2013 S1- BM0007 Revision Questions Question1 (a) The following is a production possibility table for cakes and

bread in country Z. Output A B C D (per year) Cakes (in thousand units) 0 10 20 30 Bread (in thousand units) 100 90 70 40 i)

E 40 0

Sketch and clearly label the production possibility curve (PPC) of country Z using the data above. ( 3 marks) Briefly explain a possible reason for country Z to produce a combination of goods inside the PPC e.g. 40 breads and 20 cakes. (2 marks) Between which points is the opportunity cost 10 thousand units of cakes to 10 thousand units of breads? Is this the lowest opportunity cost between cakes and breads? Briefly explain your answer. (3 marks)

ii)

iii)

Question 2 (a) Determine if the following statements are correct or incorrect and explain your answers: (i) Entrepreneurs can be categorised as labour in the four factors of production. (2 marks) A discovery of new mineral wealth such as oil and iron ore deposits will not help to improve the economic condition of the country. (2 marks) Income effect in the demand concept is defined as buying more goods when a person has higher income. (2 marks) Supplier will produce and sell higher quantity of a good if the price of the good is stable. (2 marks) Suppliers will produce more of a good if the government reduces its tax. (2 marks)

(ii)

(iii)

(iv)

(v)

(b)

An article reported the following: The volcano was spewing t ones of gaseous particles to the atmosphere from Ice-Land since 16 April 2010, resulting in closures of all major European airports. As such, many European travelers were trapped in Singapore and the demand for the Singapores hotel rooms increased significantly. (i) Using only demand diagram, briefly explain the impact of the natural disaster in Ice-Land on the demand of the hotel rooms in Singapore. (4 marks) Assume that the government did not allow the hotels to increase the price of the room charges as the result of the natural disaster. Using a market equilibrium diagram, briefly explain the impact on the hotel rooms. (4 marks)

(ii)

(iii)

Assume the government decided to set a price floor on the room charges for all hotels in Singapore following the increased in demand. Illustrate and explain the price floor with a market equilibrium diagram. (4 marks)

(c)

In producing electronic component A and component B, company XYZ incurred expenses in workers, factory rentals, utilities and machines. XYZ uses the same resources to produce both components. (i) From the expense items above, identify which items are fixed cost and which items are variable cost. (2 marks) State if the production of component A and B is in the short run or long run, and explain your answer. (2 marks) Assume that the price of component A increased significantly and the price of component B remain unchanged, and all other expenses remain fixed. Describe what the producer should do to the production quantities of component A and B. Explain your reason for the producers decision. (4 marks)

(ii)

(iii)

Question 3 (a) The following are the demand elasticities of the goods: Good A B C Demand elasticity -0.90 -2.50 0.00

(i) Identify the demand elasticity for good A, good B and good C and provide a relevant example of each good. (6 marks) (ii) State and explain which goods can be selected for price promotion so as to help the seller to improve its sales. (2 marks) (b) The table below indicates a consumers income level and his consumption of good Y and good Z with respect to the price of good X: Year 2009 (Income level at $1500) 2010 (income level at $2000) (i) Price of good X $5 $8 Demand for good Y 150 120 Demand for good Z 80 200

Calculate and interpret the cross elasticities of good X and good Y, good X and good Z, and income elasticity of good Z between 2009 and 2010 using mid-point formula (correct to 2 decimal places). (6 marks)

(ii) If price of X decreased by 5%, calculate the percentage change in the demand for good Y and good Z. (4 marks) (iii) Sketch the Engels curve for good Z. (2 marks)

Question 2 (20 marks) (c) Describe the characteristics of the following cost items in a production of a good: (i) Total fixed cost. (2 marks) (ii) Total variable cost. (2 marks) (iii) Average total cost. (2 marks) (d) The table below represents the daily production costs of a firm in producing product Z. Assume that each hired worker costs $10 per day and monthly rental of the factory is $3,600. The factory is operating 30 days in one month without rest. Labour 0 1 2 5 9 (i) Output 0 11 25 30 34 TFC TVC TC MC

Copy and complete the table in your answer booklet. (4 marks)

(ii)

From the above completed table, identify the level of output where the Law of Diminishing Marginal Return sets in and explain how you arrived at this answer. (4 marks) The landlord of the factory decided to increase the factory rental by 10%. Calculate the impact on TFC, TVC,TC and MC at 34 units output level. (4 marks) Explain the cause of the Law of Diminishing Marginal Returns in the above production. (2 marks)

(iii)

(iv)

Question 4 Company XYZ was operating in a perfect competitive market structure. The selling price for each product is $28.00 and the following table was its cost of production:

Output (Q)

Total Variable Cost $0 17 30 45 73 110

Total Cost

Average Variable Cost

Average Fixed Cost

Average Total Cost

Marginal Cost

Total Revenue

0 1 2 3 4 5

$38

(a) (b)

Copy and complete the table (2 decimal places) in your answer booklet. (6 marks) Calculate the marginal revenue of XYZ and determine the production level where it maximizes its profit. (4 marks) Sketch the total profit maximization diagram for XYZ using total revenue and total cost curves. (4 marks) Due to global warming, the production of the whole market was affected, ceteris paribus. As a result, the market price of the product increased by $9 but the output level for XYZ did not change. With sketches of market equilibrium diagram, and average cost and individual demand curve diagram, show the effect of the change on the market prices and individual firms profit. (6 marks)

(c) (d)

Question 5 The supplies of a communication service in country X was nominated by four big players providing various package services for the retail and corporate consumers. Competition was very keen in this sector as the communication service penetration rate was very high. Facing with such situation, many consumers said that the only way to improve their profits was to undercut their rivals. (e) Identify the market structure of the telecommunication industry in country X and describe TWO (2) of its characteristics. (5 marks) Briefly explain the reason that the communication service providers would likely not engage in a price war but would put more emphasis on service differentiations. (4 marks) An analyst in country X said that he suspected that there was price collusion by the four communication service providers. Briefly explain price collusion and provide ONE (1) reason that this arrangement is usually illegal in many countries. (4 marks) Some analysts observed that the communication service providers were playing the follow the leader game. Briefly explain this statement and hence, explain the advantage the sellers could gain from the new strategy. (4 marks) Assume that the government in country X decided to merge all the four service providers into a single firm. State THREE (3) possible impacts on the consumers following this decision. (3 marks)

(f)

(g)

(h)

(i)

SECTION C COMPULSORY (30 marks) Read the following article and answer ALL the questions.

Mr Jonas Favourite Restaurant

Mr Jona went to his favourite Japanese restaurant located in one of the citys shopping malls in the central business district. He was not very impressed by many other Japanese restaurants located around the shopping area. In fact, he found that there were too many similar competitors and their qualities and presentations were inferior to his favourite haunt. He felt that his favourite restaurant was still the best with very good promotions and value for money meals. However, during this visit to the restaurant after a long absence, Mr Jonas friends reminded him that there were some changes to the menu. On careful examination, he realised that the menu was shortened as some of his favourite dishes had disappeared from the menu. Mr Jona wondered why and one of his friends said that the restaurants might not be doing very well. This could be the reason the restaurant decided to shorten the menu. Mr Jona also found out that the restaurant also stopped giving away free toys to children. He overheard one of the waiters explaining patiently about the new toy policy to an upset mother who was trying to get some toys to entertain her kids while waiting for their orders to be served. Mr Jona felt sad as the restaurant was always very family friendly compared to other similar restaurants. Mr Jona also observed that the restaurant seemed to have less customers queuing for tables compared to his other previous visits despite being a weekend. In fact, many customers were quite happy to have to wait less than ten minutes to be seated. He told his friends that the economic recession must have hit the food and beverage industry pretty hard. He began to wonder how his favourite restaurant could maintain its promotions and introduce more marketing programmes to attract customers during this recession period. He thought that it must be quite hard for the restaurant owner trying to keep costs down and yet having the need to spend on attracting more customers.

Question 5 (30 marks) (a) (b) Identify and describe the market structure for Mr Jonas favourite restaurant and provide TWO (2) evidences to support your answer. (6 marks) List FOUR (4) methods of product differentiation that the Mr Jonas favourite restaurant could implement which could appeal to customers with many family members and family with children. (4 marks) Briefly explain THREE (3) ways how shortening the restaurant menu helps to save on food ingredient preparation expenses. (6 marks) It was mentioned that the food and beverage business could be badly affected by the recession and might respond positively to price promotions. Based on this statement, state TWO (2) characteristics of restaurant service demand and hence, explain the recessionary impact on the demand of restaurant service. (4 marks) Suggest THREE (3) ways that the restaurant could reduce labour costs during the recession period. (6 marks) State and describe TWO (2) promotional methods that the restaurant could embark to reach out to more customers. (4 marks)

(c) (d)

(e) (f)