The Association of Business Executives

QCF
Quantitative Methods for
Business Management
30 November 2011, Afternoon
1. Time allowed: 3 hours.
2. Read the instructions at the top of each section carefully.
The number of questions you have to answer is marked clearly at the top of each section.
Do not answer more questions than instructed.
3. The number of marks per question may vary. Marks for subdivisions of questions and the
total marks for each question are shown in brackets after the question.
4. No books, dictionaries, notes or any other written materials are allowed in this
examination.
5. Calculators, including scientifc calculators, are allowed providing they are not
programmable and cannot store or recall information. Electronic dictionaries and
personal organisers are NOT allowed. All workings must be shown.
6. A Formulae Sheet and tables for the Normal and Chi-Squared distributions are provided on
pages 7-11.
7. Candidates who break ABE Examination Regulations (Conduct during the Examinations), or
commit any misconduct, will be disqualifed from the examinations.
8. Question papers must not be removed from the Examination Hall.
5QMBM1211 ABE 2011 K/502/4800
STRUCTURE OF PAPER: Answer ALL FIVE sections
SECTION A: Answer ALL EIGHT questions
Maximum marks for Section A
Q1-Q8 5 marks
each
40 marks
SECTION B: Answer ANY FOUR questions
Maximum marks for Section B
Q9-Q13 15 marks
each
60 marks
TOTAL MARKS AVAILABLE FOR THE PAPER 100 marks
0
5
3
9
9
3
5QMBM1211
5QMBM1211 2
This paper consists of TWO SECTIONS.
Follow the instructions at the top of EACH section.
SECTION A
You must answer ALL EIGHT questions in this section.
Each question carries 5 marks.
Section A is worth 40% of the total marks available for the paper.
Q1 Distinguish between probability and non-probability samples and give one example of each.
(5 marks)
Q2 The following data represent the sizes of twelve pairs of mens shoes sold by a department
store during a given day:
7 6 8 11 8 7 7 8 8 5 8 7
Find the mean, median and mode of these shoe sizes. (5 marks)
Q3 On average, one in fve people contacted by a market research company buys a companys
product. Suppose that the market research company contacts fve new potential customers.
Use the binomial distribution to fnd the probability that at least two of them buy the
companys product. (5 marks)
Q4 The life of an engine component is normally distributed with a mean of 5,000 hours and a
standard deviation of 500 hours. Find the probability that a randomly selected component will
last for between 4,500 and 5,250 hours. (5 marks)
Q5 Two independent quality control inspectors (A and B) were commissioned to test the quality
of seven different brands of soup. The two inspectors ranked the brands of soups in order
of quality (where 1 = highest quality, 2 = second highest quality, etc). The results were as
follows:
A: 2 5 3 1 4 7 6
B: 3 7 4 1 5 6 2
Calculate Spearmans rank correlation coeffcient between the two inspectors quality
rankings and interpret the result. (5 marks)
Q6 Distinguish between seasonal variation and random variation in time-series data. (5 marks)
5QMBM1211 3 [Turn over
Q7 A frm manufactures carpets with a projected selling price of 1,000. The frm has fxed costs
of 80,000 per month and variable costs per carpet are 600. Find the frms break-even
level of monthly output. (5 marks)
Q8 In a random sample of 1,000 voters in a country, 45% state that they would favour a
decrease in corporation taxation. Calculate 90% and 95% confdence intervals for the
percentage of voters favouring a decrease in corporation taxation. (5 marks)
END OF SECTION A
MAXIMUM MARKS FOR SECTION A: 40
TURN OVER TO SECTION B
5QMBM1211 4
SECTION B
You must answer ANY FOUR questions in this section.
Each question carries 15 marks.
Section B is worth 60% of the total marks available for the paper.
Q9 The distances travelled each week (in miles) by 150 randomly-selected lorry (truck) drivers in
a country are as follows:
Distance (miles) Frequency
100 but under 200 56
200 but under 300 44
300 but under 400 25
400 but under 500 17
500 but under 600 7
600 but under 700 1
Required:
(a) Find the arithmetic mean and the median. (5 marks)
(b) Calculate the standard deviation. (5 marks)
(c) Calculate the coeffcient of skewness and comment on the result. (5 marks)
(Total 15 marks)
Q10 A survey of 500 people was conducted to investigate a possible link between gender and
choice of daily newspaper (Sun, Mail and Times). The results are summarised below:
Men Women
Sun 100 60
Mail 80 160
Times 20 80
Required:
(a) Find the row and column totals, and calculate the expected frequencies in each cell of
the table, on the assumption of independence. (5 marks)
(b) Calculate the chi-squared statistic (
2
) to test the hypothesis that gender and choice
of daily newspaper are independent. Use a 5% level of signifcance and state your
conclusions carefully. (10 marks)
(Total 15 marks)
5QMBM1211 5 [Turn over
Q11 Consider the following set of data, where y represents the annual rate of growth (%) and x
represents asset size ( millions) for ten randomly selected companies.
y 3 -2 4 1 8 6 -4 7 1 9
x 12 10 25 2 50 20 6 50 6 60
(a) Calculate the equation of the least-squares regression line, assuming that y depends
on x. (5 marks)
(b) Calculate the Pearson correlation coeffcient between x and y and comment on the
result. (5 marks)
(c) Predict the annual rate of growth of a company with an asset size of 30 million and
a company with an asset size of 100 million. Comment on the likely accuracy of your
prediction. (5 marks)
(Total 15 marks)
Q12 A frm must decide which of two products to supply. A market research study has been
conducted to predict the probabilities of different levels of proft or loss for the two products
over the coming year. The results are shown below:
Proft/Loss Product A Product B
250,000 0.6 0.4
100,000 0.3 0.6
-50,000 0.1 0
Required:
(a) Construct a decision tree for this problem. (5 marks)
(b) Determine which product will maximise the expected monetary value (EMV) of the
frms proft. (5 marks)
(c) Comment on the advantages and disadvantages of EMV analysis in this case.
(5 marks)
(Total 15 marks)
5QMBM1211 6
Q13 In a competitive market, the supply function for a particular good is given by the equation:
P = 10 + 2Q
S
where P is the price of the good (in per unit) and Q
S
is the quantity supplied per time
period.
The demand function is given by the equation:
P = 50 0.5Q
D
where Q
D
is the quantity demanded per time period.
Required:
(a) Calculate the equilibrium price and quantity. (5 marks)
(b) Suppose that a change in demand conditions increases the quantity demanded at
every price by 10 units. Calculate the new equilibrium price and quantity. (5 marks)
(c) Starting with the original demand and supply functions, suppose now that the
government imposes a unit tax of 5 (so that frms now require an extra 5 per unit to
supply any given quantity). Find the new equilibrium price and quantity. (5 marks)
(Total 15 marks)
END OF SECTION B
MAXIMUM MARKS FOR SECTION B: 60
TOTAL MAXIMUM MARKS: 100
END OF QUESTION PAPER
5QMBM1211 7 [Turn over
FORMULAE
Mean of ungrouped data:
=

Geometric mean of ungrouped data:
=

where: = "the product of "

Mean of grouped data:
=

Median of grouped data:
=

where: L = lower boundary of the median class
F = cumulative frequency up to the median class
f = frequency of the median class
i = width of the median class

Mode of grouped data:
=

where: L = lower boundary of the modal class
f
m
= frequency of the modal class
f
m1
= frequency of the pre-modal class
f
m+1
= frequency of the post-modal class
i = width of the modal class

Standard deviation of ungrouped data:
=

( )

Standard deviation of grouped data:
=
( )

5QMBM1211 8

3( )

where: x
~

= median
s = standard deviation

Regression:

()

Pearson correlation:


[

()

] [

()

Spearmans rank correlation:

6

)


Laspeyres price index:

00

Paasche price index:

00

Binomial distribution:
()

Poisson distribution:
()

Coefficient of skewness:
5QMBM1211 9 [Turn over
Standard normal distribution:

Confidence interval for a mean:

Confidence interval for a proportion:

Test statistic for a single mean:

Test statistic for a difference between means:

Test statistic for a single proportion:

(1

Test statistic for a difference between proportions:

+
1

where:

1

Chi-squared test statistic:

( )

5QMBM1211 10
Areas in the Right-Hand Tail of the Normal Distribution
z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.0
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.0
.5000 .4960 .4920 .4880 .4840 .4801 .4761 .4721 .4681 .4641
.4602 .4562 .4522 .4483 .4443 .4404 .4364 .4325 .4286 .4247
.4207 .4168 .4129 .4090 .4052 .4013 .3974 .3936 .3897 .3859
.3821 .3783 .3745 .3707 .3669 .3632 .3594 .3557 .3520 .3483
.3446 .3409 .3372 .3336 .3300 .3264 .3228 .3192 .3156 .3121
.3085 .3050 .3015 .2981 .2946 .2912 .2877 .2843 .2810 .2776
.2743 .2709 .2676 .2643 .2611 .2578 .2546 .2514 .2483 .2451
.2420 .2389 .2358 .2327 .2296 .2266 .2236 .2206 .2177 .2148
.2119 .2090 .2061 .2033 .2005 .1977 .1949 .1922 .1894 .1867
.1841 .1814 .1788 .1762 .1736 .1711 .1685 .1660 .1635 .1611
.1587 .1562 .1539 .1515 .1492 .1496 .1446 .1423 .1401 .1379
.1357 .1335 .1314 .1292 .1271 .1251 .1230 .1210 .1190 .1170
.1151 .1132 .1112 .1093 .1075 .1056 .1038 .1020 .1003 .0985
.0968 .0951 .0934 .0918 .0901 .0885 .0869 .0853 .0838 .0823
.0808 .0793 .0778 .0764 .0749 .0735 .0721 .0708 .0694 .0681
.0668 .0655 .0643 .0630 .0618 .0606 .0594 .0582 .0571 .0559
.0548 .0537 .0526 .0516 .0505 .0495 .0485 .0475 .0465 .0455
.0446 .0436 .0427 .0418 .0409 .0401 .0392 .0384 .0375 .0367
.0359 .0351 .0344 .0336 .0329 .0322 .0314 .0307 .0301 .0294
.0287 .0281 .0274 .0268 .0262 .0256 .0250 .0244 .0239 .0233
.02275 .02222 .02169 .02118 .02068 .02018 .01970 .01923 .01876 .01831
.01786 .01743 .01700 .01659 .01618 .01578 .01539 .01500 .01463 .01426
.01390 .01355 .01321 .01287 .01255 .01222 .01191 .01160 .01130 .01101
.01072 .01044 .01017 .00990 .00964 .00939 .00914 .00889 .00866 .00842
.00820 .00798 .00776 .00755 .00734 .00714 .00695 .00676 .00657 .00639
.00621 .00604 .00587 .00570 .00554 .00539 .00523 .00508 .00494 .00480
.00466 .00453 .00440 .00427 .00415 .00402 .00391 .00379 .00368 .00357
.00347 .00336 .00326 .00317 .00307 .00298 .00289 .00280 .00272 .00264
.00256 .00248 .00240 .00233 .00226 .00219 .00212 .00205 .00199 .00193
.00187 .00181 .00175 .00169 .00164 .00159 .00154 .00149 .00144 .00139
.00135
.00097
.00069
.00048
.00034
.00023
.00016
.00011
.00007
.00005
.00003
5QMBM1211 11
p value
df
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
40
50
60
80
100
0.25 0.20 0.15 0.10 0.05 0.025 0.02 0.01 0.005 0.0025 0.001 0.0005
1.32 1.64 2.07 2.71 3.84 5.02 5.41 6.63 7.88 9.14 10.83 12.12
2.77 3.22 3.79 4.61 5.99 7.38 7.82 9.21 10.60 11.98 13.82 15.20
4.11 4.64 5.32 6.25 7.81 9.35 9.84 11.34 12.84 14.32 16.27 17.73
5.39 5.59 6.74 7.78 9.49 11.14 11.67 13.23 14.86 16.42 18.47 20.00
6.63 7.29 8.12 9.24 11.07 12.83 13.33 15.09 16.75 18.39 20.51 22.11
7.84 8.56 9.45 10.64 12.53 14.45 15.03 16.81 13.55 20.25 22.46 24.10
9.04 9.80 10.75 12.02 14.07 16.01 16.62 18.48 20.28 22.04 24.32 26.02
10.22 11.03 12.03 13.36 15.51 17.53 18.17 20.09 21.95 23.77 26.12 27.87
11.39 12.24 13.29 14.68 16.92 19.02 19.63 21.67 23.59 25.46 27.83 29.67
12.55 13.44 14.53 15.99 18.31 20.48 21.16 23.21 25.19 27.11 29.59 31.42
13.70 14.63 15.77 17.29 19.68 21.92 22.62 24.72 26.76 28.73 31.26 33.14
14.85 15.81 16.99 18.55 21.03 23.34 24.05 26.22 28.30 30.32 32.91 34.82
15.93 16.98 18.90 19.81 22.36 24.74 25.47 27.69 29.82 31.88 34.53 36.48
17.12 18.15 19.40 21.06 23.68 26.12 26.87 29.14 31.32 33.43 36.12 38.11
18.25 19.31 20.60 22.31 25.00 27.49 28.26 30.58 32.80 34.95 37.70 39.72
19.37 20.47 21.79 23.54 26.30 28.85 29.63 32.00 34.27 36.46 39.25 41.31
20.49 21.61 22.98 24.77 27.59 30.19 31.00 33.41 35.72 37.95 40.79 42.88
21.60 22.76 24.16 25.99 28.87 31.53 32.35 34.81 37.16 39.42 42.31 44.43
22.72 23.90 25.33 27.20 30.14 32.85 33.69 36.19 38.58 40.88 43.82 45.97
23.83 25.04 26.50 28.41 31.41 34.17 35.02 37.57 40.00 42.34 45.31 47.50
24.93 26.17 27.66 29.62 32.67 35.48 36.34 38.93 41.40 43.78 46.80 49.01
26.04 27.30 28.82 30.81 33.92 36.78 37.66 40.29 42.80 45.20 48.27 50.51
27.14 28.43 29.98 32.01 35.17 38.08 38.97 41.64 44.18 46.62 49.73 52.00
28.24 29.55 31.13 33.20 36.42 39.36 40.27 42.98 45.56 48.03 51.18 53.48
29.34 30.68 32.28 34.38 37.65 40.65 41.57 44.31 46.93 49.44 52.62 54.95
30.43 31.79 33.43 35.56 38.89 41.92 42.86 45.64 48.29 50.83 54.05 56.41
31.53 32.91 34.57 36.74 40.11 43.19 44.14 46.96 49.64 52.22 55.48 57.86
32.62 34.03 35.71 37.92 41.34 44.46 45.42 48.28 50.99 53.59 56.89 59.30
33.71 35.14 36.85 39.09 42.56 45.72 46.69 49.59 52.34 54.97 58.30 60.73
34.80 36.25 37.99 40.26 43.77 46.98 47.96 50.89 53.67 56.33 59.70 62.16
45.62 47.27 49.24 51.81 55.76 59.34 60.44 63.69 66.77 69.70 73.40 76.09
56.33 53.16 60.35 63.17 67.50 71.42 72.61 76.15 79.49 82.66 86.66 89.56
66.98 68.97 71.34 74.40 79.08 83.30 84.58 88.38 91.95 95.34 99.61 102.70
88.13 90.41 93.11 96.58 101.90 106.60 108.10 112.30 116.30 120.10 124.80 128.30
109.10 111.70 114.70 118.50 124.30 129.60 131.10 135.80 140.20 144.30 149.40 153.20
Chi-Squared Critical Values
5QMBM1211 12 691129
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.

The Association of Business Executives
QCF
Quantitative Methods for Business
Management
December 2011
Suggested Answers


STRUCTURE OF PAPER: Answer BOTH sections
SECTION A: Answer ALL EIGHT questions Q1Q8 5 marks
each
Total marks for Section A: 40 marks
SECTION B: Answer ANY FOUR questions Q9Q13 15 marks
each
Total marks for Section B: 60 marks
TOTAL MARKS AVAILABLE FOR THE PAPER 100 marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
SECTION A
Candidates are required to answer ALL EIGHT questions in this section.
Each question carries 5 marks.
Section A is worth 40% of the total marks available for the paper.
Question 1


Question 2


Q1


[1.1]

Distinguish between probability and non-probability samples and give one example of
each type.
In probability sampling, every item in the population has a known chance of being
selected as a sample member. In non-probability sampling, the probability that any item
in the population will be selected for a sample cannot be determined.

Examples of probability sampling include random sampling and stratified sampling.
Examples of non-probability sampling include quota sampling and judgmental sampling.
Q1 Total Maximum Marks for Question 5 marks
Q2

[1.2]
The following data represent the sizes of twelve pairs of mens shoes sold by a
department store during a given day:

7 6 8 11 8 7 7 8 8 5 8 7
Find the mean, median and mode of these shoe sizes.
Mean = 90 / 12 = 7.5

Median = 7.5
Mode = 8
Q2 Total marks for question 5 marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 3


Question 4

Q3

[2.1]
On average, one in five people contacted by a market research company buys a
companys product. Suppose that the market research company contacts five new
potential customers. Use the binomial distribution to find the probability that at least two
of them buy the companys product.

P(0) = 0.8
5
= 0.32768
P(1) = 5 0.2 0.8
4
= 0.4096
P(at least 2) = 1 - (0.32768 + 0.4096) = 0.26272
Q3 Total marks for question 5 marks
Q4


[2.1]

The life of an engine component is normally distributed with a mean of 5,000 hours
and a standard deviation of 500 hours. Find the probability that a randomly selected
component will last for between 4,500 and 5,250 hours.

z
1
= (5250 5000)/500 = 0.5
z
2
= (4500 5000)/500 = -1
P(between 4500 and 5250) = 1 (0.3085 + 0.1587) = 0.5328
Q4 Total Maximum Marks for Question 5 marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 5



Question 6


Q5


[3.1]

Two independent quality control inspectors (A and B) were commissioned to test the
quality of seven different brands of soup. The two inspectors ranked the brands of
soups in order of quality (where 1 = highest quality, 2 = second highest quality, etc).
The results were as follows:
A: 2 5 3 1 4 7 6
B: 3 7 4 1 5 6 2
Calculate Spearmans rank correlation coefficient between the two inspectors quality
rankings and interpret the result.
( )
57 . 0
1 49 7
24 6
1 =

= R
This represents a moderate degree of positive rank correlation.

Q5 Total Maximum Marks for Question 5 marks
Q6


[3.3]

Distinguish between seasonal variation and random variation in time-series data.

Seasonal variations are predictable regular short-term fluctuations which take place
within one complete period. If the data are measured quarterly, seasonal fluctuations
would be associated with each season of the year. Random variations are unpredictable
residual variations in a time series.
Q6 Total Maximum Marks for Question 5 marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 7



Question 8

End of SECTION A
Maximum for SECTION A: 40 marks
Q7


[4.3]

Consider a firm that manufactures carpets with a projected selling price of 1,000.
The firm has fixed costs of 80,000 per month and variable costs per carpet are 600.
Find the firms break-even level of monthly output.
TR = 1000Q
TC = 80,000 + 600Q
For break-even, 1000Q - 600Q - 80000 = 0
Q = 200 carpets
Q7 Total Maximum Marks for Question 5 marks
Q8


[2.3]

In a random sample of 1,000 voters in a country, 45% state that they would favour a
decrease in corporation taxation. Calculate 90% and 95% confidence intervals for the
percentage of voters favouring a decrease in corporation taxation.
n = 1000
p = 45% q = 55%
At the 90% confidence level: 59 . 2 45
1000
55 45
645 . 1 45 =

= t
At the 95% confidence level: 08 . 3 45
1000
55 45
96 . 1 45 =

= t
Q8 Total Maximum Marks for Question 5 marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
SECTION B
Candidates must answer ANY FOUR questions in this section.
Each question carries 15 marks.
Section B is worth 60% of the total marks available for the paper.

Question 9
The distances travelled each week (in miles) by 150 randomly-selected lorry drivers in a
country are as follows:
Distance (miles) Frequency
100 but under 200 56
200 but under 300 44
300 but under 400 25
400 but under 500 17
500 but under 600 7
600 but under 700 1










Q9
(a)

[1.2]
Find the arithmetic mean and the median.

x f fx fx
2

150 56 8400 1260000
250 44 11000 2750000
350 25 8750 3062500
450 17 7650 3442500
550 7 3850 2117500
650 1 650 422500
150 40300 13055000








Mean = 40300 / 150 = 268.67

Median = 200 + (19/44) 100 = 243.18


5 marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.

Q9
(b)

[1.2]
Calculate the standard deviation.

Standard deviation (n) = 86 . 121 67 . 268
150
13055000
2
=

Standard deviation (n 1) = 122.27
5 marks
Q9
(c)

[1.2]
Calculate the coefficient of skewness and comment on the result.
Sk =
63 . 0
86 . 121
) 18 . 243 67 . 268 ( 3
=

There is a moderate degree of positive skew (i.e. a longer tail
to the right).
5 marks
Q9 Total Maximum Marks for Question
15
marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 10
A survey of 500 people was conducted to investigate a possible link between gender
and choice of daily newspaper. The results are summarised below:


Men Women
Sun 100 60
Mail 80 160
Times 20 80



Q10
(a)

[2.3]
Find the row and column totals, and calculate the expected frequencies in each cell of
the table, on the assumption of independence.



The row totals are 160, 240 and 100.

The column totals are 200 and 300

The expected frequencies are:

Men Women
Sun 64 96
Mail 96 144
Times 40 60

















5 marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.

Q10
(b)

[2.3]
Calculate the chi-squared statistic (_
2
)

to test the hypothesis that gender and choice of
daily newspaper are independent. Use a 5% level of significance and state your
conclusions carefully.










O E (O-E)
2
/E
100 64 20.2500
80 96 2.6667
20 40 10.0000
60 96 13.5000
160 144 1.7778
80 60 6.6667
54.86
With 2 degrees of freedom, the critical of
2
at the 5% level is 5.99.
Since 54.86 > 5.99, we reject the hypothesis of independence. The evidence
suggests that there is a link between gender and choice of daily newspaper.


















10
marks
Q10 Total Maximum Marks for Question
15
marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 11
Consider the following set of data, where y represents the annual rate of growth (%) and x
represents asset size ( millions) for ten randomly selected companies.

y 3 -2 4 1 8 6 -4 7 1 9
x 12 10 25 2 50 20 6 50 6 60


Q11
(a)

[3.2]

Calculate the equation of the least-squares regression line, assuming that y depends
on x.
The following calculations are required for parts (a) and (b):
x y x
2
xy y
2

12 3 144 36 9
10 -2 100 -20 4
25 4 625 100 16
2 1 4 2 1
50 8 2500 400 64
20 6 400 120 36
6 -4 36 -24 16
50 7 2500 350 49
6 1 36 6 1
60 9 3600 540 81
241 33 9945 1510 277










17276 . 0
241 ) 9945 10 (
) 33 241 ( ) 1510 10 (
2
=


= b



a = 3.3 (0.17276 24.1) = -0.86352
So the least-squares regression equation is x y 173 . 0 864 . 0 + =



5 marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.

Q11
(b)

[3.1]
Calculate the Pearson correlation coefficient between x and y and comment on the
result.

857 . 0
) 33 ) 277 10 )( 241 ) 9945 10 (
) 33 241 ( ) 1510 10 (
2 2
=


= R

This represents a high degree of positive correlation.
5 marks
Q11
(c)
[3.2]
Predict the annual rate of growth of a company with an asset size of 30 million and a
company with an asset size of 100 million. Comment on the likely accuracy of your
prediction.

x = 30 gives: 3 . 4 ) 30 173 . 0 ( 864 . 0 = + = y
x = 100 gives: 4 . 16 ) 100 173 . 0 ( 864 . 0 = + = y

The correlation coefficient is close to one, suggesting a close relationship.
However, the prediction for x = 100 requires extrapolation and so is unlikely
to be accurate. Also the sample is small and other influencing factors (such
as wage costs are ignored.

5 marks
Q11 Total Maximum Marks for Question
15
marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 12
A firm must decide which of two products to supply. A market research study has been
conducted to predict the probabilities of different levels of profit or loss for the two
products over the coming year. The results are shown below:

Profit/Loss Product A Product B
250,000 0.6 0.4
100,000 0.3 0.6
-50,000 0.1 0


Q12
(a)

[4.1]

Construct a decision tree for this problem.

The required decision tree is as follows:


A
B
0.6
250,000
0.3 100,000
0.1
-50,000
0.4
250,000
0.6
100,000

5 marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Q12
(b)

[4.1]
Determine which product will maximise the expected monetary value (EMV) of the
firms profit.
The expected values of the firms profits associated with each chance
mode are:
Product A
Expected profit = (0.6 250000) + (0.3 100000) (0.1 50000)
= 175,000
Product B
Expected profit = (0.4 250,000) + (0.6 100000) = 160,000

So to maximise profit, the firm should be recommended to produce Product A.


5 marks
Q12
(c)

[4.1]
Comment on the advantages and disadvantages of EMV analysis in this case.
Assuming that the correct probabilities can be estimated, EMV analysis is
a relatively simple way of comparing proposed new products or strategies
and should help firms to identify proposals that are most likely to
maximise profits. In this case, although Product A has the higher EMV, it
carries the chance of a 50,000 loss, which could be very serious for the
firm. A risk-averse firm may select the product that minimises the chance
of making a large loss, which in this case would be Product B, while a
risk-taker may select the product which gives the highest chance of a
large profit, in this case A. There may also be non-pecuniary factors, such
as the preferred location of the new activity and the level of employment
that may be created by each product. The environmental effects
(externalities) of the two products could also be important.
5 marks
Q12 Total Maximum Marks for Question
15
marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.
Question 13
In a competitive market, the supply function for a particular good is given by the
equation:
P = 10 + 2Q
S

where P is the price of the good (in per unit) and Q
S
is the quantity supplied per time
period. The demand function is given by the equation:
P = 50 - 0.5Q
D

where Q
D
is the quantity demanded per time period.

Q13
(a)

[4.2]
Calculate the equilibrium price and quantity.
Equilibrium is reached when Q = Q
S
= Q
D
. So, we have:
10 + 2Q = 50 - 0.5Q
2.5Q = 40
Q = 16
P = 42
5 marks
Q13
(b)

[4.2]
Suppose that a change in demand conditions increases the quantity demanded at
every price by 10 units. Calculate the new equilibrium price and quantity.
After the change in demand conditions, the demand function is:
P = 55 - 0.5Q
D

Now equilibrium is reached when:
10 + 2Q = 55 - 0.5Q
2.5Q = 45
Q = 18
P = 46
5 marks
Please note that these are not fully-worked model answers, but they are
intended as a guide to the type of answer expected.

End of SECTION B
Maximum for SECTION B: 60 marks
Q13
(c)

[4.2]
Starting with the original demand and supply functions, suppose now that the
government imposes a unit tax of 5 (so that firms now require an extra 5 per unit to
supply any given quantity). Find the new equilibrium price and quantity.
After the tax, the supply function is:
P = 15 + 2Q
S

Now equilibrium is reached when:
15 + 2Q = 50 - 0.5Q
2.5Q = 35
Q = 14
P = 43
5 marks
Q13 Total Maximum Marks for Question
15
marks