Take-Home Exam

Course Name: Economics for Managers.

Exam Instructions: Please read carefully.
1- Kindly note that this is NOT a group assignment; that is, you MUST work on this exam
independently. Any kind of collaboration between individuals will be investigated, and could be
considered as an act of cheating, and would result in an “F” grade in the course.
2- Your answers should be typed with font (Calibri) size (12).
3- On the cover page, type ONLY the following information in order: Your Full Name, Group, Course
Name, Final Take-Home Exam and Date of Submission.
4- After you finish solving the exam questions, please, email your answers in PDF format to Ms.
Shymaa Safieldin @ shymaa.safieldin@eslsca.edu.eg by Tuesday, November 3rd @ 12:00 noon.
5- All answers submitted after the deadline will not be accepted regardless of the quality of the work.

Answer the following questions:

1. Use the demand-supply fundamental model to illustrate the changes in the value of the Egyptian
pound (EGP) against the U.S. dollar (USD) in the past few years. In your answer, try as much as
possible to distinguish between the demand-side factors and the supply-side factors as
discussed in class. Finally, show how the intervention by the Central Bank of Egypt (CBE) at some
point has led to the creation and deepening of the “Black Market”. Although drawing graphs is
not necessarily required, yet it will definitely help you to illustrate your answer.

2. ZPharma Co., a pharmaceutical company, sells three different products:

Zdiet, a Weight Loss Medication, Zataflam, a Non-Steroidal Anti-Inflammatory and Zolymox, an
Antibiotic. Due to a new government regulation with regard to pricing medications, suppose
that the prices of these products have increased as follows: Zdiet (25%), Zataflam, (20%) and
Zolymox, (10%). As a result, the monthly quantity sold from each product declined by the
following percentages: Zdiet (35%), Zataflam (12%), and Zolymox (5%).
Calculate the price elasticity of demand for the three products: Zdiet, Zataflam and Zolymox.
Interpret your results to the best of your ability. Analyze the potential effect of the increase in
prices on sales revenue of each product. Now, suppose the decline in demand indicated above
was caused by a 20% decrease in income level. How would you best describe each product?

3. With an estimated market share of 60%, Atlas is the dominant company and the price leader in
an oligopolistic steel industry. The remaining market share is distributed equally between ten
companies. Suppose that one of those ten companies, Norton, attempts to gain market share by
undercutting the price set by Atlas.
Calculate the “Four Firm Ratio” and Herfindahl-Hirschman Index “HHI” in the above described
market and interpret your answer. What model can best resemble this market? Briefly explain
this model. In your opinion, what will be the effect of Norton’s attempt described above on
Atlas’s market share: will it increase, decrease, or not affected at all? Justify your answer.
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4. Galaxy, a multinational corporation, has two plants, one in the United States and the other in
Mexico, and it cannot change the size of the plants or the amount of capital equipment in the
short run. The wage in Mexico is equivalent to US $5 per hour. The wage in the U.S. is $25 per
hour. Given current employment situation, the productivity per worker in Mexico is 200 units
per hour, and the productivity per worker in the U.S. is 400 units per hour.
Is Galaxy maximizing output relative to its labor cost? If not, what should Galaxy do? Justify
your answer.

5. Jessie, a pharmacist, is planning on opening her own pharmacy. Jessie Pharmacy is expected to
generate yearly revenue of $500,000. Jessie will run the pharmacy herself on full-time basis.
Jessie’s alternative employment options are as follows:
- Continue to work as a senior medical representative for $50,000 per year.
- Accepts a research position in another company for $70,000 per year.
Jessie expects to spend $350,000 per year on purchasing drugs and cosmetics for resale to her
customers. She will also need to hire three employees: an assistant, an accountant and a
custodian, for whom the total salaries to be paid are expected to be $48,000 per year. Jessie
owns the building in which her pharmacy is supposed to be; however, she could rent the
pharmacy-store space out for $42,000 per year.
Calculate Jessie’s accounting profit and economic profit. In your opinion, should Jessie proceed
with opening her own pharmacy? Justify your answer.

6. What does it mean to say that: “A firm operating under perfect competition conditions is a price
taker"?
Why Can't this firm set any price it chooses? What if it operates in a monopolistically
competitive market, would it be able to set the price? Why? Give some real-life examples to
support your answer.
Discuss the rationale behind the principle “marginal revenue equal marginal cost" condition
for profit maximization.

7. Suppose you are the economic advisor of Jackie Brown Company, a perfectly competitive
company that is suffering economic losses due to unforeseen continuous drop in the market
price. Jackie Brown is a price taker, hence it cannot influence the market price, nor could it
change production technology in the short run. You are asked to decide whether the company
should shut down its operations or to continue to operate at a loss. Jackie Brown is selling 50
units of output per day, at a price of $20 per unit. The cost of raw material, direct labor, energy,
and other variable inputs is about $24000 monthly. Unfortunately, an estimate of Jackie Brown
fixed costs is currently unavailable.
So, what is your decision? Justify your answer.

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8. The pie-chart given above shows the annual global market share of Pepsi and Coke for the last
five years on average.
Under what market structure do Pepsi and Coke operate? What microeconomic model can
best describe the behavior of Pepsi and Coke? Explain the main theme of this model. Given the
obvious market share of both Pepsi and Coke, on what grounds would you justify the multi-
billion-dollar annual advertising spending by those two companies?

9. Gillette and Schick are two of the dominant manufactures of disposable razors worldwide. Each
firm can either sign or not sign an exclusive contract with Hugh Jackman to appear on their TV
ads. If both companies manage to sign with Jackman, they will each make $7 million in economic
profit. If only one of them signs, it earns $10 million in economic profit and the other firm incurs
an economic loss of $1.5 million. If neither firm sign, they only make normal profit.
Build the pay-off matrix for the above game. Identify “Nash Equilibrium”, if any. Is this
equilibrium optimal for both companies? Justify your answer.

Best Wishes

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