ECMC40 Sample Midterm

12 Pages
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Department
Economics for Management Studies
Course Code
MGEC40H3
Professor
Jack Parkinson

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1 NAME SOLUTIONS STUDENT NUMBER UNIVERSITY OF TORONTO AT SCARBOROUGH ECM C40 ECONOMICS OF ORGANIZATION & MANAGEMENT Jack Parkinson Solutions SAMPLE Mid-Term Exam #1 INSTRUCTIONS: 1. Total time for this examination is 90 minutes. 2. Total marks = 80 3. This test has eight (8) pages ! 4. Aids allowed: Calculator 5. Do not use pencil. If pencil is used then that portion of (question on) your Exam cannot be considered for re-grading. MARKS QUESTION 1 8 /8 QUESTION 2 20 /20 QUESTION 3 10 /10 QUESTION 4 14 /14 QUESTION 5 8 /8 QUESTION 6 20 /20 TOTAL 80 /80 SHORT ANSWER PROBLEMS (80 MARKS - Various weights) Q1. (8 Marks) Use several sentences to describe in words how businesses arrive at their optimal structure/strategy. Why might such optimal strategies vary over time? Explain. The amount of infrastructure includes physical as well as business environment structure created via government rules, industry conventions, social norms and/or past traditions in the areas of communications, transportation, finance, government, and the level or degree of technological advancement. We learned in chapter one of the textbook (the first lecture) that this infrastructure is crucial to shaping (influencing) what is the optimal structure and strategy for business to adopt. Since this (business) environment is dynamic then so might the optimal structure and strategy be. Aside: According to the textbook what is time invariant are the economic principles that one employs to obtain these optimal structure/strategies. Q2. (20 Marks) Suppose two firms face market demand Q = 56 – (½)P. Each firm has (constant) marginal cost of $20 per unit of output. Calculate the equilibrium price, output and profits assuming that the firms behaved under the rules of Perfect Competition. Calculate the equilibrium price, output and profits assuming that the firms formed a Monopoly Cartel. Calculate the level of welfare loss that would occur under the Cartel situation. Q = 56 - (½)P, which implies P = 112 - 2Q  MR = 112 - 4Q  MC = i0 = AC (i = i & 2, as fixed costs = 0) Perfect Competition (PC) Pick q to MAX i (P - AC)qi= (P i MC)qi i i i i  /q = P - MC = 0 i i i i  P * = MC = $ 20 i i 3  Q* = 56 - (½)P* = 56 - ½(20) = 46  Q* = q + 1 & q2= q d1e to2symmetry   * 1  * =2$ 0 (per period, as P = AC)  CS = ½(112 - 20)(46) = (92/2)(46) PC = (46) = 2,116 (Question 2 continued) Monopoly Pick Q to MAX  = P Q - ACQ = (112 - 2Q)Q - 20Q 2 = (112 - 20)Q - 2Q /Q = 92 - 4Q = 0 (Same as MR = 112 - 4Q = MC = 20)  Q* = 92/4 = 46/2 = 23 (q1= q 2 11.5 due to symmetry)  P* = 112 - 2Q* = 112 - 46 = $ 66   * = (P* - AC)Q* = (66 - 20)23 = 46(23) = $ 1,058 (per period)   *1=  * 2 */2 = $ 529 (due to symmetry) CSM= ½(112 - 66)(23) = ½(46)23 = 23 = 529 Consumers’ welfare loss = CS PC- CSM= 2,116 - 529 = 1,587 Producers’ welfare loss =  PC- M= -  =M- 1,058 Societies welfare loss = (consumers’ welfare loss) + (producers’ welfare loss) = 1,587 + ( - 1,058) = 529 = Deadweight loss of the monopoly (DWL) = ½(46)(46 - 23) = 23(23) = 23 = 529 5 Q3. (10 Marks) Suppose that you have a co-worker Bill. Sometimes Bill takes other employee’s work and repackages it. He then passes it off as his own. A) What is Bill guilty of doing? Explain with reference to principles discussed in this course. Bill is guilty of: SShirking or Slacking (which leads to agency costs); and SRent seeking and Influence costs (which leads to influence costs). This is clear since he is trying to appropriate work and economic credit (in the form of positive appraisals, pay raises and promotions) by claiming he is responsible for other peoples value-added. [At best what he is doing is immoral. At worst, it is illegal.] B)When is this kind of situation more likely to occur? [Hint: In what kind of firm. Small/large, public/private, or integrated/non-integrated etc.] Explain why. This kind of situation is most likely to occur in: Sextremely large organizations (say due to a high degree of horizontal integration via scale economies); Sboth the public and private sector (contrary to what some politicians might say the private sector is not significantly better suited to avoid such problems); Slarger organizations that employ people in a number of occupations (either because the organisation is vertically integrated or is horizontally integrated around scope economies - as either leads to many employees in a number of occupations which can cause monitoring problems/agency costs); and Sinternal costs centres (without outside competitors or an outside market) and service oriented organizations (though not exclusively, just perhaps more likely) as in both it is more difficult to measure output and hence to allocate credit for effort (even if that effort is properly measured/monitored). 7 Q4. (14 Marks) Sometimes firms outsource the production of certain goods or services to arms-length firms. A)List and briefly explain each of the main arguments for outsourcing. Outsourcing can reduce the firms’ costs in the following ways: SIf the suppliers are more efficient at producing the good (or service) due to scale; scope; or learning economies and pass along enough of their cost saving to their customers (this requires that the suppliers be in a competitive (enough) market - students should think of the conditions that are required to support competition and whether they are likely to be present in this industry). SIf the firms’ own costs might be reduced since the outsourcing might allow the firm to become more efficient. That is, the firm might be able to reduce the firms internal costs stemming from internal agency, rent seeking and/or influence costs. [So vertically dis- integrating the firm might help the firm stick to what it does best while reducing certain internal costs not directly related to the production of the good or service.] B) When should a firm chose to outsource? Explain This is simple, the firm should choose to outsource whenever the benefits exceed the costs (and these can be large and should be investigated prior to making a decision). The explanation is clear as long as the firm has objectively sought out and evaluated all possible benefits and costs then outsourcing when benefits exceed costs improves the financial position (health & profitability) of the firm. Q5. (8 Marks) Provide a brief definition and explanation of ANY 4 of the following 6 terms: 1)Core competencies 2) Economies of scope 3) Oligopoly 4) Cross Price Elasticity 5) Horizontal Integration 6) Vertical Chain Core competencies: These are the functions that an organizations does best (either in terms of highest profit margin or highest value-added). Such activities might have lower agency and influence costs and can be tied to special internal proprietary information (trade secrets) or relationship
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