ECO 162

ASSIGNMENT ECO162 MICROECONOMICS JULY ² NOV 2009 Instructions: 1. Form a group of 4 or 5 members. 2.On the cover of the assignment, please write: a. Names and matrix no. of ALL group members. b. Programme/part/group. 3. The assignment must be submitted NO LATER than 15th October 2009. TASK 1 ² Answer ALL questions. 1. 2. 3. 4. Explain how Socialism and Capitalism solve the three basic economic problems. Explain 4 differences between Islamic and conventional economic systems. Explain the concept of scarcity, choice and opportunity cost. Draw all diagrams (with labels) as stated below: a. Chapter 1: The concave PPC with points showing efficient production, inefficient production and scarcity problem. b. Chapter 2: i) The consumer·s equilibrium. ii) The changes in Qd and changes in Dd curve. c. Chapter 3: Market equilibrium with a floor price. d. Chapter 4: i) The production curves (TP, MP, AP) in one diagram. ii) The cost curves (TC, TVC and TFC) in one diagram. e. Chapter 5: i) Perfect Competition curve ² the 3 short run profits and long run profit. ii) Monopoly curve ² the 3 short run profits and long run profit. iii) Oligopoly curve ² the Sweezy·s model. Write down the formula to calculate cross elasticity of demand. Explain the importance of its coefficient. Summarize the concept of the Law of Diminishing Marginal Return. Explain 4 determinants of demand. Explain 4 determinants of price elasticity of demand. Using a diagram, explain and distinguish between elastic supply and inelastic supply. Discuss 4 characteristics of monopolistic competition. 5. 6. 7. 8. 9. 10. TASK 2 (PAST FINAL EXAMS) ² Answer PART C ONLY. Each group must select ONE of the past final exam questions as listed below. Please make sure that you don·t choose the same question. Attach a copy of the question. 1. 2. 3. 4. 5. 6. 7. APR 2009 OCT 2008 APR 2008 OCT 2007 APR 2007 OCT 2006 APR 2006 8. 9. 10. 11. 12. 13. 14. NOV 2005 MAR 2005 OCT 2004 MAR 2004 OCT 2003 APR 2003 SEP 2002 15. MAR 2002 16. SEPT 2001 1 Normally they will produce product that are highly demanded. goverment fairly divide the goods to the society. Second basic economic problem is How to produce?. it depends on consumer purchasing power. There are three basic economic problems. They can either choose labor intensive or capital intensive based on prices of the factors. Capital intensive is used to increase economic growth while labor intensive is used to reduced unemployment problem. In Capitalism. there are What to produce?. In different economy systems there are different ways to overcome or solve this problems The first basic economic problem is What to produce?. The price consumers willing to pay serves as signal for producer to decide what to produce. they use price mechanism to overcome this problem.QUESTION 1 Explain how Socialism and Capitalism solve the three basic economic problems. The authority plans what to be produced based on society need not indiv idual need. In Socialism. In Capitalism. in Socialism. the decision are made by the goverment. In Socialism. In Capitalism. In the othet hand. If income increase. The third basic economic problem is For whom to produce?. they will increase their demand. The basic needs will be distributed according to overall society needs. 2 . the methods determined by the government depending on economic purpose. producers normally choose methods in order to maximize profits. How to produce? And For whom to produce?. QUESTION 2 Explain 4 differences between Islamic and Co nventional Economic S ystems. not just for this world satisfaction only. For example in Malaysia. Islam prohibits riba. In Islam.w. there is no separation between religion and economics in Islam. This is to promote social justice and to uphold the principle of brotherhood. Citizens also would change their mind set. in Islam the concept utility is for this world and hereafter. we have clear cut between haram and halal. Everything is under Allah. majority people are Muslim so it could prevent people from doing the bad things. from negative to positive. All people are same range because all of the human is creation of Allah s. Muslim produce goods and services according to their hierarchy of needs. There are more halal items than haram that can be explore by people. There are many differences between Islamic and Coventional economic systems.t. Then. Other than that. Islam use equity participation and profit sharing (mudharabah). Lastly. The second different between Islamic and conventional economic systems is in Islamic economic is religiously value loaded. its will decrease the gap between poor people and rich people. The differences are. 3 . choice and oppurtunity cost. Example. This is because human wants are unlimited. we have two choice to make. It occurs when the society wants exceed the ability of the economy to meet those wants. it occurs when you choose something or when a decision is made on certain preference that will give maximum satisfaction. 4 . benefits and satisfaction. Scarcity is the situation in which human wants are forever greater than available supply of time. Opportunity cost is the second best alternatives that a person has to forego. goods and resources. Choice. Choice will involve a set of alternatives and decision is made due to cost.QUESTION 3 Explain the concept of scarcity. to buy fried chicken or to buy burger. The opportunity cost of buy fried chicken is we have to forego burger and vice versa. whereas the resources to satisfy these wants limited. Anything that consumer has to give up or sacrifice in order to gain somethings. b. ii) The changes in Qd and changes in Dd curve. e. Chapter 1: The concave PPC with points showing efficient production. d. c. AP) in one diagram. TVC and TFC) in one diagram. iii) Oligopoly curve the Sweezy s model. Chapter 3: Market equilibrium with a floor price. MP. Chapter 4: i) The production curves (TP. ii) Monopoly curve the 3 short run profits and long run profit.Question 4 Draw all diagrams (with labels) as stated below: a. i) Perfect Competition curve the 3 short run profits and long run profit. ii) The cost curves (TC. inefficient production and scarcity problem. 5 . Chapter 5: Note : Answers behind. Chapter 2: i) The consumer s equilibrium. If the cross elasticity of demand is a positive (+). the relationship of goods is a complementary goods. then.QUESTION 5 Write down the formula to calculate cross elasticity of demand. Explain the importance of its coefficient. the relationships of goods is a substitute goods. 6 . then. the relationship of goods is a unrelated goods. If the cross elasticity of demand is equal to 0. When cross elasticity of demand is a negative (-). FORMULA of Cross Elasticity of demand (PEDxy): PEDxy = =   Q x = initial quantity of good X Q x = new quantity of good X P y = initial price of good Y P y = new price of good Y The importance of coefficient of cross elasticity of demand is how responsive the quantity demanded of one good is to a change in the price of another good. The marginal product of each succeeding worker would arise. given the fixed and variables factors of production. If we have one or two worker. if we keep adding workers. painting and so on. But. In this situation. Now. Worker has to wait to use the machines. our production would be very slow. the Marginal Product (MP) of the variable input declines. assume that we have a small furniture factory. because the factory become so crowded and congested until no work can be done. which has several machines for cutting. We must assume that the all units of variable input are equal in quantity. when additiona l units of variables input (eg. The example is. labor) are added to fixed input (eg. Some workers would sit idling. additional workers are applied to a constant amount of capital equipment (fixed resources). In other word. as the operation become more efficient. The significant of Law of Diminishing Marginal Return is to enable the producers to identify the most economical stage of production. If we add more workers.total product (output) would decline instead of increasing. could not do any work. 7 . We can solve this problem by adding more workers in our factory. we use labour as our variable input. Law of Diminshing Marginal Return states that after a certain point. output will eventually rise by smaller and smaller amounts as more worker are employed. total output would increase at a diminishing (decrease) rate.QUESTION 6 Summarize the concept of the Law of Diminishing Marginal Return. the marginal product would become negative. Some machines may be over-utilized. Many things such as raw materials and utilities can be the variable input in real world. The benefit of specialization could be realized. the problems of overcrowding would arise. capital or land). The more desirable people find the good. Thus. the demand for its substitute will also increase. when income increase. during Hari Raya. when income increase. Tastes and preference also is the determinant of demand. Examples. For example. Complementary goods is a pair of goods consumed together. demand for most goods will rise. baju kurung. Second determinant of demand is consumer s income. If the goods is a inferior goods. Examples. by consideration of health. coffee and tea. Th ere are different effects on different goods. dem and will be constant. people will use umbrellas or rain coats. As a price of one good goes up. depending on wether the related good is a substitute or a complementary. therefore the more you will demand for th at product even thought there is no change in price. Substitute goods is a pair of goods alternatives to each other. Last but not least. magarine and butter. in rainy season. For example. Different products will also be demanded at different festive seasons. trend of fashion. Therefore. Dd curve of substitute will shift to right. camera and film. buying power will increase. when income incr ease. raya card will be highly demanded. the demand for its complementary good will fall. Therefore demand for those products will increase. Dd curve of complements shift to left. seasons and climate also the determinant of demand. As income increase. 8 .QUESTION 7 Explain 4 determinants of demand. traditional Malay cookies. Seasons or climate can also affect demand. First determinant of demand is the price of related goods. As price of one good goes up. If the goods is a necessities. brand-conscious person / comfortable with certain brand. A change in the price of related good may increase the demand for a product. cars and petrol. Thus. If it is a normal/luxury goods. demand also increase. the more they will demand. Example. demand will decrease. Affected by advertising. by the experience from consuming the good on previous occasions etc. then the more inelastic the demand will be. determinant of price elasticity of demand is the proportion of income spent on the good. Pe ople don t want to switch to other products). Honda. determinant of price elasticity of demand (PED) is the number and closeness of substitute goods. Second. the more elastic the demand will be.QUESTION 8 Explain 4 determinats of price elasticity of demand. the demand is highly inelastic. Habit forming also is the determinant of the price elasticity of demand (PED). The longer the time period after a price of certain goods changed. For example. price of a rises by 20%. The fourth determinant of price elasticity (PED) is the time period. but as time goes by they may shift to other brand of shampoo. automobiles like Toyota. The more substitute and the closer they are. For good s that has no close substitute. the more we will be forced to cut consumption when its price increase. So the demand curve for Proton must be elastic. First. The higher the proportion if income that is spent on a particular good. The lower the proportion of income spent on certain good. the more inelastic the demand will be. 9 . the consumers may not switch immediately. The more people get used to one product. Nissan and many others became perfect substitute for Proton. the more elastic is the demand. Example. Therefore price elasticity of demand will be more elastics. Ford. ELASTIC P Ss P P 0 Q Q Q % Qs > % P :  The Ss curve is less steep. easy to employ more factors of production.g. It has a PES of less than 1.QUESTION 9 Using a diagram. The coefficient = 1 < PES < Elastic supply means that an increase in price causes a bigger increase in supply. This means that an increase in price causes a smaller increase in supply. explain and distinguish between elastic supply and inelastic supply. It has a PES of greater than 1. Supply will be elastic if it is easy for a firm to increase supply e. Supply is often inelastic in short -term. The coefficient = 0 < PES < 1 Inelastic demand. spare capacity in factory. INELASTIC P Ss P P 0 Q Q Q % Qs < % P :  The Ss curve is steep. when it is difficult for firms to increase their capacit 10 . the non-price competition. Lastly. In a simple word. Differentiated products is also the characteristic of monopolistic competition. so each has limited control over the market. a strategy to make price less important factor in consumer purchases and product differences is a greater factor. quality. The industry has many sellers but less than in perfect competition industry. One seller cuts its price and increase in sales. Third characteristic of monopolistic competition is relative easy entry and exit. the other firm may not fell it. The firm only has a small market share. location and accessibility. Anybody can set up firms easy but not as easy in perfect competition. real or imagined. New firms have to come up with new product features and brands to compete or establish their reputations. There are no collusion. 11 . services to consumers. First characteristic of monopolistic competition is many sellers. Examples. advertising and packaging. Monopolistic competition provide produts slightly different from competing products with regard to product attributes. or other qualities.QUESTION 10 Discuss 4 characteristics of monopolistic competition. differentiated products explain the products are similar in nature but different in terms of packaging. brand names etc. It has significant role because sellers cannot really compete in terms of prices. Monopolistic competition firms advertise their products heavily in effort to inform consumer about their product differentiation. because the presence of large number of firms ensure that collution is very unlikely and there is little interpendence. Each firm has a comparatively small percentage of the total market. each firm can determine its own pricing without considering the possible reactions of rival firms. Which resources should be used. In this economic system. serve as signals for producer and seller to decide what to produce and how much to produce. The three basic economic problems is what goods and services will be produced? Due to limited resources. Which resources should be used. 12 . we have to produce less of another good. more labor and less capital.PAST FINAL EXAM QUESTION PAPER . Price of resources and production factors or inputs. and how they should be combined to production. For whom will goods and services be produced? Who will consume the goods and services produced? What is the basis of the distribution? This question is also known as a distribution question. m order to maximize production. consumers are very powerful they can influence the producer decisions. They may use different decision making rules and mechanisms on deciding in what goods to be produce more of one goods. The price they are willing to pay for any goods. indicate what production methods to use to minimize production cost. etc. all economic must make a choice. Producer will produce goods that are higher demanded which pay the highest price in order to maximize profits. How will goods and services be produced? The economic system must determine how output is to be produced. and how output is to be produced.MARCH 2004 PART C (30 MARKS) Question 1 a) Discuss how a capitalist economy uses market mechanism to solve basic economic problems. Based on the diagr m above. if we choose to a produce at point Y. it means that we have made a choice of producing more rice and less car. Based on the diagram. From the PPC. This is because human wants are unlimited. the points PPC signifies the concepts of choice. whereas the resources to satisfy these wants are limited.       13 ¢ ¡§ £ ¦ § ¨ § ¢§ ¡§ § ¡ ¢ ¡ ¦¥ £ ¢ ¤¢ ¡ ¢ ¢ ¢ ¡ ¡   nd . We have to make a choice among the various combination of rice and car. Opportunity cost is anything that consumers has to give up or sacrifice in order to gain something.b With th h lp of n pp op i t di oppo tunit ost £ £ © §¨ £ xpl in th on pts of s it hoi Choice occ s whe you choose some hing or when a decision is made on certain pre erence that will give satis action. it is unattainable due to the problem of scarcity or not enough resources to produce at that point. Scarcity occurs when the individual or society wants e ceed the ability of the economy to make those wants. we can say that if we switch from point B to point C we are actually sacrificing the production of the car in order to produce more rice. To move an alternative A to alternative B. the time period or adjustment period of agriculture products are responsive to price. and price of other goods. he must sell his current crop at whatever price. fishes or vegetables that harvests in large quantity. In technology. Managerial specialization (managerial economies). Firstly. But change in supply is a change in any one or more of these determinants of supply or supply shifters will more the supply curve for a product either to the right (increase in supply. So. Change in supply means a change in the entrée schedule or a shift of the enterer curve. Agricultural product requires a long period of p roduction. the higher resource (input of the production) price will raise the production cost and reduce the profit. improvement in technology enabl es firms to produce more unit of output at lower costs. The time period to produce the industrial products is short. Resource price. expectation. Large-scale production also means better use of. This is because of the nature of the industrial products are long lasting and more durable than agricultural products. taxes and subsidies. technology. resource price.producers supply larger quantity of the product at each possible price) or to the left ( decrease in supply). As example. carrot. from planting to harvest. the crops capacity of individual producers is persumed fixed. It is caused by a change in one or more of the determinants of supply such as number of sellers. Change in supply and change in quantity supply is the same concept as change in demand and change in quantity demanded. For example. a farmer can use more fertilizer to increase output in response to a presumed increase in demand. In short-run. these increases the firms profit and therefore encourage them to increase their supply. Most of the industrial products that are not perishable compare agricultural products. That will make the agriculture products is inelastic. The agriculture products also are perishable. If the products are easily perishable. his current supply is inelastic because tomatoes cannot be stored for long time and any change in price can only affect the next growing season. Goods that are too costly to be store is goods that are to be store in large amount. and greater specialization in management. Examples of agriculture products that is perishable are tomatoes. Sometimes the agriculture products are too costly to store. Example. fish etc. b) Explain the difference between a change in quantity supplied and a change in supply. The firm can use any kind s of materials for its input resulting in supply of its output become elastic. then the supply would be inelastic. This means that a change in market price during which producer cannot respond with the change quantity of supplied. 14 . But they still have limited way to increase production and supply.Question 2 a) Explain why agricultural products are more supply price inelastic compared to that of industrial products. Even the price is increase supplier would no t increase their quantity supply in large volume due to perishable problem. it will have a low elasticity of Ss (inelastic). a farmer planting tomatoes. the supply of the industrial products is elastic. TP start to decline. no machines are left idle as we have the right number of labors to operate all machines. This is the most efficient stage of production it because the combination of variable and fixed inputs are used efficiently. The values of AP and MP are decreasing but still positive. The firm will start from the source until the intersection of MP and AP. Stage 2 .Question 3 a) With the use of a diagram. The inputs are fully utilized. There is overutilization of capital. For rational producer will continue producing goods at this stage since TP can be increase by adding more labor. A rational producer should not be producing the product at this stage. TP/AP/MP Stage 1 Stage 2 Stage 3 TP AP 0 MP Q of L Stage 1 . A rational producer will produce at this stage. 15 . It means that each additional will increase in labor units results in greater increase of TP. Stage 3 . There is a sharp will increase of TP as we increase the units of variable input. example labor. It because. If the firm continues produce the product after this stage. From the intersection of MP and AP until MP equal 0 and TP at the max. describe the three (3) stages of production in the short -run. Begins when MP=0 and continues to decline thereafter. the TP will start to decline. If advertising is undertakes. quantity will increase also and the AC will decrease.b) Explain four (4) factors that lead to economies of scale experienced by large -scale firms. get special discounts. financial economies. Role of non-price competitions. Then. it means one worker with only a few tasks. decrease the cost and AC will decrease also. it means the firms buy inputs in bulk. Perfect competition Many buyers and sellers. y There is only one seller with many buyers. increase the skills. The fourth one is managerial economies. marketing economies. Question 4. y The product is sold by many other sellers or a fixed price. Perfect knowledge. y Both buyer and sellers have perfect knowledge of market condition. The four factors that influence is job specialization. y Firms can also freely exit from the market if incur losses. this is to have a good relationship with the consumers. y Firms can enter the industry without restrictions from relevant authorities or government. y If a seller increases the price. This means that when a manager can manage a bigger output efficiently at the same wage. the other sellers and the buyers will come to know about it. ( government laws and regulations) Role of non-price competition. 16 . y Producers or seller in this market structure don t have to advertise their product. quantity increase and AC will decrease. There are barriers to entry. y Advertisement is not needed to promote sales. y There are restrictions for a new firm to enter the market. a) Compare any four (4) characteristics of perfect competition and monopoly. The monopolist has power to control the market price. no guarantee the sales will increase. consumers do not have other choice. Free entry and exit. repeating the same work. y The sellers are normally the price takers because the output sold is relatively small compared to the market volume. Other than that. Since the monopolist is the only seller in the market. big and established firms normally get favorable term when borrow money from banks (lower interest rate and longer repayment period). y Neither of them have the influence over the market price. y Even if they do advertise. Monopoly Sole producer. the economic profits enjoyed by the existing firm will attract new firm to the industry. Economic profit here is zero. Entry eliminates economic profit.b) Explain why firms in a perfectly competitive industry are not able to maintain supernormal profit in the long -run. In long run equilibrium. Exit eliminates losses. If P exceeds ATC. This will cause the firm to leave the industry. 17 . and the industry is in equilibrium . In the short run. Supply will increase unti l it force the P back to minimum ATC. Temporary loss. P= MC= Minimum ATC. firms may not have sufficient time to liquidate their assets and go out of the business. P ATC P P MR P P D 0 Q 0 D Q P S S  Single firm Industry Show the long run equilibrium position of a competitive firm. If P less than ATC. The existing firms are earning normal profit. P ATC P S S P P MR P P D D 0 Q 0 Q  Single firm Industry Show the long run equilibrium position of a competitive firm. Temporary profit. bringing the P back to equality with minimum ATC. the firm will incur losses. The firm produces at MR=MC and the price is equal to minimum ATC. total supply will decline. P= MC= Minimum ATC. As they leave.