Question

Question 1 Goldberg Inc. has found reason to invest in Zambia given the new lucrative investment climate in the country. The decision has to be made as to construct a large plant or a small plant or not invest at all. The returns from each alternative will vary depending on the choices and state of nature given in the country. A preliminary study carried out by an international reputable consultant brought in the following details for your considerations State of Zambia economy Probability Large plant Small plant S Favourable market Unfavourable market 250000 0.5 500000 (15000) 0.5 (120000) You have been invited to assess the viability of the above information and recommend on the way forward for the company. Which decision should be taken on the following criteria: (i) Maxi min rule [5] (ii) Maxi max rule [5] (ii) Expected monetary value [5] (iv) Comment on the other investment options a company could take to invest in Zambia [10] Question 2 Explain income elasticity of demand with clear reference to a product of your choice. What advise can be made to a retail manager opting to purchase stock for the Christmas eve. [25] Question 3 Discuss the nature and scope of managerial economics. [25]

Answer 1

" FM = Farourable market UM = UnFavourable mkt Lp = Large Plant SP = small plant 1st consider maximax rule LP yield maximum payoff of 500,000 SP yield maximum payoff of 250,000 in maximax we choose highest payoff therefore 500,000 therefore we should choose large plant in maximax rule \r\n (ii) maximum rule LP has worst payoff of - 120,000 SP has worst payoff of -15000 therefore Least worse payoff worth -15000 From SP therefore using maximum rule we should choose ""SP"" = small plant (iii) EMV of LP = 0.5(500,000) + 0.5(-120,000) = 250,000 - 60,000 = 190,000 EMV of SP = 0.5(250000) + 0.5(-15000) = 125,000 - 7500 = 117,500 EMV of LP > EMV of SP therefore using expected monetary value approach Large plant to be chosen over small plant \r\n (iv) we can use sharpe ratio approach or Return per unit risk approach That is we divide expected return oF option with standard deviation of "