ABBE4024 ECONOMICS FOR MARKETING

Prepared by: Michele Khu B.K.

Past Year Questions (Chapter 1 4) Source: 2007 / 2008 September & 2007 / 2008 April __________________________________________________________________________________ 1) Two Sugar Refiners Yet to Increase Production PUTRAJAYA: Two of the countrys four sugar refineries have yet to increase coarse sugar production and as a result of this the Government may have to list fine sugar as a controlled item. Deputy Domestic Trade and Consumer Affairs Minister Datuk S. Veerasingam said while the two companies had been very co-operative in meeting the ministrys requests to supply sugar to affected areas, it had not increased its coarse sugar production ever since Deputy Prime Minister Datuk Seri Najib Tun Razak had made the directive two weeks ago. They (manufacturers) cited production costs as the reason for not increasing their production. We cannot accept this reason because if the two other companies can do it, so can they. We have issued them reminders and the two weeks deadline has also ended. We will give them a bit more time and hope to see changes. If all fails, we may have to resort to other forms of action, including putting fine sugar on the controlled items list, he told reporters after attending his ministrys monthly gathering on Monday. On Aug 25, the Deputy Prime Minister reminded the four sugar refineries to increase production by 10 to 15% within two weeks to overcome the current shortage. The refineries are Malayan Sugar Manufacturing (MSM) Penang, Central Sugar Refinery, Selangor, Gula Padang Terap, Kedah and Kilang Gula Felda, Perlis. Veerasingam said sugar manufacturers preferred to produce more of the fine sugar as it could be sold at a higher price since it was not a controlled item. Since the price of fine sugar is not controlled there is a tendency for refiners to produce more of this, although public demand for coarse sugar is higher. Fine sugar is sold at RM2.50 a kg at many places. Coarse sugar is capped at RM1.90 a kg, so they realize they can make a lot of profit if they sell more fine sugar, he added. Asked when the Government would start to control the price of fine sugar, he said his minister Datuk Shafie Apdal would be meeting the Deputy Prime Minister soon, after which an announcement would be made. Source: Adapted from The Star, dated 11 September 2006.

ABBE4024 ECONOMICS FOR MARKETING

Required:

Prepared by: Michele Khu B.K.

Assume WC Coffeehouse allocate a budget of RM200 on fine and coarse sugar.

a) Using a diagram, illustrate the coffeehouses budget set where X is the quantity of fine sugar and
Y is the quantity of coarse sugar. (3 marks) (3 marks) (2 marks)

b) Write the equation for the coffeehouses budget line. c) Determine the market rate of substitution between fine and coarse sugar.

d) Using an appropriate diagram, show how the coffeehouses budget constraint change if Domestic
Trade and Consumer Affairs Minister announce to list fine sugar as a controlled item and capped at RM2.00 per kg. How does this change alter the market rate of substitution between fine and coarse sugar? (4 marks)

e) Would WC Coffeehouse better off or worse off when government controls the price of fine sugar?
Explain. Consumer Affairs Minister. (6 marks) [Total: 25 marks] 2) Assume KS Corporations demand and supply functions for Good J are estimated as Qd = 1700 7P and Qs = 15P 150, where P = price and Q = quantity of output produced. i) Draw the supply and demand curves. marks) ii) Determine the equilibrium price and quantity. marks) (3 (2 (4 marks) (3 marks)

f) Identify and describe the type of price control mentioned by Deputy Domestic Trade and g) Using mathematical expression, explain the difference between budget set and budget line.

iii) If RM5 excise tax is levied on Good J, determine the new equilibrium price and quantity. (4 marks) iv) How does the tax affect consumer surplus? (3 marks) 3) Viva Sdn Bhd is selling imported perfume in Malaysia at RM250 per bottle. If a consumer purchase up to 3 bottles, each additional bottle will be given a discount of 50%. Suppose a consumer has RM2000 to spend on perfume and other goods. i) Illustrate how this marketing tactic affects the consumers budget set if the average price of other goods is RM200. (5 marks) (3 marks)

ii) Will a consumer purchase exactly 3 bottles of perfume? Explain.

4) Suppose Melissa has RM500 to spend on Good X and Good Y. Given the price of Good X is RM20 per unit and the price of Good Y is RM25 per unit. i) Draw a budget line and an indifference curve to show that Melissa is in equilibrium at a bundle comprises 10 units of Good X and 12 units of Good Y. (3 marks)

ABBE4024 ECONOMICS FOR MARKETING ii)

Prepared by: Michele Khu B.K.

Assume Melissa receives a RM100 gift voucher valid only for Good X. If both Good X and Good Y are normal goods, show on the same graph how the gift voucher affects Melissas budget line and indifference curve. (4 marks)

5) Suppose a director seek your advice to decide on which of the three options to take to maximize the value of the firm over the next three years. Each option costs RM150 000 today. The following table shows the expected year-end income generated from each option. Interest rates are expected to be stable at 7 percent over the next three years. Option A B C Profits in Year 1 RM60 000 RM80 000 RM50 000 Profits in Year 2 RM70 000 RM70 000 RM80 000 Profits in Year 3 RM90 000 RM60 000 RM100 000 (8 marks)

Which option will you advise the director to choose? Explain.

6) Mr. Khu, a sole proprietor, must decide whether or not to purchase a new forklift which costs RM25,000 today. The forklift will reduce operation costs by RM10,000 in the first year, RM8,000 in the second year, RM6,000 in the third year , RM5,000 in the fourth year and RM3,000 in the final year of usefulness. The above cost savings will be realized at the end of each year. Suppose the interest rate is 5 percent, what is the net present value (NPV) of purchasing the forklift? Should Mr. Khu purchase the forklift? (5 marks) 7) Suppose Good A and Good B are complements and both are normal goods, show graphically what would happen to the budget line if i) the price of Good A decreased. ii) consumer incomes increased. (3 marks) (3 marks)

8) Suppose BK Computer Shop receives total revenue of RM60,000 per month from printer sales and RM10,000 per month from cartridge sales. Assume the own price elasticity of demand for printer is -2.5, and the cross-price elasticity of demand between printer and cartridge is -4.5. How much would the computer shops total revenues change if it reduced the price of printer by 5 percent? (5 marks) 9) Explain any THREE (3) main characteristics of indifference curve. (9 marks)

10) Alice Beauty Centers demand and supply functions for slimming course are estimated as: Qd = 2,400 40P and Qs = 35P 500, where P = price and Q = quantity of output produced. i) Draw the supply and demand curves. ii) Determine the equilibrium price and quantity. iii) Calculate the total amount of consumer surplus. (4 marks) (3 marks) (3 marks)

iv) If RM16 excise tax is levied on Alices slimming course, determine the new equilibrium price and quantity. (3 marks)

ABBE4024 ECONOMICS FOR MARKETING

v) How does the tax affect consumer surplus?

Prepared by: Michele Khu B.K.

(3 marks)

11) Assume Good A and B is the only two goods available in market. Given that the price of Good A and B is RM25 and RM40 respectively. If Agness income level is RM4,000, illustrate her budget line and opportunity set. (6 marks) 12) Differentiate between elastic demand and inelastic demand. (4 marks)

13) Suppose the market demand and supply for a product in competitive market is as follows: Qd = 240 6P Qs = 44P Calculate the value of shortage if a price ceiling of RM3.50 is imposed. (4 marks)