Question 1

Many business people have not had the good fortune to be able to take an Economics course, and have never heard of the demand curve, marginal revenue curve, marginal cost curve, elasticity and similar concepts. Nevertheless, they are very successful.

In your view, can managers disregard economic principles? If not, what practical (informal) approximations to the economic concepts do they use when determining the price they charge?

Question 2

The market demand for steel is described by Q = 100 - P, where Q is the quantity of output and P is the price per unit of output. The marginal private cost of producing steel (i.e. the cost recorded in the steel companies' accounting) is MCPRIVATE = 6Q. The steel producing firms pollute a river, and the marginal cost downstream users incur for cleaning the water is MCEXTERNAL = 3Q.

a) How much output would a perfectly competitive industry produce in the absence of emission fees (effluent charges) and in the absence of the requirement to buy pollution permits?

b) What is the socially optimal output of steel, taking into consideration the social (not just private) cost of steel production?

c) Suppose an entrepreneur takes over all firms in the industry and manages them as a single organization (a monopoly). How much steel does a profit-maximizing monopoly produce in the absence of emission fees (effluent charges) and in the absence of the requirement to buy pollution permits?

d) Assume the government imposes a pollution tax on the monopoly equal to the magnitude of the externality (i.e. equal to the cost downstream users incur for cleaning the water). How much steel does a profit-maximizing monopoly produce now?

Question 3

"The social responsibility of business is to increase its profits". Discuss.

Question 4

You have been hired as an economic advisor to a foreign-exchange trading firm. What buy or sell recommendations for the Canadian dollar would you make in response to each of the following news, considered separately (a one-sentence comment in each case would be sufficient):

a) Faster economic growth in the European Union;
b) Expectations of higher interest rates in Canada;
c) Canadian interest rates rise, but less than expected;
d) Expected loosening of Canadian monetary policy;
e) Higher inflationary predictions for Canada.

Question 5

Declines in stock prices are sometimes viewed as an indicator of future declines in real GDP. Explain why