2
11
11
2 1
= (1)995QS (1)QT QS (2)1.25QS

S
995 QT 2.50QS
QS
--------------------------- (5)

Similary, HYNIX total profits is equal to

T PQT TCT

= (1000 - QS QT)QT (110,000 + 5QT + 0.15 QT2 )

= - 110,000 + 995QT QSQT 1.15 Q T2 ---------------- (6)

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HYNIXstotalprofit is a function of SAMSUNGs output level (Q S). Differentiate of

equation (4) with respect to QT
S - 110,000 995Q T QS QT 1.15QT2
11
11
2 1
= (1)995QT (1)QS QT (2)1.15QT

T
995 Qs 2.30QT
QT
---------------------(7)

Assume equation (5) equal to zero,

2.5QS + QT = 995 ----------------------------(8)
Assume equation (7) equal to zero, find QS
QS + 2.3QT = 995 ---------------------------(9)
QS = 995 - 2.3QT -----------------(10)
Subsitute equation (10) into equation (8), to find QT
2.5QS + QT = 995
2.5(995 - 2.3QT) + QT = 995
2487.5 5.75QT + QT = 995
QT = 314.21 units------------ (11)
Insert QT = 314.21 into equation (9), to find QS
QS + 2.3QT = 995
QS + 2.3(314.21) = 995
QS = 272.317 units -------------(12)

Therefore, an optimal output for HYNIX is 314.21 and optimal output for SAMSUNG
is 272.317 units.

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To get selling price per unit, substitute equation (11) and equation (12) into equation (1)
to get selling price per unit:
P = 1000 QS QT
= 1000 -272.317 314.21
= $ 413.473

Substitute QS QT into equation (4) and (6) to get the respective profits for the two
firms, where;
S = - 70,000 + 995Q Q Q 1.25 Q 2
S
S T S

= -70,000 + 995(272.317) (314.21)(272.317) 1.25(272.317)2

= $ 22,695.00
T = - 110,000 + 995QT QSQT 1.15 Q T2

= -110,000 + 995(314.21) - (272.317)(314.21) 1.15(314.21)2

= $ 3,535.17
The profit-maximizing Price and output levels for a two-firm cartel can be determined
algebraically when the demand and cost functions are given. Consider again the
SAMSUNG (Firm S) and HYNIX (Firm T) example as discussed above. The demand
function was given by equition (1) and the cost functions for the two firms were given by
equations (2) and (3). Suppose that Siemens and Alcatel-Lucent decided to form a cartel
and act as a monopllist to maximixe total profits form the production and scale of the
components.
Total industry profits ( Total ) are equal to the sum of SAMSUNGs and HYNIXs
profits and are given by the following expression:
Total S T

= PQS TC S PQT TCT ---------------(13)

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Subsitute equation (1), (2) and (3) into equation (13)

Total (1,000 QS QT )QS (70,000 5QS 0.25QS2 )
(1,000 QS QT )QT (110,000 5QT 0.15QT2 )
180,000 995QS 1.25QS2 995QT 1.15QT2 2QS QT -------- (14)

To maximize Total , differentiate equation (14) with respect to Q S and QT :

Total
995 2.50QS 2QT
QS
Total
995 2.30QT 2QS
QT

Setting these expressions equal to zero yields

2.5QS + 2QT 995 = 0 ---------- (15)
2QS+ 2.3QT 995 = 0 ---------- (16)
Solving equation (15) and (16) simultaneously gives the following optimal output levels:
2.5QS + 2QT 995 = 0
QT = 497.5 1.25 QS ---------------(17)
Subsitute equation (17) into equation (16)
2QS+ 2.3QT 995 = 0
2QS+ 2.3(497.5-1.25 QS ) = 995
0.875QS = 149.25
QS = 170.57 units
Insert QS = 170.57 into equation (15)
2.5QS + 2QT 995 = 0
2.5(170.57) + 2QT = 995
2QT = 995 426.425
QT = 284.29 units.
Therefore, QS=170.57 units and QT = 284.39 units.

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To get an optimal selling price and total profit for the cartel, subsitute QS=170.57 units
and QT = 284.39 units into equation (1) and equation (14).
P = 1000 - QS - QT
= 1000 170.57 284.39
= 545.04
Total 180,000 995QS 1.25QS2 995QT 1.15QT2 2QS QT

= -180,000 + 995(170.57) 1.25 (170.57)2 +995(284.39) 1.15 (284.39)2

-2(170.57)(284.29)
= -180,000 + 169,717.15 36367.656 + 282968.05 93009.3229 96982.6906
= $46,325.53

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4.3

REQUIREMENT NO. 2 (ii)

The marginal costs of the two firms at the optimal output level are equal to:
MC S

d (TC S )
5 0.50QS , where QS = 170.57
dQs

= 5 + 0.50(170.57)
= $ 90.29

MCT

d (TCT )
5 0.30QT , where QT = 284.39
dQT

= 5 + 0.30(284.39)
= $ 90.29
The optimal output (or market share) for each firm in the cartel occur where
marginal costs of the two firms are equal. Table 4.4.1 summarized the results of the
SAMSUNG and HYNIX where:
1. The two ompanies acted independently to maximize their own company profits
(cournot equilibrium),
2. Thet formed a cartel to maximize total industry profits.
Several conclusions can be drawn from this comparison. First total industry output (QTotal)
is lower and selling price (P) is higher when the firms collude. Also, total industry profits
( Total ) are higher when the firms set prices and output jointly than when they act
independently. Finally, although it may not be sure true all collusive agreements, one
firms profits (SAMSUNG) are actually lower under cartel solution than when it acts
independently. Therefore, to get SAMSUNG to participate in the cartel, HYNIX probably
would have to agree to share a significant part of the cartels additional profits with
SAMSUNG.

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Table 4.4.1: Comparison of picing, output and profits for SAMSUNG and HYNIX.
Optimal Value

QS (Samsung output)
QT (Samsung Hynix output)
QTotal = QS + QT (Total Industry
Output)
P (Selling Price)

S ( Samsung Profits)
T (Hynix Profits)
Total (Total Industry Profits)

No Collusion: Samsung and

Hynix act independently to
maximize their own
companysprofits
272.32 units
314.21 units

Collusion: Samsung and

Hynix from a cartel to
maximize total industry
profits
170.57 units
284.29 units

586.53 units

454.86 units

$413.47/units
$22,695.00
$3,536.17
$26,231.17

545.04/units
$14,858.15
$31,433.28
$46,325.53

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