# bmme5103 - BMME5103/SEPT 07-F/KN PART A INSTRUCTIONS ANSWER...

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BMME5103/SEPT 07-F/KN 1 PART A INSTRUCTIONS: ANSWER ALL THREE (3) QUESTIONS. Question 1 1. Discuss the difference between profit maximisation and shareholder wealth maximisation. Which of these is a more comprehensive statement of a company’s economic objectives? [5 marks] 2. What effect would each of the following have on the value of the firm? a. A new advertising campaign increases the sales of the firm substantially. [2 marks] b. A new competitor enters the market. [2 marks] c. The production department achieves a technological breakthrough which reduces production costs. [2 marks] d. The firm is required to install pollution-control equipment. [2 marks] e. The work force votes to unionise. [2 marks]

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BMME5103/SEPT 07-F/KN 2 3. The following is a quote from a New Straits Times article: “If a company makes product donations to the school - computers for instance - then the image of a company goes up as graduate students use the company’s products.” Is such action consistent with a company’s objective of profit maximisation? Discuss in brief. [5 marks] [TOTAL : 20 MARKS]
BMME5103/SEPT 07-F/KN 3 Question 2 The maker of a leading brand of low-calorie microwavable food estimated the following demand equation for its product using data from 26 supermarkets around the country for the month of April: Q = - 5200 – 42P + 20Px + 5.2I + 0.20A + 0.25M (2,002) (17.5) (6.2) (2.5) (0.09) (0.21) R 2 = 0.55 n=26 F=4.88 Assume the following values for the independent variables: Q = Quantity sold per month P (in cents) = Price of the product = 500 Px (in cents) = Price of leading competitor’s product = 600 I (in dollars) = Per capita income of the standard metropolitan statistical area (SMSA) in which the supermarket is located = 5,500 A (in dollars) = Monthly advertising expenditure = 10,000 M = Number of microwave ovens sold in the SMSA in which the supermarket is located = 5,000. Using this information, answer the following questions: 1. Compute elasticities for each of the variables. [5 marks] 2. How concerned do you think this company would be about the impact of a recession on its sales? Explain.

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