UNIVERSITY OF PROFESSIONAL STUDIES, ACCRA (UPSA)

DEGREE PROGRAMME

Take-Home Examination Cover Page

STUDENTS’ SUBMISSION SHEET

END OF SECOND SEMESTER EXAMINATIONS- 2019/2020 ACADEMIC YEAR

FACULTY OF ACCOUNTING & FINANCE

DEPARTMENT OF BANKING & FINANCE

LEVEL 300

BAAF304: MANAGERIAL ECONOMICS FOR BUSINESS

Start Date: Monday, May 18, 2020: 5 pm
End Date: Wednesday, May 20, 2020: 5 pm

STUDENT ID. NUMBER: 10105932

DIGITAL/PHYSICAL ADDRESS OF THE STUDENT: GD-268-8277

Adentan, East Adenta, Greater Accra, GHA

Amrahia, Dodowa road

Question 1(a)

If Px = Price of the Micky Phones

Py & Pz = Price of other related commodity or product

M = Income of consumers (students)

(I). Qx = 1200 - 1/2Px + 1/4Py - 8Pz + 1/10M

= 1200 - 0.5Px + 0.25Py - 8Pz +0.1m

= 1200 - 0.5(4,910) + 0.25(5,900) - 8(90) + 0.1 (55,000)

= 1200 - 2,455+ 1,475 - 720 + 5,500

= 5,000 units.

Therefore, the total demand for good X is 5,000 units

(II). Own price elasticity of demand

= (∆𝑄𝑑𝑥/ ∆𝑃x) × (𝑃x /𝑑𝑥)

4,910
= - 0.5 x
5,000

= -0.495

Cross price Elasticity of demand for commodity X with respect to product Y

= (∆𝑄𝑑𝑥/ ∆𝑃y) × (𝑃y/𝑑𝑥)

5,900
= 0.25 x 5,000

= 0.295

 Commodity X and Y are substitutes. The cross price elasticity of demand for commodity X with
respect to commodity Y is positive. This means that an increase in price of commodity Y will lead to
more than proportionate change or an increase in demand for commodity X.
Cross price Elasticity of demand for Commodity X with respect to product Z

= (∆𝑄𝑑𝑥/ ∆𝑃z)× (𝑃z /𝑑𝑥)

90
= -8 x
5,000

= -0.144

 Product X and Z are also complement products. The cross price elasticity of demand for product X
with respect to Z is negative. This means that an increase in the price of product Z will lead to less
than proportionate change or decrease in demand for product X.

(III). Price Elasticity of demand

∆ Qdx Py
= ∆ Py x dx

4,910
= -0.5 x 5,000

= -0.495

Price elasticity of demand is fairly inelastic. This is because a change in the price of commodity X will lead
to less than proportionate change in quantity demanded of commodity X by -0.495

(IV). The effect on quantity demand of Mizky mobile phone should it increase its price by GH¢ 500

Qx = 1200-0.5Px + 0.25Py-8Pz+0.1m

= 1200-2,705+1,475-720+5,500

Qx =4,750

Quantity demand for Milky phones will reduce to 250 units, since some of the consumers will shift their
demand to buy product Y or Z.
(V). Income price elasticity of demand of X

∆ Qdx Py
= ∆ Py x Qdx

55,000
= 0.1 x 5,000

=1.1

 The income price elasticity of demand is positive. This means the product X is a luxury good, e.g.
sport car. An increase in consumers’ income leads to more than proportionate increase in quantity
demand of commodity X.

(VI). Income price elasticity of demand measures the relationship between a change in quantity demand of
commodity X and a change in real income. It helps classify luxury good (product X) based on relationship
between consumers income and its demand. When this happens producers benefits more and are able to
produce more luxury goods.

(VII). Examples of Y are Butter and Margarine.

Examples of Z are Car and Petrol

(VIII). An increase in price does not necessarily mean an increase in total revenue or profit. This is because
Profit or revenue is maximize at the point where elasticity is unitary elastic. When the price is elastic, the
quantity effects outweighs the price effect, this means if price decreases the revenue gained from more units
sold will outweigh the revenue lost from the decrease in price.

When the price is inelastic, the price effect outweighs the quantity effect, meaning if we increase prices, the
revenue gained from higher price will outweigh the revenue lost from less unit sold.

Question 1(b)

The free market refers to the economic system where government has little or no control over the demand and
supply of goods and services.

Essential commodities are those commodities that helps maintain a minimum acceptable standard of living.
Commodities that the government thinks is necessary to maintain or increase supplies, it regulates it
production, supply, distribution and sale of that commodity. The open market and consumers determine Price
of goods and services. When this happens producers, store most of their goods and supply more when the
demand is high, but at a high price. This affects the average Ghanaian worker to buy such a commodity. This
has become necessary leading to government intervention through the minimum wage legislation and rental
control with its associated problems.

Government intervention through the minimum wage legislation was a mechanism to help employers pay
their workers. This was to reduce high prices of essential commodities consumed by the average worker and
to control inflation. Because every employee or worker will be able to afford the basic essential commodities
such as food, electricity and others. This was to clear the excess supply of commodities in the market. The
minimum wage legislation became a problem when there was excess demand for a particular type of work but
limited in supply. This created unemployment among the unskilled laborers because there was a fall in the
minimum wage of government. The minimum wage created unnecessary hardship for the very Ghanaians it
was supposed to help.

Government intervention through rental control was mechanism to help prevent landowners from over
increasing the amount of money charge for rent. This was to help the average Ghanaian worker to afford a
place to sleep after the hard days’ work. This became a problem after the demand for rent increased more than
the supply. Since demand for rent increased, land owners began to charge higher price for rent, leaving most
of the Ghanaian workers who were not able to afford on the streets.

Question 2.

KEK LIMITED AND OPK LIMITED

(A) Duopoly Market: This is a type of oligopoly market characterized by corporations operating in a market
or industry producing the same or similar goods and services. Under this market, firms enjoy same
monopoly power.

(B). Elements of the game are;

i. Players; KEK Ltd and OPK Ltd

ii. Strategy ; This is to advertise or not to advertise
iii. Play off; it has to win more customers from saturated market of mobile users.
(C).

KEK LTD
Strategies High Level of Lower level of
OPK LTD Advertising Advertising
Higher Level of 5,000,000/5,000,000 18,000,000/2,000,000
Advertising
Lower level of 2,000,000/18,000,000 12,000,000/12,000,000
Advertising

(D). Yes, the players have a dominant strategy. The dominant strategy of these players ( KEK Ltd and OPK
Ltd) is to choose high level of Advertising or to choose lower level of advertising.

(E). The Nash equilibrium of the game is to choose High level of Advertising. This is because it will help
them with 5,000,000 customers each.

(F). The Pareto preferred outcome is to choose lower level of advertising. This is because it will help them
with 12,000,000 customers each

(G). The type of game KEK Ltd and OPK Ltd engaged in is the two person non-constant sum game. In this
game, the sum of the pay offs for the players do not sum to a constant value but varies from strategy
combination. In this game, both players do not loose. When they both decide to choose high level of
advertising, they win 5,000,000 customers but also, when decided to choose lower level of advertising they
win 12,000,000 customers.

(H). The type of game that has multiple equilibria is the Two-person constant-sum game. This game solves
the problem by making use of all available information, players can deduce strategies that are optimal which
makes the outcome strictly determined.

Question 3a

Q= 180.68 – 7.15X + 4.11A + 48.11pY + 0.58Y + 33.01Pop

Where Q is the quantity demanded of smoothies (dependent variable) and Px, A, PY, Y are the independent
variables of the expression of the price of smoothies. Amount spent on Advertising, is the price of Mary Ann
Major Competitor, and the disposable income per capita, and population of University students.

i. The coefficient of -7.15 is an independent variable of the price of smoothies. This means that a
proportionate increase in the price of the smoothies by one GH¢1, will lead to a proportionate decrease
in the quantity demanded of smoothies by -7.15units all other things being equal.
ii. The coefficient of 4.11 it’s also an independent variable of the amount spent on advertising, which
means that an increase in advertising by one GH¢1, will lead to a proportionate increase in quantity
demanded for smoothies by 4.11 all other things being equal.
iii. The coefficient of 48.11 is an independent variable of the price of smoothies from Mary-Ann’s major
competitors. This means an increase in the price of smoothies by GH¢1, will lead to a proportionate
increase in quantity demanded for smoothies by 48.11, all other things being equal.
iv. The co-efficient of 0.58, it is an independent variable of the amount of income spent on smoothies by
consumers. This means an increase in income of consumers on smoothies by GH¢1 will lead to a
proportionate increase in quantity demanded of smoothies by 0.58, all other things being equal.
v. The coefficient 33.01, it is an independent variable of the number of students who consume smoothies.
This means that an increase in the number of students by 1 unit will lead to an increase in the quantity
demanded of smoothies by 33.01, all other things being equal.
vi. Statistical significance of each of the independent variable @ 5% level
a. At the significant level of 5%, the price (Px) of smoothies is statistically significant (0.004).
That is its P-value is less than 5%.
b. At the significant level of 5%, competitors price (Py) for smoothies is statistically significant
(0.001). Its P-value is less than 5%.
c. At a significant level of 5%, income of consumers for smoothies is statistically insignificant
(0.882). Its P-value is greater than 5%.
d. At the significant level of 5%, Advertising for smoothies is statistically insignificant (0.19). Its
P-value is greater than 5%.
e. At the significant level of 5%, students’ population for smoothies is statistically significant
(0.002). Its P-value is less than 5%.

vii. R- Square value of 0.82. That about 82% change in the dependent variable (smoothies) its explained
by the independent variables (price of other competitors, per capita income, Advertising, and Population of
students).

viii. Q = 180.68 - 7.15X + 4.11A + 48.11PY+ 0.58Y + 33.01Pop

 =180.68 - 7.15(5) + 4.11(350) + 48.11(8) + 0.58(800) + 33.01(2,500)

=180.68 – 35.75 + 1,438.5 + 384.88 + 464 +82,525

Q = 84,957.31

Therefore, the quantity of smoothies sold by Mary-Ann Beverages is 84,957.31 units.

Question 3b.

Accounting profit refers to the difference between the total monetary revenue and total monetary cost.
Accounting profit consist of the explicit cost are direct payments made to others in the course of running your
business. Examples of such are rent, wages and materials, for production. Accounting profit is general total
revenue from sale, minus cost of producing the goods sold. Economic profits refers to the difference between
the total revenue received by the firm from its sales and the opportunity cost of all the resources used by the
firm. The profit reflects both explicit and implicit cost. Explicit cost are the cost that involve direct monetary
payments such as wages to workers, rent paid to land owner, etc. Implicit cost is the opportunity cost of
factors of production that an owner of a business already owns. Implicit cost can also be a cost incurred using
an asset instead of renting or lending it. The implicit cost here is my friend using his or her own house for the
shop, hence pays no rent.

Accounting profits will not factor the use of the house in its cost of operations and this will turn out increasing
the profit of the firm.

Economic profit factors all this implicit cost such as using your own home as a shop. Implicit cost in
economics treat this as an additional cost (renting of the house) to the firm and hence added to the cost of
operation. Economic profit does this because, assuming you do not own a house, you will rent a shop for your
retail outlets.

I will advise my friend to adopt the economic profit of operations because it is a much better reflection of the
business finances than the accounting profit he or she is using currently.