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QUESTION 1
A shopping trip to Klang, Selangor costs RM 500, while a similar shopping trip in Kuala Lumpur would cost RM 600. The shopping trip to Klang, however, involves transport cost of RM 50 and travel time (valued at RM 50). Considering the economic costs of shopping, which option is better, i.e., shopping in Kuala Lumpur or shopping at Klang, Selangor?
QUESTION 2
A firm has the following revenue and cost functions.
TR = 90 Q – Q 2
TC = Q 2 +30 Q + 30
Determine the quantity level at which the firm maximizes its total profit.
Question 3
What is price elasticity of demand? How is it measured? If the price elasticity is -3 and RM 300 is the marginal cost of product X, what should be the optimal sale price?
(Hint: apply the mark-up rule)
Question 4
What is meant by price discrimination? What are the conditions to make price discrimination effective? Discuss your answers with examples from the Airline Industry.
Question 5
Write short notes on:
a. Law of diminishing returns and the short-run cost curve
b. Economies of Scale
c. Demand Estimation – various methods [ 15 marks]
ASSIGNMENT 1_MANAGERIAL ECONOMICS_0115 Page 2
Question 6
Briefly explain how firms compete/set price under -
a. Perfect competition
b. Oligopoly
QUESTION 7
Most recently, the price of oil has fallen drastically. Explain if this is a result of:
a. A drastic reduction in the cost of production (i.e. shift in the supply curve)?
b. A fall in the demand for oil and oil products ( i.e. shift in the demand curve?
c. A change in the Speculative Activity ( i.e. change in stock piling)?
d. Other factors ?
(Hint: Search through the material on oil pricing in the global market) [10 marks]
PART B: (30 marks)
Question1
How does the macroeconomic environment affect the firm’s decision making? Explain briefly the important variables influencing business activities.
Question 2
What are the main components of Aggregate Demand? Which components are more volatile than others? Explain.
Question 3
What determines the foreign exchange rate? Discuss critical factors which may have caused the recent depreciation of the Malaysian Ringgit.
Solution
PART A
Question #1:
If it is assumed that there is no travel time and transport cost involved in shopping at Kuala Lumpur, then it can be stated that shopping at Kuala Lumpur would be beneficial deal as shopper can purchase more. The opportunity cost associated with the decision is the loss of opportunity to travel to Klang, Selangor. It is a form of implicit cost.
Question #3:
It shows the relationship between the change in the quantity demanded and change in the price of that product. It is measured as the ratio of percentage change in quantity demanded to the percentage change in the price.
P = 450
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Question #4:
Price discrimination is a pricing strategy where different customers are charged different price for the same product or services. It is consider effective when it is brought into practice. There are various occasions that can reflect price discrimination in the airline industry, for instance, the time of buying the ticket, unsocial hours are made cheaper, seats with more leg rooms are charged more and when one travel at the peak times. The time of buying the ticket, unsocial hours, and peak times, all reflect same reason for the determination of prices. The reason for the price discrimination is associated with the cost and benefit of the airline industry. During the peak times, the airlines industries increases the prices as supply of the seats are less than the demand for the seats and the airplane company has stronger hold. On the other hand, during the unsocial hours less people travel which reflects more supply than demand, and, therefore, the airlines end up reducing the travelling prices to attract more consumers. The leg rooms are the additional benefits provided to the customers to charge more prices. The airline could have used that space to accommodate one more seat for another passenger and, therefore, it tries to accommodate that pricing with the customers willing to pay more for more space.
Question #5:
Law of diminishing returns states that if all other conditions remained constant, then the increase in the one input variables is made constantly then there will be a time when the marginal per unit output will begin to go down. The short run cost curve helps in increasing the product if the MC is less than MR and can decrease if opposite.
Economies of scale states that increase in the production of certain products to large scale leads to decrease in costs.
Various methods of demand estimation are qualitative, time series, causal, and simulation.
Question #6:
In perfect competition, prices are determined based on the current competitive price of the product in the market based on the variables such as customer demand and number of available suppliers.
In Oligopoly, the prices of the products are decided by the suppliers as there are only few of them in the market and commodity is concentrated into few hands. In such conditions, each of the producers can influence the prices in the market.
Question #7:
The reasons for the most recent fall in the oil prices can be one of the following:
Oil demand reduced in China and other countries due to less economic activity. The increased economic activity, in general, consumes more energy. However, reduction in the economic activity demands less energy and if the supply of energy is more than the demand, then it is obvious that the price will fall as suppliers will try to attract more consumers for their excess idle resources.
Political conflicts in Iraq and Libya. The political conflicts results in the competitive pricing most of the time to outdo the competition. And, therefore, decrease in the oil price can be attributed to same.
Emergence of other producers such as America other than OPEC. In this situation, the number of suppliers has increased and the number of buyers is still the same as previous. This situation led to the increase in the supply and demand being constant. Therefore, prices fall in such condition due to excess supply as suppliers try to attract more consumers towards them with attractive oil prices.
PART B
Question #1:
Macroeconomic environment impact the firm’s decision in multiple ways based on which variables have been considered. The company operates within the environment and each of its decisions depends on the external factors. Some of the macroeconomic factors are political, economic, social, technological, legal, and environmental. These factors defined the market conditions in which any business house operates. For instance, if a business is involved in selling tobacco leaves and government bans selling such items effective from today, then the companies relying on such business has to shut down. This instance comes under legal variables. Moreover, stability of the political situation in the country impacts the decisions related to taxes and other factors which is important for the business to operate. Technology is changing rapidly which is increasing the pace with which the companies used to involve in business functionality. The companies those are not ready to adopt contemporary technology might be left behind by the companies those do.
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Place Your OrderQuestion #2:
The main components of aggregate demand are Consumption, Investment, Government Spending, and Net Exports (X-M). The component “Investment” is considered to be the most volatile. The investment is affected by interest rates, physical wealth, technological advancements, expectations, and capital prices. Expectations of good economy drive more investment, else investors draw money causing economy to fail. Increase in the interest rates lead to reduction in the investments and vice-versa.
Question #3:
Differentials in inflation, interest rates, current-account deficits, public debt, terms of trade, and political stability and performance of the economy determine the foreign exchange rate. The 1MDB scandal where the almost US$700 million (2.6 billion Ringgit) found in the prime minister’s Najib Rajak’s personal account disturbed the sentiments of the investors and they started to fly back with their investments. The increase in the supply of Ringgit and in exchange of USD, reduced the value of Ringgit. Moreover, the increase in the interest rates in the US market, attracted more investors from Malaysia to US, thus further impacting the Ringgit.
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