International Economic Exam Paper

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MN5118 / MN5118R

UNIVERSITY OF LONDON MSc EXAMINATION 2011

For Internal Students of Royal Holloway

DO NOT TURN OVER UNTIL TOLD TO BEGIN
MN5118 : INTERNATIONAL BUSINESS ECONOMICS MN5118R : INTERNATIONAL BUSINESS ECONOMICS - PAPER FOR RESIT CANDIDATES

PAPER A

Time Allowed: THREE hours Answer THREE questions

No credit will be given for attempting any further questions.

This exam paper has been made available in electronic form strictly for the educational benefit of current Royal Holloway students on the course of study in question. No further copying, distribution or publication of this exam paper is permitted. By printing or downloading this exam paper, you are consenting to these restrictions. © Royal Holloway University of London 2011 Page 1 of 5 2010 -11

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MN5118 / MN5118R

Answer only three questions. Please note that ALL answers must be accompanied by a short paragraph and diagrams where relevant. Question 1. a) How does a market economy solve the what, how and for whom to produce problems? Are there alternative solutions? Explain your answer. (5 marks) b) Explain what is wrong with the following figure and draw a corrected one. (5 marks)

Figure 1
AC(Q) P

P
Profits

MC(Q)

AC D Q

Q*

MR

c) What is cross-price elasticity? (2 marks) d) For each of the following pairs of goods state whether the cross-price elasticity is likely to be greater, smaller or equal to zero. (8 marks) i) Petrol, car ii) Tea, coffee iii) Nike trainers, generic brand trainers. tie, business suit. iv) e) In the discussion of elasticity and raising and lowering prices, economists suggest that if you have an elastic demand you should hesitate to raise your price, and that lowering price can possibly increase profits. Why is the word ‘possibly’ used? (5 marks) TOTAL: 25 MARKS

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MN5118 / MN5118R

Question 2. a) State and explain three reasons for a potentially beneficial role of government intervention. (6 marks) b) Draw hypothetical supply and demand curves for tea. Show how the equilibrium price and quantity will be affected by each of the following occurrences: (8 marks) 1) Bad weather wreaks havoc with the tea crop. 2) A medical report implying tea is bad for your health is published. 3) A technological innovation lowers the cost of producing tea. 4) Consumers’ income falls. (Assume tea is a normal good). c) Demand for ‘prestige’ university education is generally considered to be highly inelastic. What does this suggest about tuition increases at prestige schools in the future? Why don’t colleges raise tuition by amounts even greater than they already do? (5 marks) d) When the tolls on the Dulles Airport Greenway were reduced from $1.75 to $1.00 traffic increased from 10000 to 26000 trips a day. Assuming all changes in quantity were due to the change in price, what is the price elasticity of demand for the Dulles Airport Greenway? (6 marks) TOTAL: 25 MARKS Question 3. a) Explain what are agency problems and discuss three ways of dealing with them. (5 marks) b) You are a manager at a firm that relies on the work of one employee to produce quality goods. The more effort ‘e’ the employee puts in, the more revenue your firm gains. The problem is that exerting effort is costly to your employee so it’s your job to motivate him to work in the company’s interests. As a manager, you are aware that the employee will increase its effort level from e0 to e1 if and only if the additional value received from doing so is worth at least C(e1)C(e0). You decide to examine three different compensation packages. 1) One were the employee is paid £1000.00 per week. 2) One were it is paid £1000.00 per week and 10% commission on its effort level. 3) One were it is paid...
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