Reference no: EM132302702

Part A -

Question 1 - a) Explain the principal-agent problem in the context of the pursuit of the objectives of an organisation. Choose TWO of the following contractual arrangements and explain how they may assist an organisation in overcoming the principal-agent problem: (i) efficiency wages; (ii) share option schemes; and (iii) franchise arrangements.

b) Explain how equilibrium price and equilibrium quantity are determined through the interaction of demand and supply in a market and, with the aid of appropriate diagrams, discuss what would happen to demand, supply and price of domestic apartments in Singapore if:

i) The government allocates additional land to domestic property developers;

ii) Improved transport links between Malaysia and Singapore increase the ability to commute between the two countries.

c) Explain the meaning and relevance to business of EITHER the price elasticity of demand OR the income elasticity of demand.

Question 2 - Supporting your answers with business and/or public sector examples, answer the following questions:

a) Identify and discuss four possible sources of economies / diseconomies of scale. How do economies / diseconomies of scale impact the shape of the long run average cost (AC) curve?

b) Identify and explain four sources of barriers to entry to an industry. How do barriers to entry influence the market demand curve?

c) Discuss pricing behaviour and explore why, or why not, marginal cost, marginal revenue, demand, and market power play a role. (You may wish to include one or more diagrams to support your discussion.)

Question 3 - a) Explain the circular flow of income in an economy and its equilibrium, and discuss how the multiplier and accelerator give rise to the business cycle.

b) What is the difference between supply-side and demand-side macroeconomic policies? Explain two types of demand-side macroeconomic policies and two types of supply-side macroeconomic policies. Include in your explanation some consideration of the effects of the policies on aggregate output and aggregate price levels.

Question 4 - a) Donald Trump, the US President, advocates the use of trade restrictions to promote the domestic economy's performance. From an economic perspective, critically evaluate whether trade protectionism, such as the use of tariffs, promotes higher levels of production, employment and well-being in an economy pursuing such policies.

b) With respect to currency exchange rate determination:

(i) Explain how changes in exports and imports of goods and services, and purchases of foreign assets, affect the exchange rate.

(ii) Explain the goal of currency speculation, and discuss how it can affect the exchange rate. 

Part B -

Question 1 - (a) Explain how equilibrium price and equilibrium demand are determined through the interaction of demand and supply in a market. In your answer ensure that you define the key concepts, and illustrate the determination of market equilibrium using appropriate diagram(s).

(b) Explain, with the aid of appropriate diagrams, what would happen to demand, supply and price of petrol in Singapore if:

(i) The government further restricts the number of older motor vehicles allowed on the roads in the country;

(ii) In an attempt to curb greenhouse gas emissions, the government imposes increased taxes on petrol sales;

(iii) The government expands the coverage and frequency of public transport in Singapore.

(c) Explain the meaning of the following concepts and their relevance to business:

(i) Price elasticity of demand;

(ii) Income elasticity of demand.

 [Part b could be about the rental housing market in Hong Kong].

Question 2 - a) List, and briefly explain, five different objectives that firms may pursue.

b) What are the main reasons why profit maximization may not be the goal pursued by managers?

c) Explain the principal-agent problem, and discuss how contracts should be designed to deal with it.

Question 3 - a) What is the difference between variable and fixed costs, and how is this difference linked to the notion of the 'short run' and the 'long run'?

b) Explain the law of diminishing returns and what it implies for the shape of the marginal cost curve.

c) In the context of a perfectly competitive firm, explain, and show in a diagram, the short run profit maximizing equilibrium output for the firm. Why might the firm continue to produce in the short run even if it is making a loss?

d) What is meant by the economic term externality, and why might the presence of external costs indicate that the firm's profit maximising level of output (in part (c) above) is at a higher level than is socially optimal.

[There might be something on different types of market failure e.g. in place of part d].

Question 4 - a) Explain, and show in a diagram, the equilibrium price, output and profits for a monopolist firm facing a downward sloping demand curve, assuming profit maximisation.

b) Identify and explain five 'barriers to entry' that might help to maintain a monopoly's market position.

c) What is a 'natural monopoly'? Why are governments often called upon to regulate the activities of natural monopolists? Discuss how governments might achieve this regulation, including in your answer reference to economic and incentive regulation approaches.

[There might be a part on 'limit pricing' and why it might be adopted by a monopoly firm instead of part b].

Question 5 - (a) Briefly explain the main characteristics of the following three market structures: monopoly, oligopoly and monopolistic competition. In all three cases provide examples of products and/or services for each type of market.

(b) Explain the term economies of scale, and provide three potential causes for economies of scale. Why might the existence of economies of scale lead to a firm securing market power and, potentially, a monopoly position in the market? Give examples to support your answer.

(c) Explain the difference between a collusive and non-collusive oligopolies, and give examples to support your answer.

Question 6 - a) Explain the circular flow of income model and explain the equilibrium condition for the economy.

b) Use the national income equilibrium condition for the economy to provide a critique of the US President Donald Trump's following assertions about cheap imports from China:

"They have taken our jobs; they have taken our money; and on top of that they have loaned the money to us and we actually pay them interest now on money."

c) Explain the difference between demand-side and supply-side macroeconomic policy.

Question 7 - a) Explain why business cycles occur in an economy, and discuss the role of fiscal policy in stabilising such cycles.

b) Explain the different types of inflation and explore how monetary policy can be used to achieve an inflation target in practice.

c) Explain the different types of unemployment and discuss the role of supply-side policies in reducing unemployment.

Question 8 - a) On international trade:

(i) What do you understand by a country having a comparative advantage in international trade?

(ii) What gives a country a competitive advantage? (In your answer you might make reference to the work of the World Economic Forum and to Porter's (1980) 'diamond model'.)

b) Identify and briefly explain the three main elements of an economy's Balance of Payments. Does the Balance of Payments balance?

c) Define what is meant by an exchange rate, and discuss the factors that can generate an appreciation in the value of a currency.

Question 9 - a) Critically discuss the following arguments that might be used in an attempt to justify the introduction of import tariffs and other protectionist trade measures:

i) Imports should be reduced since they lower the standard of living and the money goes abroad rather than into the domestic economy.

ii) Protection is needed from cheap foreign labour.

iii) Protection reduces unemployment.

iv) Protection is needed to prevent the abuse of the environment.

v) Although overall levels of consumption may be higher, trade may make some people poorer.

b) The exchange rate of the Hong Kong Dollar closely follows that of the US dollar. What are the advantages of this arrangement? Identify and explain the role and actions of a central bank or monetary authority in an economy with such an exchange rate system.

Note - Total 13 questions, total 5200 words - 400 words per question.