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BM/OCT 2007/ECO410

UNIVERSITI TEKNOLOGI MARA FINAL EXAMINATION

COURSE COURSE CODE EXAMINATION TIME

: : : :

MICROECONOMICS ECO410 OCTOBER 2007 3 HOURS

INSTRUCTIONS TO CANDIDATES 1. This question paper consists of two (2) parts : PART A (2 Questions) PART B (5 Questions)

2.

Answer ALL questions from PART A and three (3) questions from PART B in the Answer Booklet. Start each answer on a new page. Do not bring any material into the examination room unless permission is given by the invigilator. Please check to make sure that this examination pack consists of: i) ii) the Question Paper an Answer Booklet - provided by the Faculty

3.

4.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 6 printed pages
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PART A QUESTION 1 Drive on biofuels risks oil price surge Abdalla El-Badri, secretary-general of the Organisation of the Petroleum Exporting Countries (OPEC), said the powerful cartel was considering cutting its investment in new oil production in response to moves by the developed world to use more biofuels. The warning from OPEC, which controls about 40 per cent of global oil production, comes as the group of eight leading industrialised nations meets on Wednesday with climate change at the top of its agenda. The US and Europe want to use biofuels to combat global warming and to strengthen energy security. OPEC has previously expressed scepticism about alternative energy but Mr El-Badri's comments mark the first clear threat that the cartel might act to safeguard its interests in the face of a shift towards biofuels. "OPEC will continue investing, but with biofuels on the horizon, they may not invest enough." Mr El-Badri warned that biofuel production could prove unsustainable in the medium term as it competed with food supplies. Biofuels are one reason retail food prices are now heading for their biggest annual increase in about 30 years. In this case, he warned, oil prices would go "through the roof. He said OPEC members had so far maintained their investment plans but he warned: "If we are unable to see a security of demand...we may revisit investment in the longterm." OPEC plans to invest about $130bn until 2012 to raise its oil output. The cartel forecasts a capacity of 39.7m barrels of crude oil per day in 2010, up from today's 35.7m b/d. From 2013 to 2020 OPEC plans to invest another $500bn in production infrastructure but that could change depending on the biofuels outlook, Mr El-Badri said.
Extracted from Financial Times, 6 June 2007

a)

What is a cartel? Why the Organisation of the Petroleum Exporting Countries (OPEC) is considered a powerful cartel? (4 marks) Explain two reasons why OPEC is skeptical with the idea of alternative energy, biofuels. (4 marks) With the aid of a diagram, show how a drive on biofuels could lead to a surge in retail food prices. (4 marks) Explain the statement in the third paragraph, "If we are unable to see a security of demand...we may revisit investment in the long-term." (4 marks) Discuss two advantages and disadvantages respectively of using biofuels rather than oil as source of energy. (4 marks)
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b)

c)

d)

e)

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BM/OCT 2007/ECO410

QUESTION 2

a)

The marketing department of Yukari Sdn Bhd that manufactures motorcycles has determined the following demand function for its motorcycles: Q m = 2000 - 0.4P m + 0.1P c + 0.02Y + 0.01A where Qm Pm Pc Y A = = = = = the number of the firm's motorcycles sold weekly the price of motorcycle the price of a close competitor's motorcycle average household income weekly advertising RM spent

and i)

If P m = RM3.500, P c = RM2.800, Y = RM12,000 and A = RM1.200, find the price elasticity of demand for motorcycle. (2 marks) Is demand elastic, unitary elastic or inelastic? Why? If the firm plans to decrease its price, what will happen to total revenue? (2 marks) Using the same values given in (a), determine the income elasticity of demand. Interpret your answer. (2 marks) Calculate the cross price elasticity of demand and interpret your answer. (2 marks)

ii)

iii)

iv)

b)

Suppose that a firm Anggunjaya Bhd has the following short-run total cost (TC) function: TC = 40 + 15Q - 0.3Q 2 + 0.002Q 3 i) Determine the output level at which marginal cost will be minimized. (2 marks) ii) Determine the output level at which average variable cost will be minimized. (2 marks) iii) Find the value of average variable cost when it is at its minimum. (1.5 marks) iv) Find the value of marginal cost when average variable cost is at its minimum. (1.5 marks)

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c)

A perfectly competitive firm is selling Good F which is priced RM30. The firm's total cost function is: = 5 0 + 1 5 Q - 1 . 5 Q 2 + 0.4Q3

i)

What is the profit maximizing output of the firm? (2 marks)

ii)

What is the firm's economic profit at this output level? (1 mark)

iii)

Determine the firm's shut down price and output. (2 marks)

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PARTB

QUESTION 1 a) Using examples distinguish between microeconomics and macroeconomics? (8 marks) b) Describe the three different types of economic system. How do you define the Malaysian Economy? (12 marks)

QUESTION 2 a) Why do agricultural commodities subjected to high price fluctuations in the market? (10 marks) b) Discuss the implications of a government setting a minimum price on an agricultural product. (10 marks)

QUESTION 3 a) Compare a perfect competitive market and monopoly in terms of the following: i) ii) iii) iv) v) Number of sellers Type of products produced Entry and exit Type of profit in the long run Shape of demand curve (10 marks) b) Using appropriate diagram explain the Kinked Demand curve faced by an oligopolist. (10 marks) QUESTION 4 a) With appropriate diagram(s) and using an example, explain the Law of Diminishing Marginal Returns. (10 marks) b) Discuss the situation of a company facing a reduction in its Long Run Average Cost (LRAC). Briefly explain three reasons for a company to enjoy economies of scale. (10 marks)

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QUESTION 5 a) Illustrate how wages are determined in a perfectly competitive market. (10 marks)

b)

There are two theories explaining how interest rates are determined. Discuss these two theories using relevant diagrams. (10 marks)

END OF QUESTION PAPER

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