Managerial Economics Essay

2645 words - 11 pages

Examination Paper of Managerial Economics IIBM Institute of Business Management Subject Code-B-106 Examination Paper Managerial Economics Section A: Objective Type (30 marks)    This section consists of multiple choices & Short notes type questions. Answer all the questions. Part one carries 1 mark each & Part two carries 5 marks each. MM.100

Part one: Multiple choices: 1. It is a study of economy as a whole. a. Macroeconomics b. Microeconomics c. Recession d. Inflation 2. A comprehensive formulation which specifies the factors that influence the demand for the product. a. Market demand b. Demand schedule c. Demand function d. Income effect 3. It is computed when the data is discrete ...view middle of the document...

a. Globalization b. Subsidies c. GDP d. GNP

Part Two: 1. Define ‘Arc Elasticity’. 2. Explain the law of ‘Diminishing marginal returns’. 3. What is ‘Prisoner’s Dilemma’, of non cooperative game? 4. What is ‘Third degree Discrimination’?


IIBM Institute of Business Management


Examination Paper of Managerial Economics Section B: Case lets (40 marks)     This section consists of Case lets. Answer all the questions. Each Case let carries 20 marks. Detailed information should form the part of your answer (Word limit 150 to 200 words). Case let 1 The war on drugs is an expensive battle, as a great deal of resources go into catching those who buy or sell illegal drugs on the black market, prosecuting them in court, and housing them in jail. These costs seem particularly exorbitant when dealing with the drug marijuana, as it is widely used, and is likely no more harmful than currently legal drugs such as tobacco and alcohol. There's another cost to the war on drugs, however, which is the revenue lost by governments who cannot collect taxes on illegal drugs. In a recent study for the Fraser Institute, Canada, Economist Stephen T. Easton attempted to calculate how much tax revenue the government of the country could gain by legalizing marijuana. The study estimates that the average price of 0.5 grams (a unit) of marijuana sold for $8.60 on the street, while its cost of production was only $1.70. In a free market, a $6.90 profit for a unit of marijuana would not last for long. Entrepreneurs noticing the great profits to be made in the marijuana market would start their own grow operations, increasing the supply of marijuana on the street, which would cause the street price of the drug to fall to a level much closer to the cost of production. Of course, this doesn't happen because the product is illegal; the prospect of jail time deters many entrepreneurs and the occasional drug bust ensures that the supply stays relatively low. We can consider much of this $6.90 per unit of marijuana profit a risk-premium for participating in the underground economy. Unfortunately, this risk premium is making a lot of criminals, many of whom have ties to organized crime, very wealthy. Stephen T. Easton argues that if marijuana was legalized, we could transfer these excess profits caused by the risk premium from these grow operations to the government: If we substitute a tax on marijuana cigarettes equal to the difference between the local production cost and the street price people currently pay – that is, transfer the revenue from the current producers and marketers (many of whom work with organized crime) to the government, leaving all other marketing and transportation issues aside we would have revenue of (say) $7 per [unit]. If you could collect on every cigarette and ignore the transportation, marketing, and advertising costs, this comes to over $2 billion on Canadian sales and substantially more from an export tax, and you forego...

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