Master of Business Administration - MBA 2014

Course: MBA 502 Economic Analysis for Business

Assignment 2
Answer All Questions
MCQs
1. Which of the following statements is incorrect for perfect competition?
a) Market demand curve is downward sloping
b) A firm may earn abnormal profit in the short run
c) A firm aims to produce where AC is at a minimum
d) The firm can sell as much as it wishes at the prevailing market price
2. Which of the following are common features of oligopolistic markets?
i) Advertising
ii) Barriers to entry
iii) Interdependence of decision making
iv) Price stability
a) (i) & (ii) only
b) (i), (ii) & (iii) only
c) (i) (ii) & (iv) only
d) All of them
3. A monopolist is free to set
a) Only the price
b) Only the quantity
c) Either the price or the quantity
d) Both the price and the quantity

4. Which of the following does NOT represent investment?

a) An increase in the quantity of shoes accumulated in a shoe store
b) The construction of a house that will be occupied by its owner but used for business
c) The purchase of newly issued shares in XYZ company.
d) The construction of a factory building using money borrowed from a bank
5. A washing machine is produced by its manufacturer in 2008, sold during 2009 to
a
retailer and sold by the retailer to a final consumer in 2009. The washing machine would
have been:
a) Counted as consumption in 2008
b) Counted as investment in 2009
c) Counted as investment in 2008
d) Excluded from the GDP of 2008
6. Which of the following cannot be described as fiscal policy?
a) A change in income tax aimed at altering the distribution of income
b) A planned reduction in the budget deficit aimed at reducing government borrowing.
c) A reduction in interest rates which helps to reduce the cost of servicing the public debt.
d) An increase in welfare assistance to the poor.
7.Inequality in income distribution in an economy is most likely to decrease when
a) Indirect taxation is constant and direct taxation rises
b) Indirect taxation falls and direct taxation rises
c) Indirect taxation rises and direct taxation falls
d) Indirect taxation is constant and direct taxation falls
8. A progressive tax is one where the tax payment
a) Rises as income increases
b) Falls as income increases
c) Is a constant proportion of income
d) Rises at a faster rate than income increases

9. If the Central Bank buys government securities in the open market:

a) The real money supply increases, leading to a fall in the interest rate
b) The real money supply increases, leading to a rise in the interest rate
c) The real money supply decreases, leading to a fall in the interest rate
d) The real money supply decreases, leading to a rise in the interest rate
10. The banking system receives a new deposit of Rs. 20,000 where the cash ratio is 10%.
The extra money created within the banking system with the new deposit is Rs.
a 200,000
b 180,000
c 20,000
d 2,000
Short Answer Questions
1. In 2011, Henry was a school teacher drawing an annual salary of Rs. 280,000 but he
enjoys creating cartoons. So on 1st January 2012 Henry gave up teaching and set to
work as a cartoonist. He stopped renting his apartment for Rs. 50,000 a year and
used it as his office. He withdrew Rs. 100,000 from his savings account (for which the
bank paid 5% annual interest) in order to buy a new computer. He leased a printer for
Rs.3,000 a year. During 2012, Henry paid Rs. 25,000 for stationery & utilities and sold
Rs.500,000 worth of cartoons. Normal profit is Rs. 60,000 a year.
At the end of 2012
Henry was offered Rs. 68,000 for his computer. For the year
2012, calculate Henrys:
a) Explicit costs
b) Implicit costs
c) Economic profit
2. Assume that Toshiba & Dell Computer have a large inventory of personal computers that
they wish to sell before a new generation of faster machines is introduced. Assume that the
question facing each company is whether or not they should advertise a clearance sale on
these discontinued items, or let excess inventory work itself off over the next few months.
If both aggressively promote their products, each will earn profits of $ 5 million. If one
advertises while the other does not, the firm that advertises will earn $ 20 million, while
the other one that does not advertise will earn $ 2 million. If neither advertises, both will
earn $ 10 million. Assume that this is a one-off game, and both firms seek to maximise
profits.
a) Using the above data construct the payoff matrix
b) What is the dominant strategy for each firm?
c) What is the Nash Equilibrium?
3

3 The Table below shows some selected National Accounts statistics for economy ABC.
Item
Consumption expenditure
Gross investment
Depreciation
Govt. purchases of goods & services
Imports
Exports
Transfer payments
Taxes
(i) What is country ABC's GDP for the year?

Rs. Million
250
60
40
94
22
20
40
120

(ii) What is the countrys net investment?

(iii) What is the countrys disposable income?

4. The Table below shows some selected National Accounts statistics for country XYZ.
Item
Consumption expenditure (C)
Investment expenditure (I)
Taxes incl. Indirect taxes (T)
Transfer payments (TR)
Exports (X)
Imports (M)
Government expenditure (G)
Depreciation (Depr.)
Indirect taxes (IT)
Subsidies (SB)
Wages and Salaries (W)
Gross operating surplus (GOS)

Rs. Million
200
50
90
30
20
10
70
20
15
05
230
90

Given the above data, calculate country XYZ's:

a) GDP at market prices, using the expenditure approach
b) Disposable income (YD)
c) Saving (S)
d) Net investment (NI)
e) Net taxes (NT)
f) Check whether total leakages from and total injections into the circular flow of
income are equal.