BBC403: MICROECONOMICS

FINAL GROUP ASSINGMENT

Group A1

DANIYA ILYASSOVA
SAMAL KUSSANOVA
MAOOTAZ TORKMAN
YUNUSMETOV RUSLAN

BEB140007
BEA130004

AZRIANNA ALYSSA AZMIL BEE140005

BBC403: MICROECONOMICS
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FINAL GROUP ASSINGMENT

Question 1
(a) With the help of figure, explain three economics concepts that are
represented in the production possibilities frontier.
(b) The
(i) The
(ii) The
(iii)The
(iv)

following events occur in the market for Malaysian Airline System (MAS).
crash of MAS flight MH17 in Ukraine.
wage rate paid to MAS captain and cabin workers decreases.
price of Air Asia tickets increase.
People expect the price of MAS economic class tickets to fall next

school holidays.
With the help of figures, explain the effect of each event on the market equilibrium
of MAS service.
Answer
(a) With the help of figure, explain three economics concepts that are
represented in the production possibilities frontier.
The Production Possibilities Frontier (PPF) shows the various combinations of goods
and services produced within the specified time, given available factors of
production and state of technology. It is the boundary between the combinations of
goods and services that can be produced and the combinations that cannot be
produced.
Used to explain basic economic concepts: Scarcity, Choices and Opportunity cost.
Scarcity is defined as wants always exceeds limited resources to satisfy them. Its a
problem, which faces not only poor people, as well as rich people in order to fulfill
their needs.
Choices exist because of scarcity. We must to make choice between available
alternatives.
Opportunity cost is defined as the best alternative that must be forgone for another
choice.

PPF puts three features of production:

-

Attainable (inside the PPF) and unattainable (outside the PPF)

Efficient (at a points on the PPF) and inefficient (at a points inside the PPF)
Tradeoffs (exchange, involves choice) and free lunches (nothing forgone o
increase production)

Factors that influence the shift of PPF:

(b)
(i)

Economic growth
Improvements in technology
Population
The crash of MAS flight MH17 in Ukraine decrease the demand of MAS
service and demand curve shifts leftward, therefore quantity demanded
decreases from Qe to Q1, supply of airplanes decrease and price
equilibrium falls from Pe to P1. The figure is shown below.

(ii)

The decrease in wage rate paid to MAS captain and cabin workers can be
considered as decrease in input or decrease in cost. Therefore, it
increases supply and supply curve shifts rightward, quantity increases
from Qe to Q1, price falls from from Pe to P1. The figure is shown below.

(iii)

Air Asia services are substitute to the services of MAS. When the price of
Air Asia tickets increases, the demand of MAS services increases, quantity

of tickets sold increases from Qe to Q1 and price per ticket increases from
Pe to P1. The figure is below.

(iv)

People expect the price of MAS economic class tickets to fall next school
holidays, which influence both demand and supply. The fall in expected
price decreases demand among clients for current season, demand curve
shifts leftward, and increases supply of MAS services for now, supply
curve shifts rightward. So it lowers the price from Pe to P1, we cannot say
what happens to quantity unless we know the magnitudes of changes.
The figure is shown below.

Question 2
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a) Nora Nabila owns the Sweet Chocolate stall in KB Mall. She charges RM10 per
gram for her hand made chocolate. As an economist, Chun Yew, has calculated the
elasticity of demand for chocolate in KB Mall to be 2.5. If Nora Nabila wants to
increase her total revenue, what advice will Chun Yew gives her?
(b) A 10 percent increase in the price of a good has led to a 1 percent increase in
the quantity supplied of the good after one month and a 25 percent increase in the
quantity supplied after one year.
(i)

What is the price elasticity of supply of this good after one month? Is the
supply of this good elastic, unit elastic or inelastic? Is this good likely to be
produced using factors of production that are easily obtained?
What is the price elasticity of supply of this good after one year? Has the

(ii)

supply of this good become more elastic or less elastic? Why?

(c) Luqman Hakiem decided to quit lecturing at the Al-Hijr University and opens LH
Economics Consultant in Kangar. He gave up an annual income of RM50,000 to open
the consultant firm. A year after opening the firm, the total revenue for the year was
RM200,000. Luqman Hakiem's expenses were RM30,000 for labor, rent was
RM18,000, and utilities were RM1,200. He also had to purchase new furniture from
manufacturers, at a cost of RM60,000, which was financed by cashing in his savings
of RM60,000 that had been in a bank earning 8 percent per year. The normal profit
from operating a firm is RM20,000.
(i)
(ii)
(iii)
(iv)

Which of Luqman Hakiem's costs are explicit costs and what is their total?
Which of Luqman Hakiem's costs are implicit costs and what is their total?
What is Luqman Hakiem's economic profit?
What is Luqman Hakiem's profit as reported by his accountant?

Answer
a) The demand elasticity of chocolate in KB Mall is elastic. To increase total
revenue Nora Nabila should decrease the price of chocolate, because when
demand is elastic the quantity effect dominates the price effect; so a
decrease in the price increases total revenue
b)
(i)

The supply of a good is inelastic if the percentage increase in the quantity

supplied is less than the percentage increase in price. In this example, a

10 percent price rise brings a 1 percent increase in the quantity supplied,

so supply is inelastic.
Because the quantity supplied increases by such a small percentage after one
month, the factors of production that are used to produce this good are more likely
to be difficult to obtain.
The elasticity of supply equals the percentage change in the quantity supplied
divided by the percentage change in the price.
Elasticity of supply = 1 10 = 0.1
(ii)

After one year, the elasticity of supply = 25 10 = 2.5.

The supply of the good has become more elastic after a year since the price
increased.
Possibly other producers have gradually started producing the good and with the
passage of time more factors of production can be reallocated.
c)
(i)

The explicit costs (EC) are the cost of labor, the rent, the utilities, and the
cost of the furniture.

EC = RM30,000 + RM18,000 + RM1,200 + RM60,000 = RM109,200

(ii)

The implicit costs (IC) are the forgone income from the job he quit, the
forgone interest, and the normal profit.

The forgone interest = 8 % x RM60,000 = RM4,800

IC = RM50,000 + RM4,800 + RM20,000 = RM74,800.
(iii)

The economic profit (EP) equals the total revenue (TR) minus the total
opportunity cost (TOC) and the total opportunity cost equals the sum of
the explicit and implicit costs.

EP = TR TOC, where TOC = EC + IC

TOC = RM109,200 + RM74,800 = RM184,000.
EP = RM200,000 - RM184,000 = RM16,000

(iv)

The accounting profit (AP) equals the total revenue (TR) minus explicit
costs (EC) and minus depreciation.

AP = RM200,000 - RM109,200 = RM90,800

Question 3
a) Shantini spends RM28 a week on magazines and ice-creams. The price of a
magazine is RM4 and the price of an ice-cream is RM4. Table 1 shows
Shantinis marginal utility from magazines and ice-creams.

(i)
(ii)

How many magazines and ice-creams does Shantini buy?

If the price of an ice-cream doubles to RM8 and other things remain the

same, how many magazines and ice-creams does Shantini buy?

(iii)
Plot Shantinis demand curve for ice-creams?
b) In what type of market is each of the following goods and services sold?
Explain your answers.
(i)
Toothbrushes.
(ii)
Printer cartridges.
(iii)
Fixed line telephone service.
(iv)
Rice.
(v)
Athletic shoes.
Answer
a)
(i)
(ii)

Shantini buys 2 magazines and 5 ice-creams

If the price of an ice-cream doubles to RM8 and other things remain
the same, Shantini buys 2 ice-creams and 3 magazines.

(iii)

Quantity
per week

Magazines
Marginal
utility per
dollar

Ice creams at
price of 4RM
Marginal utility
per dollar

1
2
3
4
5
6

10
8
7
6,25
5,75
5,5

15
14
12,5
10,5
8
5

Ice creams
at price of
8RM
Marginal
utility per
dollar
7,5
7
6,25
5,25
4
2,5

When the price per ice - cream is 4RM, Shantitni buys 5 ice creams per
week and 2 ice - creams per week at the price of 8RM per ice cream. The
demand curve for is illustrated below.

b)
(i) Toothbrushes Monopolistic competition:
Many firms produce identical tooth brushes differentiated by price, design, quality
and etc.
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(ii) Printer cartridges Oligopoly:

A few number of firms produce identical product or can differentiate by price or
quality
(iii)Fixed line telephone services Monopoly:
There usually only one company in country, which provides fixed line telephone
service. It is hard to find substitute.
(iv)

Rice Perfect competition

Many farms can sell rice to many buyers. Rice is identical product.
(v) Athletic shoes Monopolistic competition:
Many firms produces athletic shoes, which can be slightly different from each other.
A differentiated product has close substitute, but we cannot find a perfect
substitutes.

Question 4
(a) Figure 1 shows the market for onions. The government introduces a price
support for onions at RM16 per kilogram.
(i)

Before the price support is introduced, what are the equilibrium price and

(ii)

quantity of onions? Is the market for onions efficient?

After the government introduces the price support, what is the quantity of
onions demanded, the quantity produced, and the subsidy received by

(iii)

onions farmers?
With the price support, is the market for onions efficient? Who gains and
who loses from the price support and what is the deadweight loss? Could
the price support be regarded as being fair?

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(b) After microeconomics class one day, your friend, Abolfazl suggests that taxing
food would be a good way for government to raise revenue because the demand for
food is quite inelastic. Critically evaluate his suggestion.
Answer

a)
(i) Before the price support the equilibrium quantity was 4 billions of
pounds of onions per year at equilibrium price of 12$ per pound.

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The market is efficient because marginal cost equals marginal

benefit.
(ii) iiAfter the government introduced the price support the quantity of
onions demanded is 2 billions of pounds per year, the quantity
produced is 6 billions of pounds per year, and the subsidy received
by onions farmers is 64 billions of dollars.
(iii)iii. The price support is inefficient because marginal benefit is less
than marginal cost. Farmers gain: they produce more and receive a
higher price on what they sell in market as well as government
subsidy. Consumer lose: they pay more for onions and pay taxes to
fund the government subsidies. The deadweight loss is 8 billions of
dollars (the area of grey triangle). The outcome is unfair on both
views of fairness unless the onion farmers are poorer than
consumers, in which case it might be fair to boost farmers` income.
b) Food is not a luxury good. It is widely produced, broadly consumed
product and generally accounts for an important share of the family
budget of low- and middle-income consumers. It is well established that
taxes on essentials such as food or drink take a larger share of income
from the poor than from the rich.

Taxing the food would increase

government revenue because of higher prices charging for food. Some

people would not able to afford
this prices and would change products for cheaper = worse products, for
example fast food or expired food, which would influence on their health
and decrease their physical activity.
Question 5
(a) Faridzuan is a catfish farmer and the catfish market is perfectly competitive.
When the market price is RM25 a fish, Faridzuan maximize profit by producing 200
fish a week. At this output, average total cost is RM20 a fish and average variable
cost is RM15 a fish. Minimum average variable cost is RM12 a fish.
(i) By using the above information, sketch the short-run cost curves for
Faridzuan catfishs farm.
(ii) What is the amount of maximum profit earned by Faridzuan.
(iii)If the price falls to RM20 a fish, will Faridzuan farm produce 200 fish a week?
(iv)
If the price falls to RM12 a fish, what will Faridzuan do?
(v) If the price falls below RM12 a fish, what will Faridzuan do?
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(vi)

Derive Faridzuans supply curve for catfish.

(b) Compare the performance of a single-price monopoly with that of perfect

competition.
Answer
a)
(i) The graph is below
(ii) The maximum profit earned by Faridzuan is 1000RM

(iii) If the price falls to 20RM per fish Faridzuan will produce less than 200 fish
per week. The MC curve has upward slope, so to lower MC to 20RM, Faridzuan
needs to cut production.
(iv)
If the price falls to 12RM per fih, faridzuan will cut production intill MC
equals MR. Because 12RM per fish is also a minimum AVC, Fariddzuan is at
the shutdown point he can ether produce the quantiity of fish at the
shutdown OR shut down and do not produce any catfishes.
(v) If the price falls below RM12 a fish, Faridzuan shuts down and produces no
fish.
(vi)

On the graph above.

b) The firms in perfect competetive market produce at equilibrium point, at

which MC = MB, while single price monopoly produces at point at profit
maximizing output, MC = MR.

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Compared to a perfect competitive market, a

single-price monopoly produces at lower output
and charges a higher price

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