Managerial Economics

Question 1
(1) Explain – with the aid of a diagram if helpful – “the Circular Flow of Income Model”. Discuss how and why the different sectors shown in the circular flow of income model can affect the economy. (25 marks)

Question 2
Outline the main theory as to why international trade occurs. List and explain reasons why the theory of international trade does not work perfectly in practice. (25 marks)

Question 3
(i) Explain the following terms: Marginal Cost; Total, Average and Marginal Revenues. Why is it important for a company to know what its Marginal Costs and Revenues are? (20 marks)
(ii) Define and explain the terms “Privatisation” and “Deregulation”. Compare and contrast the arguments in favour of privatisation against the arguments in favour of deregulation. (20 marks)

Place a tick in the box against the one correct statement in each set. (2 marks each)

(1) The macroeconomic goals of government policy are:
A. full employment, stable prices, economic growth, a balance of payments equilibrium,
B. a positive income effect, stable prices, economic growth, excess export over import trade figures. equilibrium,
C. high employment, control over wages and prices, zero inflation, a balance of payments equilibrium. equilibrium,
D. a positive multiplier effect, stable exchange rates, international growth, an open economy.

(2) Three possible methods by which a balance of payments deficit can be overcome are:
A. increasing export prices; amending currency exchange rates; developing a trade-free zone. 
B. decreasing bank interest rates; devaluing the currency; decreasing import quotas.
C. direct government import controls; deflationary measures; currency devaluation.
D. decreasing exports; decreasing import taxation; avoiding inflation.

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