Semester 1



   

(TMA 2 – 15%)


 
25 March 2011


 




Instructions:

1. TMA 2 covers the topics in Unit 2 and Unit 3.2.

2. TMA 2 contains:

Part A: 4 quantitative questions

Part B: 5 essay and application type questions

Answer all questions in an A4 sized paper. All workings must be shown.

3. The total marks for TMA 2 is 100 which is equivalent to 15% of your final

total marks.

4. The deadline for the submission of TMA 2 is on 25 March 2011 before 12.00

midnight.

2
Part A (40 marks)
Answer ALL the questions in this section.

Question 1

Use the diagram below to answer the questions that follow.

Price (RM) Demand (units) Supply (units)

100 9000 1000
200 8000 2000
300 7000 3000
400 6000 4000
500 5000 5000
600 4000 6000
700 3000 7000
800 2000 8000
900 1000 9000

(a) What is the equilibrium price and quantity for this market?
[2 marks]

(b) What happens to the market if government decided to set the

market price at RM300? Is this price binding?
[6 marks]

(c) Is the price set above a price floor or price ceiling? Why do you say so?
[2 marks]

3
Question 2

Use the diagram below to answer the questions that follow.

Price
22

20

18
A Supply
16

14

12

10

6
B
4
Demand
2

100 200 300 400 500 600 700 800 900 1000 Quantity

Suppose the government levies a tax of the vertical distance from point A to point
B. Determine the values of:

(a) Consumer surplus

(i) before tax
(ii) after tax
[4 marks]

(b) Producer surplus

(i) before tax
(ii) after tax
[4 marks]

(c) Total revenue to the government.

[2 marks]

4
Question 3

Use the diagram below to answer the questions that follow.

Price
22

20
A
18

16

14
B
12

10

8
C
6

2
Demand
100 200 300 400 500 600 700 800 900 Quantity

(a) Using the midpoint method, compute the elasticity of demand between
points A and B. Is demand along this portion of the curve elastic or
inelastic? Interpret your answer with regard to price and quantity
demanded.
[5 marks]

(b) Using the same method as above, compute the elasticity of demand
between points B and C. Is demand along this portion of the curve elastic
or inelastic? Interpret your answer with regard to price and quantity
demanded.
[5 marks]

5
Question 4

Use the table below to answer the questions that follow.

Total Average Average

Average Total Cost Marginal
Product Variable Fixed Cost
Cost (RM) (RM) Cost (RM)
(units) Cost (RM) (RM)
0 - - 50 - -
1 70 20
2 10
3 25
4 40
5 51

(a) Complete the table above.

[8 marks]

(b) Is the firm operating in the short run or long run? Why do you say so?
[2 marks]

Part B (60 marks)

Answer ALL the questions in this section.

Question 1

Using an appropriate diagram, explain the effects of a price floor (set above the
equilibrium price) in a market for vegetables.
[12 marks]

Question 2

Which good, of the following pairs, would you expect to have more inelastic
demand and why?

(a) A can of Coca-cola or a glass of water

(b) Mankiw’s Principles of Economics or a novel
(c) Fine dining or hawker fare
(d) Hokkien mee or mee (raw noodles)
[12 marks]

6
Question 3

(a) What is price ceiling? What happens to a market when a binding price
ceiling is imposed?
[5 marks]

(b) Using an appropriate example, explain the imposition of price ceiling on

the market for milk.
[4 marks]

(c) What happens in a market if a binding price ceiling is removed?

[3 marks]

Question 4

Using an appropriate diagram, explains the effects of a leftward shift in the

demand curve on
(a) consumer surplus,
(b) producer surplus and
(c) deadweight loss.
[12 marks]

Question 5

(a) Distinguish between explicit cost and implicit cost.

[6 marks]

(b) Explain the relationship between marginal cost and average cost. Use an
appropriate diagram.
[6 marks]