UBEA 1063
TUTORIAL 2
1. (a) Microeconomics
(b) Macroeconomics
(c) Microeconomics
Microeconomics
 Study of individuals, households and firms’ behaviour in decision making and
allocation of resources.
Macroeconomics
 Studies how an overall economy – the market systems that operate on a large scale –
behaves 活动.
 Studies economy-wide phenomena such as inflation, rate of economic growth,
national income, gross domestic product (GDP), and changes in unemployment.
2. (a) Positive economic analysis
(b) Positive economic analysis
(c) Normative economic analysis
Positive statements
 Objective statement
 Analysis describing relationships of cause and effect
Normative statements
 Subjective statement that express an opinion about what ought to be
3. Scarcity is the limited nature of society’s resources. Resources are scarce, so people are
faced to choose and make decisions and making a choice leads to sacrifices. The second best
choice given up is the opportunity cost of the decision that we have made.
Scarcity
 Unlimited wants, limited resources
**PPF is convex for decreasing opportunity cost: As we move along the PPF with
increasing good X, less and less of good Y should be forgone.
Y
N
A
B
M
C
X
Point A, B, C: Attainable + Efficient: Able to be produced and use all available resources.
Point M: Attainable + Inefficient: Able to be produced but do not use all available
resources.
Point N: Unattainable: Do not have enough resources.
4. (a) Opportunity cost
=
A to B = = -2
B to C = = -2
C to D = = -2
D to E = = -2
⸫ Opportunity cost of producing the pizza:
If produce 1 extra unit of pizza, you need to forgo 放弃 2 units of KFC.
(b)
Combination
KFC
Pizza
Opportunity cost
A
80
0
-
B
60
10
-2
C
40
20
-2
D
20
30
-2
E
0
40
-2
**Constant opportunity cost with a linear PPF
KFC
A
80
B
60
C
PPF
40
D
20
E
Pizza
0
10
20
30
40
Efficient Points: A, B, C, D, and E
(c) Constant opportunity cost. When there is additional production of Pizza, an equal number
of KFC needs to be sacrificed.
(d)
KFC
A
80
B
60
C
40
PPF1
20
D
PPF2
E
0
10
20
30
Pizza
40
Technological improvement will increase the production of KFC and Pizza,
PPF1 shifts outward to PPF2.
UBEA 1063
TUTORIAL 3
1.
S3
Price
S1
S2
P2
B
P1
A
0
Quantity supplied
Q1
Q2
Change in supply will shift the supply curve either to the right from S1 to S2
when supply increases or shift the supply curve to the left from S1 to S3 when
supply decreases. Change in quantity supplied is change in the price of the good
itself and have movement along the supply curve.
2.
(a) Number of students increase, the demand for textbooks will increase and the
demand curve will shift to the right.
(b) Cost of production decreases, the supply of textbooks will increase and the
supply curve will shift to the right.
(c) Earn less money so consumptions reduced, the demand for textbooks will
decrease and the demand curve will shift to the left.
(d) Technology could increase the production, the supply of textbooks will
increase and the supply curve will shift to the right.
(e) The demand for textbooks will decrease and the demand curve will shift to
the left.
(f) The quantity demanded for textbooks will increase due to price of the good
itself decrease and the quantity supplied of textbooks will decrease due to price
of the good itself decrease, that will cause the downwards movement along the
demand curve or downwards movement along the supply curve.
3.
(a) Quantity supplied = Quantity demanded
-500+300P
=
2000-100P
400P = 2500
P
= 6.25
⸫ Equilibrium price = RM 6.25
Substitute P = PM 6.25 in
Qd = 2000-100(6.25) =1375
Qs = -500+300(6.25) =1375
Qd = Qs = 1375 units
⸫ Equilibrium quantity = 2000-100(6.25) = 1375
(b) When the price ceiling which is RM 3 be set, there are no equilibrium in the
market, because quantity demanded will be increased whereas the quantity
supplied will be decreased. Therefore, the quantity demanded will exceed the
quantity supplied, shortage of product will be happened. After that, the
deadweight loss will also be caused due to this price ceiling because of falling
in total surplus.
1.
Change in supply
Change in quantity suplied
A shift of the supply curve rightward
or leftward
FACTORS:
Input prices, technology,
expectations, number of sellers, price
of related good produced
𝑆1
Price
A movement along the supply curve
FACTOR:
Change in price of that good itself
𝑆0
Price
𝑆0
𝑆2
B
𝑃2
P
𝑃1
𝑃2
A
P
0
𝑆1
𝑆0
𝑆2
Quantity
0
𝑄𝑆1
𝑄𝑆2
Quantity
to
If input price is higher, firm will
If price of good X increases, supplier
reduce supply. Supply curve will shift will supply/produce more X
leftward.
(increases quantity supplied). It will
cause movement along the supply
curve.
*input price (cost of production) increase, supply decrease, shift left
*technology improvement, supply increase, shift right
*expectation (prediction of future price) decrease in one week later, current supply increase,
shift right
*number of seller increase, supply increase, shift right
* price of related good produced
If price of Big Mac decrease, substitute to produce more Double Cheese burger,
supply of Double Cheese burger [NEGETIVE RELATIONSHIPS: substitute
goods]
If price of chicken meat decrease, supply of chicken wing decrease [POSITIVE
RELATIONSHIPS: complementary goods that are 2 products must
produced/supplied together]
3. (b)
Price
When the P = RM 3
𝑆1
Qd = 2000-100(3) =1700
6.25
Qs = -500 +300(3) = 400
RM 3
𝐷1
Shortage
0
400
1375 1700
Quantity
Since Qd > Qs, shortage
happened by 1300. The
suppliers would raise the
price to eliminate the
shortage. The price would
rise until quantity supplied
equal to quantity demanded
at RM 6.25.
UBEA 1063
TUTORIAL 4
1. (a)
Price of Big Mac
hamburger
S2
S1
B
P2
P1
P1
A
D1
Quantity of Big Mac hamburger
0
Q2
Q1
The increase in the price of bread used for McDonald’s Big mac hamburgers
will cause the supply of hamburgers decrease. This is because a rise in the price
of bread used for McDonald’s Big mac hamburgers lead to higher cost of
production, thus decreases the supply and shifts the supply curve leftward.
Therefore, equilibrium price will be higher and equilibrium quantity will
become smaller.
SUGEGSTED ANSWER:
S2
Price
S1
E2
P2
E1
P1
P1
D1
0
Q2
Q1
 Input price increases
 Supply reduced
 Supply curve shifts to the left
 Equilibrium price increases and
 Equilibrium quantity reduced
Quantity
(b)
Price of Big Mac hamburger
S1
P2
B
P1
A
D2
D1
0
Quantity of Big Mac hamburger
Q1
Q2
The increase in the price of KFC’s fried chicken will cause the demand for
McDonald’s Big Mac hamburgers increase. This is because a rise in the price of
KFC’s fried chicken lead to higher consumer changes the demand substitute
goods of hamburgers in McDonald that can serve as replacement, thus increases
the demand and shifts the demand curve rightward. Therefore, equilibrium price
will be higher and equilibrium quantity will become larger.
SUGGESTED ANSWER:
Price
S1
E2
P2
E1
P1
D2
D1
0
Quantity
Q1
Q2
 Increase in the price of substitute good
 Increase demand for MCD
 Demand curve shifts rightward
 Equilibrium price increases
 Equilibrium quantity increases
Price
5
10
15
20
25
30
35
40
Market Demand
155
135
115
95
75
55
35
15
Market Supply
75
95
115
135
155
175
195
215
SUGEGSTED ANSWER:
S1
Price (RM)
15
D1
0
115
Quantity
2.(b)
BEFORE
AFTER
CHANGES
Consumer Surplus
ABC
A
-B-C
Producer Surplus
DE
BD
-E+B
Total Surplus
ABCDE
ABD
-C-E
Deadweight Loss = C + E
SUGGESTED ANSWER:
 Price floor = minimum price which is set above the equilibrium price
To prevent the prices from being too low
Eg: minimum wages of RM 1200
P = 15
P = 25
BEFORE
AFTER
Consumer Surplus
A+B+C
A
Producer Surplus
D+E+F
B+D+F
Total Surplus
ABCDEF
ABDF
Deadweight loss = C+E (the value of trade that is not happen in the market)
**want to know price is how much first before calculating ..surplus
Price (RM)
S1
A
25
B
C
15
D
E
F
D1
0
115
Quantity
3.
S2
Price of good A
S1
Y
P2
P1
X
D2
D1
0
Q2 Q1
Quantity of good A
When the price of good A expected to increase in the future, current demand
will be increased whereas current supply will be decreased. Therefore, it will
cause equilibrium price to be increased and equilibrium quantity of good A to
become lesser.
UBEA 1063
TUTORIAL 5
1. (a)
Price elasticity of demand =
=
18−9
(18+9)/2
7−14
(7+14)/2
2
3
−2
3
× 100
× 100
= -1
⸫ Type of elasticity for good A is unit elastic.
(b)
Cross-price elasticity of demand =
=
(45−60)
60
(7−14)
14
−1
4
−1
2
× 100
× 100
= 0.5
⸫The relation between good A and good C is substitutes.
(c)
Income elasticity of demand =
=
(40−80)/80
(2500−1500)/1500
−1
2
2
3
× 100
= -0.75
⸫Type of good B is inferior good.
× 100
2.
-Availability of substitutes
The more substitutes a good has, the more elastic its demand.
(Where more substitutes are available, demand will tend to be more elastic.)
-The proportion of income spends on good
When an item represents a relatively small part of our total budget, we
tend to pay little attention to its price (inelastic).
(Where an item represents a smaller portion of a total budget, demand will
tend to be more inelastic.)
-The time dimensions
Goods tend to have more elastic demand over longer time horizons. The
longer the time period involved, the fuller is the adjustment consumers
can make.
(The greater the time available to adjust behavior, the more elastic demand
tends to be.)
-Types of products (Luxury & Necessity)
If the good is necessity item, the demand is unlikely to change for a given
change in price, thus the more inelastic its demand.
3.
PED=
%∆ 𝑄𝑑
%∆ 𝑃
30%
= −5%
= -6 (PED>1)
Demand is elastic, demand curve is flatter than supply curve, supply curve is
steeper.
S2
Price
S1
P2
P1
CS
PS
0
D1 (elastic)
Q2
Quantity
Q1
*CS = tax barred by consumer
*PS = tax barred/pay by producer
is tax imposed by
government
 Sales tax (cost of production increases)
 Supply reduces
 Supply curve shifts to the left
 Since demand is elastic, show the teenagers are sensitive to change in
prices, and they are unwilling to pay more compared to producer
 Consumer share is less than producer share
⸫Consumer sensitive to price, the teenagers will not bear more taxes.
5.
(a) income falls causes consumptions falls…demand drops, price drops…TR drops
(b) Price rises but people are less sensitive to the price…still consume…TR increases
(c) Price rises but customers are more sensitive to the price…demand drop…TR drops
(d) Earn more money but the demand for low quality product reduced…Price drop…TR
drop
6.
(a) food represents a relatively big portion of low-income household’s total budgets, they
tend to pay more attention to its price…(elastic)
7.
(d) Consumers will buy proportionately 按比例 more of a particular good compared to a
percentage change in their income. E.g: premium cars, boats 航船, and jewelry represent
luxury products that tend to be very sensitive to changes in consumer income. In this case, a
rise in income will lead to a rise in demand.
UBEA 1063
TUTORIAL 6
1. (a)
Quantity
1
2
3
4
5
6
COOKIE
MONSTER
TU
10
18
24
28
31
33
MU
10
8
6
4
3
2
ICE
MU/P
5.0
4.0
3.0
2.0
1.5
1.0
Quantity
1
2
3
4
5
6
TU
8
15
21
26
30
33
CREAM
MU
8
7
6
5
4
3
(b)
 Marginal utility per dollar of each good is equal
Have 3 possible combinations:
(i) 1 cookie monster and 4 ice cream
(ii) 2 cookie monster and 5 ice cream
(iii) 3 cookie monster and 6 ice cream
 The entire budget is spent
(i) 1 (RM 2) + 4 (RM 1) = RM 6
(ii) 2 (RM 2) + 5 (RM 1) = RM 9 √
(iii) 3 (RM 2) + 6 (RM 1) = RM 12
⸫Joe must purchase 2 cookie monster and 5 ice cream. This is because the
marginal utility per dollar for cookie monster and ice cream is equal to 4. The
entire budget of RM 9 is spent whereby RM 4 on rice monster and RM 5 on ice
cream.
MU/P
8.0
7.0
6.0
5.0
4.0
3.0
SUGGESTED ANSWER
1. (a)
Quantity
COOKIE
MONSTER
TU
MU
1
2
3
4
5
6
10
18
24
28
31
33
10
8
6
4
3
2
MU =
Quantity
ICE
CREAM
TU
MU
1
2
3
4
5
6
8
15
21
26
30
33
8
7
6
5
4
3
∆𝑻𝑼
∆𝑸
(b)
Total income= RM 9
Cookie= RM 2 ;
Ice cream= RM 1
Quantity
Marginal
Utility for
Cookie
Monster
Marginal
Utility for
Ice Cream
MU per RM
(Cookie Monster)
MU per RM
(Ice Cream)
1
2
3
4
5
6
10
8
6
4
3
2
8
7
6
5
4
3
5.0
4.0
3.0
2.0
1.5
1.0
8.0
7.0
6.0
5.0
4.0
3.0
To maximize utility, subject to: (condition to maximize)
(i)
𝑴𝑼𝒙
𝑷𝒙
=
𝑴𝑼𝒚
𝑷𝒚
(marginal utility per dollar must same for both product)
(ii) M = 𝑷𝒙 ∙ 𝑿 + 𝑷𝒚 ∙ 𝒀 (spend all your income in order to get maximum satisfaction,
satisfaction which is reached within your budget)
Combination:
1 cookie monster and 4 ice cream = 1 (RM 2) + 4 (RM 1) = RM 6
2 cookie monster and 5 ice cream = 2 (RM 2) + 5 (RM 1) = RM 9 √
3 cookie monster and 6 ice cream = 3 (RM 2) + 6 (RM 1) = RM 12
2.
(a) 12 (RM 2) = RM 24
6 (RM 2) + 4 (RM 3) = RM 24
8 (RM 3) = RM 24
⸫ Consumer’s income = RM 24
(b)
Rice
12
10
8
6
4
B
2
Beans
0
2
4
6
8
(c)
Rice
24
20
16
12
8
C
4
Beans
0
2
4
8
6
(d)
Rice
24
20
16
6
12
8
D
4
Beans
0
4
8
12
16
SUGGESTES ANSWER
2. (a)
M = 𝑷𝑹 ∙ 𝑹 + 𝑷𝑩 ∙ 𝑩
M = 12 (RM 2) + 0 (RM 3) = RM 24; or
M = 6 (RM 2) + 4 (RM 3) = RM 24; or
M = 0 (RM 2) + 8 (RM 3) = RM 24.
⸫ Consumer’s income = RM 24
(b)
Rice
12
6
B
Beans
0
4
8
**as long as within the budget / on the line, can be considered as desired combinations
(c)
Rice
24
12
C
Beans
0
Price of rice falls to RM 1,
Answer in 2(a):
M = RM 24
𝑅𝑀 24
𝑅𝑀 1
= 24 units (rice)
8
(d)
Rice
24
12
D
Beans
0
Income increased to RM 48,
𝑅𝑀 48
𝑅𝑀 2
𝑅𝑀 48
𝑅𝑀 3
= 24 units (rice)
= 16 units (beans)
8
16
3.
(a) False. The slope indicates the rate at which the two goods can be substituted
without changing the amount of money spent.
(b) False. An indifference curve illustrates bundles that a consumer prefers
equally, while a budget constraint illustrates bundles that are equally affordable
to a consumer.
(c) False. If the price of Good X increases, the budget constraint will rotate
inward on the other good’s axis.
SUGGESTED ANSWER
3.
(a) True, the slope of the budget line is the ratio of the price of two goods.
(b) False, a budget constraint illustrates bundles that are equally affordable to a
consumer (how much you can buy within the budget line), while indifference curve
illustrates bundles that a consumer prefers equally (equal satisfaction/happiness).
(c) False, the price of X increases will rotate the budget line inward on the X
axis.
4.
(a)
Orange juice
1500
1250
1000
750
500
250
Chicken rice
0
250
500
750
1000
SUGGESTED ANSWER
4.
(a)
**linear negative sloping
Slope of indifference curve:
(when forgone extra unit of goods Y, then need to substitute with another product like
increase consumption of goods X)
∆𝒀
= - ∆𝑿
Slope of budget line:
=-
==-
𝑷𝒙
𝑷𝒚
𝑃𝑐
𝑃𝑜
6
3
= -2
⸫Thus, marginal rate of substitution (MRS) = -2
Orange juice
1,000
A
𝑂1
Indifference curve
Budget line
Chicken rice
0
𝐶1
500
Income = RM 3,000
𝑃𝑜 = RM 3
𝑃𝑐 = RM 6
𝑅𝑀 3000
𝑅𝑀 3
𝑅𝑀 3000
𝑅𝑀 6
= 1,000 units (orange juice)
= 500 units (chicken rice)
4.
(b)
Orange juice
2000
1750
1500
1250
1000
IC
750
500
250
Chicken rice
0
250
500
750
1000
⸫ The slope of budget line will not change. To increase 1 unit of chicken rice,
consumer will forgone 2 units of orange juice even the income spent have
increased from RM 3,000 to RM 6,000. It is because the rate at which the two
goods can be substituted remain same.
SUGEGSTED ANSWER
4.
(b)
Orange juice
2,000
1,000
B
𝑂2
𝑰𝑪𝟐
A
𝑂1
𝑰𝑪𝟏
𝑩𝑳𝟐
𝑩𝑳𝟏
Chicken rice
0
𝐶1
𝐶2 500
1,000
Income = RM 6,000
𝑃𝑜 = RM 3
𝑃𝑐 = RM 6
𝑅𝑀 6000
𝑅𝑀 3
𝑅𝑀 6000
𝑅𝑀 6
= 2,000 units (orange juice)
= 1,000 units (chicken rice)
⸫ Quantity of orange juice and chicken rice increases, and the optimum
point move from A to B. Since the price of orange juice and chicken rice
remain the same, the slope of budget line also remains the same.
UBEA 1063
TUTORIAL 7
1.
(a) Richard is maximizing his utility when the budget line is tangent to the
indifference curve.
Richard’s equilibrium position is where:
Slope of indifference curve (MRS) = slope of the budget line (relatives prices of two goods)
∆𝒀
- ∆𝑿
𝑷
=
- 𝑷𝒙
𝒚
Slope of budget line:
Slope of indifference curve:
𝑴𝑹𝑺𝑰,𝑪 = -
𝑷
∆𝑪
=-
= - 𝑷𝑰
∆𝑰
𝑪
𝟒
=-
𝟖
= -0.5
𝟏
𝟐
= -0.5
C
4
2
Indifference curve
Budget line
0
I
4
8
1.
(b)
C
𝑰𝑳𝟐
4
B
A
2
𝑰𝑳𝟏
𝑩𝑳𝟏
𝑩𝑳𝟐
I
0
4
8
Initial equilibrium at point A
When price of ice cream increases to RM 2, means less ice cream can be
bought
𝑩𝑳𝟏 will pivot/rotate inward to 𝑩𝑳𝟐
New equilibrium is at point B when the new budget line, 𝑩𝑳𝟐 is tangent
to new indifference curve, 𝑰𝑪𝟐 (less ice cream and more cookies will be
consumed)
**new indifference curve:
-
Tangent to budget line
Point B must higher than point A but less than point A, because the ice cream more
expensive cause that consumption for ice cream is reduced, means
substitute/consume more cookies
2.
(a)
#PCC is a combination of two goods as the price of one good change.
Movie
A
M1
𝑰𝑪𝟏
B
M2
𝑰𝑪𝟐
C
M3
𝑩𝑳𝟏
0
B1
B2
𝑩𝑳𝟐
PCC
𝑰𝑪𝟑
𝑩𝑳𝟑
B3
Book
(normal
good)
Initially, the utility maximization point occurs at point A when the budget line,
𝐵𝐿1 tangent to 𝐼𝐶1 .
When there is a decrease in price of book, the budget line pivot outward from
𝐵𝐿1 to 𝐵𝐿2 . The new utility maximization point occurs at point B when the
budget line, 𝐵𝐿2 tangent to 𝐼𝐶2 (more book and less movie).
When price of book decrease once again, the 𝐵𝐿2 pivot outward to 𝐵𝐿3 and the
new utility maximization point occurs at point C when 𝐵𝐿3 tangent to 𝐼𝐶3
(more book and less movie).
Price consumption curve is determined by joining all equilibrium bundles A, B,
and C.
**new indifference curve:
-
Tangent to budget line
Point B must lower than point A but more than point A, because when book
becomes cheaper, must consume more quantity of book that means need forgone
some consumption of movie
2.
(b)
Movie
A
M1
𝑰𝑪𝟏
B
M2
𝑰𝑪𝟐
C
M3
𝑩𝑳𝟏
0
B1
B2
𝑩𝑳𝟐
PCC
𝑰𝑪𝟑
𝑩𝑳𝟑
B3
Book
(normal
good)
Price
A
P1
B
P2
C
Demand curve
P3
0
Quantity
B1
B2
B3
The demand curve for book (normal good) is downward sloping. A decrease in
price of book will cause consumption for book increases.
2.
(c)
A giffen good is a good whose consumption increases as its price increases.
Thus, the demand curve will be upward sloping instead of downward sloping.
Price
𝐷
0
Quantity
3.
(a)
Clothing
ICC
C3
C2
A
𝑰𝑪𝟏
C1
B
𝑰𝑪𝟐
C
𝑰𝑪𝟑
𝑩𝑳𝟑
0
𝑩𝑳𝟐
F3 F2 F1
𝑩𝑳𝟏
Food
(normal
good)
Initial equilibrium at point A.
When there is a decrease in weekly income, the budget line shifts inwards from
𝐵𝐿1 to 𝐵𝐿2 . The new utility maximization point occurs when the budget
constraints, 𝐵𝐿2 tangent to the 𝐼𝐶2 at bundle B.
When decrease in weekly income again, the budget line shifts inwards from 𝐵𝐿2
to 𝐵𝐿3 . The new utility maximization point occurs when the budget constraints,
𝐵𝐿3 tangent to the 𝐼𝐶3 at bundle C.
The income consumption curve is a line joining bundle A, B and C.
3.
(b)
Clothing
ICC
C3
C2
A
𝑰𝑪𝟏
C1
B
𝑰𝑪𝟐
C
𝑰𝑪𝟑
𝑩𝑳𝟑
0
F3 F2 F1
𝑩𝑳𝟐
𝑩𝑳𝟏
Food
(normal
good)
Income
Engel Curve
A
Y1
B
Y2
Y3
0
C
F3 F2 F1
Food
(normal
good)
The Engel curve for food is upward sloping. As income decreases, the
consumption for food decreases.
**positive relationship between income and quantity because food is normal good
3.
(c)
An inferior good is a good whose consumption decreases as its income
increases. Thus, the engel curve will be downward sloping.
Income, Y
𝐸𝑛𝑔𝑒𝑙 𝑐𝑢𝑟𝑣𝑒
0
Quantity
4.
(a) False. Both income and substitution effects will encourage consumers to
purchase more of the product.
Pepsi
Pizza
-When price of pepsi falls/becomes more relatively cheaper, quantity demanded for pepsi
increased
{SUBSTITUTION EFFECT: encourage to buy more pepsi, consumption of pepsi
increased}
{INCOME EFFECT: real purchasing power for pepsi increased, so encouraged to buy
more}
(b) False. The product is now relatively more expensive than it was before.
**substitution effect works when the price of product relatively more expensive/cheaper
**when price increase while quantity demanded decrease, it nothing relate to income
!! NOTE:
#change in real income / purchasing power: income effect
#change of indifference curve: income effect
! REASON GIVEN FOR INCOME EFFECT is “real income” change
#change in price: substitution effect
**change in price could also affect purchasing power, so when there is a change in
price, may cause substitution effect and income effect as well
#change in slope of budget line: substitution effect
! REASON GIVEN FOR SUBSTITUTION EFFECT is “relative price” change
UBEA 1063
TUTORIAL 8
1.
(b)
The production schedule in table 1 display a short run period, as the capital
given in the production process is fixed.
Short run is a period of time in which some inputs in the production process are
fixed. Long run is a period of time in which all inputs can be varied. No fixed
input in the long run.
(c)
Yes, starting from 4th until 10th workers, the firm experiences diminishing of
marginal returns. As more labor is added, total production increase at a
decreasing rate, marginal product is falling.
2.
TP
TP
I
II
III
Number of workers
AP/MP
AP
Number of workers
MP
**when MP below AP, MP will start to drop, MP cross AP at a maximum
point of MP
Stage 1:
- TP increases at an increasing rate, MP is rising.
- The fixed capital gets used more productively as added workers are
employed – labor specialized in their tasks.
Stage 2:
- TP increases at a decreasing rate (increase slowly), MP is falling.
- As more labor is added, the law of diminishing returns take hold, labor
becomes so abundant (less efficient) relative to the fixed capital that
congestion 拥塞/过剩 occurs and marginal product falls.
Stage 3:
- TP decreases, MP become negative.
- The addition of labor overcrowds the plant 厂 that marginal product
becomes negative as total output falls.
3.
(a)
The statement is false. When marginal productivity is at maximum, total
product is increase at increasing rate.
The firm should hiring workers up to the point where marginal productivity of
the last worker is zero. At this point (MP=0), total product is at maximum.
(b)
The statement is false. Negative marginal returns occur if total output falls.
Diminishing returns occur when total output is increase at a decreasing rate as
additional units of labor are combined with fixed inputs in the production
process.
4.
(a)
False. Increasing return to scale is due to economies of scale. Economies of
scale are benefits enjoyed by firms when they engage in large scale production.
(b)
False. It will lead to diminishing marginal returns as we are talking about short
run.
**TP will increase at starting, then start slowly increase, at the end drop
UBEA 1063
TUTORIAL 9
1.
MP
MP
Labor
MC
MC
Output
MP (increasing), MC (decreasing) due to increasing return (decreasing cost
due to more efficient use of the fixed input)
MP (decreasing), MC (increasing) due to diminishing returns (increasing cost
due to more intensive use of the fixed input)
2.
(i)
Income (RM)
Sales Revenue:
20,000 ×1.50 = RM 30,000
Expenses (RM)
Motorized cart (leased)
= RM 8,000
Insurance & other operating expenses
= RM 1,000
Variable cost
= RM 10,000
Total explicit cost = RM 19,000
Accounting profit = Total Revenue – Explicit Cost
= RM 30,000 – RM 19,000
= RM 11,000
(ii)
Income (RM)
Sales Revenue:
20,000 ×1.50 = RM 30,000
Expenses (RM)
Motorized cart (leased)
= RM 8,000
Insurance & other operating expenses
= RM 1,000
Variable cost
= RM 10,000
Total explicit cost = RM 19,000
Opportunity cost:
Forgone salary
= 6,000 × 2 (have 2 people) = RM 12,000
Forgone interest
= RM 1,500
Total implicit cost = RM 13,500
Economic profit = Total Revenue – Explicit Cost – Implicit Cost
= RM 30,000 – RM 19,000 – RM 13,500
= - RM 2,500
3.
(a)
Fixed Cost (FC) = Total Cost at output 0
FC = RM 60
(c)
Cost
MC
ATC
x
AVC
x
AFC
Quantity
#AFC always downward sloping because AFC decreasing when output
increase
𝑻𝑭𝑪
𝑸
, TFC will keep drop
#AVC depend on quantity of output
#ATC higher than the AFC and AVC because it is total of AFC and AVC
4.
Costs per unit
LRAC
B
A
C
Quantity
Long-run average cost curve (LRAC) generally is U-shaped due to return to
scale.
Portion A: Increasing return to scale
- Increases in the output level is more than increases in the input level, the
LRAC will be downward sloping
#AC per unit decreasing
Portion B: Constant return to scale
- Increases in the output level is same with increases in the input level, the
LRAC will be horizontal/flat sloping/normal
#AC per unit constant
Portion C: Decreasing return to scale
- Increases in the output level is less than increases in the input level, the
LRAC will be upward sloping
#AC per unit increasing
5.
(a)
AFC = ATC – AVC
= RM 1.20-RM 1
= RM 0.20
TFC = AFC × Q
= RM 0.20×6000
= RM 1,200
(b)
Monroe Bread Company is operating in the short run as fixed cost exists.
UBEA 1063
TUTORIAL 10
1.
In the short run, a perfect competitor could realize supernormal profit, normal
profit and subnormal profits.
Profit maximizing rule, MR = MC
#MC should go through minimum point of ATC
Supernormal profit
Price/Cost
MC
ATC
MR = D (because is a price taker)
P
ATC
Quantity
Q
- Profit-maximizing quantity where MR = MC
- Supernormal profit where P > ATC
P×Q (TR) > ATC×Q (TC)
Normal profit
Price/Cost
MC
ATC
MR = D (because is a price taker)
P = ATC
Quantity
Q
- Profit-maximizing quantity where MR = MC
- Normal profit where P = ATC
P×Q (TR) = ATC×Q (TC)
[TR – TC = 0, no gain and no loss, zero profit]
Subnormal profit
Price/Cost
MC
ATC
ATC
MR = D (because is a price taker)
P
Quantity
Q
- Profit-maximizing quantity where MR = MC
- Subnormal profit where P < ATC
P×Q (TR) < ATC×Q (TC)
[TC area > TR area, loss]
2.
Cost
MC
ATC
ATC
MR
P
AVC
AVC
Quantity
Q
- Loss when ATC > P
- Continue operation because P > AVC
P×Q (TR) > AVC×Q (TVC)
Cost
MC
ATC
AVC
ATC
AVC
P
MR
Quantity
Q
- Loss when ATC > P
- Shut down because P < AVC
P×Q (TR) < AVC×Q (TVC)
As long as total revenue can cover total variable cost, the firm will continue to operate because
the firm will not immediately shut down while it will temporary to produce to see whether profit
will be gained back after 2/3 months
3.
(a)
Output
(Unit)
0
1
2
3
4
5
6
7
8
9
10
Total
Cost
(RM)
500
600
690
770
840
900
970
1050
1140
1240
1350
TR
(RM)
MR
(RM)
ATC
(RM)
TVC
(RM)
AVC
(RM)
MC
(RM)
0
80
160
240
320
400
480
560
640
720
800
80
80
80
80
80
80
80
80
80
80
600
345
256.7
210
180
161.7
150
142.5
137.8
135
0
100
190
270
340
400
470
550
640
740
850
100
95
90
85
80
78.3
78.6
80
82.2
85
100
90
80
70
60
70
80
90
100
110
(b)
Output
(Unit)
0
1
2
3
4
5
6
7
8
9
10
Total
Cost
(RM)
500
600
690
770
840
900
970
1050
1140
1240
1350
TR
(RM)
MR
(RM)
ATC
(RM)
TVC
(RM)
AVC
(RM)
MC
(RM)
0
80
160
240
320
400
480
560
640
720
800
80
80
80
80
80
80
80
80
80
80
600
345
256.7
210
180
161.7
150
142.5
137.8
135
0
100
190
270
340
400
470
550
640
740
850
100
95
90
85
80
78.3
78.6
80
82.2
85
100
90
80
70
60
70
80
90
100
110
⸫ Profit maximizing price is RM 80.
When output is 3 units,
Profit = TR – TC
= 240 – 770
= -530
P < AVC
When output is 7 units,
Profit = TR – TC
= 560 – 1050
= -490
P > AVC
⸫ Profit maximizing when MR = MC at output level 7 units.
(c)
Price/Cost
Loss/Subnormal
profit
MC
ATC
ATC = 150
MR
P = 80
AVC
AVC = 78.6
Quantity
7
At output 7 units, TR = RM 560 and TC = RM 1050,
Profit = (TR-TC) = (560-1050) = -RM490
Loss of RM 490 because TR < TC
[P < ATC]
4.
Perfectly elastic demand curve implies that if an individual firm tries to increase
the price, they will not be able to sell any product as the consumer will shift to
other firms selling the same product. In other words, in a perfect competition
market, a firm as a price taker doesn’t have any control over the price.
UBEA 1063
TUTORIAL 11
1.
Firm
Price
MC
ATC
MR = AR
MC = P*
(ATC)
Quantity
Q*
Allocative efficiency
P=MC
(Produce at the output level where consumers value the most)
2.
Market
Firm
Price
MC
Price
S
ATC
MR = AR
ATC = P*
P*
D
Quantity
Q*
Firm
Market
S2
Price
Quantity
Q*
Price
S1
MC
ATC
ATC2
P1=P3
ATC=P1
MR1
P2
P2
MR2
D1
D2
Q2 Q1
Quantity
Quantity
Q2 Q1
- Demand decrease, demand curve shifts leftward, price dropped (in
market)
- As a price taker, firm also reduce the price, firm suffers loss (P2<ATC2)
- Firm suffer loss (P2<ATC2), caused existing firms exit the market,
hence, supply decrease, supply curve shifts leftward
- Supply curve shifts leftward, price increase back to P1=P3, until P=ATC,
hence, firm experienced normal profit in the long run
3.
(b) The production schedule above displayed a short run period, as the capital
given in the production process is fixed. Short run is a period of time in which
some inputs in the production process are fixed. Long run is a period of time in
which all inputs can be varied. No fixed input in the long run. It is because firms
can buy more equipment/expand the business in the long run, and, no need to
pay fixed cost in the long run.
(c)
Profit maximizing when MR=MC at output level 5 units.
(d)
At output 5 units, TR = (P×Q) = (10×5) = RM 50
TC = RM 65
Profit = (TR – TC)
= (50 – 65)
= - RM 15
⸫Loss of RM 15 because TR<TC. (subnormal profit)
UBEA 1063
TUTORIAL 12
1.
Third degree price discrimination means price is discriminated based on the
elasticity.
Eg : Business vs Tourist airfare 机票
**Airline company will charge higher price for businessman because they are
less sensitive to the price changes as they think time is money and there are
only a small portion in their income only. Other than that, businessman may
also claim the airfare for company.
**Airline company will charge lower price for tourists because tourists are
more sensitive to the price changes and there are large portion in their income,
so they can choose not travel at the peak season & wait for discount price.
The following conditions must be met for price discrimination to be successful:
(i)
Monopoly power
- Only one firm able to control price.
(ii) No resale
- Firm must prevent resale of products from one buyer to another.
**must make sure there is restrictions for tourists buy at discount price and
resale to businessman
(iii) Market segregation
- There must be a difference in price elasticities in the different markets for
the product.
2.
ATC
Price
MC
ATC = Pm
MC
MR
D
Quantity
Q
Disagree. Monopolist will earn zero profit where P = ATC. At this profit
maximizing level, P > MC.
Q = profit maximizing level
m = monopoly
Pm = price charged by monopoly
# MR twice steep as demand curve (half of demand curve)
# ATC touch the point price of Pm
# MC should go through minimum point of ATC
# Pm higher than MC due to monopolist is price maker
3.
(a)
Characteristic
Number of firms
McGalaxy (Monopoly)
One
Perfect Competitive
A very large number
Type of product
Control over price
Unique / No close
substitute
Price maker
Standardized /
Homogeneous
Price taker
Conditions of entry
Barriers to entry
Free entry and exit
(b)
Price
MC
A
Pm
B
Pc
C
MRc
E
D
MR
D
Quantity
Qm
Qc
Perfectly competitive:
Pc and Qc
Consumer surplus: A+B+C
Producer surplus: D+E
Monopoly:
Pm and Qm
Consumer surplus: A
Producer surplus: B+D
Deadweight loss: C+E
c = perfectly competitive firm
m = monopoly firm (underproducing from society point of view)
# supply = MC curve (upward-sloping curve)
# know price first if want to find CS, PS…
4.
Economies of scale [Q increase, AC decrease]
**when firm achieve economies of scale, can buy & produce & distribute a
large scale production at a lower ATC, so cheaper and faster distribution of
products, benefit the consumers
Research and development [Quality of product increased]
**monopolist can allocate lot funds / money to improve quality of product,
eventually benefit the consumers
UBEA 1063
TUTORIAL 13
1.
Price
ATC
MC
ATC = Pm
MR
DD
Quantity
Qm
- Monopolistic produce at Qm and Pm
- Earn normal profit in the long run (P=ATC)
2.
Given P = RM 1.50, quantity 150 brushes;
Total revenue = (P×Q) = (1.50×150) = RM 225
Total cost = (ATC×Q) = (1.50×150) = RM 225
Profit = (TR-TC) = (225-225) = RM 0
⸫ In the long run, monopolistic competitive firm will only gain normal/zero
profit at P=ATC=RM1.50.
3.
Price
MC
ATC
Pm
Mark
up
MRc
Pc
Minimum of ATC
MC
MR
D
Quantity
Qm
Qc
Excess
capacity
Perfectly Competitive:
- Pc and Qc
- Produce at minimum of ATC
Monopolistic:
- Pm and Qm
- Mark-up: Pm > MC
- Excess capacity: produce at Qm, which is not the minimum of ATC
4.
Diagram 1: supernormal profit in the short run
When firm experienced profit (P>ATC), TR>TC
-
New firm enter the market
Demand decreases, demand curve shift inward until tangent to ATC
MR also shift inward
Firm produce at Q2 and P2
Firm earn normal profit in the long run (P2=ATC2)
Price
MC
ATC
P1
ATC2=P2
MR1
MR2
Q2 Q1
DD2
DD1
Quantity
Diagram 2: subnormal profit in the short run
When firm experienced loss (P<ATC), TR<TC
-
Existing firm exit the market
Demand increase, demand curve shift outward until tangent to ATC
MR also shift outward
Firm produce at Q2 and P2
Firm earn normal profit in the long run (P2=ATC2)
Price
MC
ATC
ATC2=P2
P1
DD2
MR2
MR1
DD1
Quantity
Q1 Q2
UBEA 1063
TUTORIAL 14
1.
MC
Price
P*
DD
Quantity
Q*
MR
Increase in price above P*

Not follow by others
Consumers switch to other lower-priced products
Demand will drop quickly
Demand more elastic
MC
Price
elastic
P*
Price rigidity
inelastic
价格在确定后就
不易变动的现象
DD
Quantity
Q*
MR
Decrease in price below P*
- Other competitors will follow
- Not much changes in demand
 Demand more inelastic
*reasons: don’t care the price changes, because know other firms will also change
(reduce) the price, MR drop dramatically!!
⸫ As long as MR intersects with MC in the gap, the firm will produce at the
level of output where MC=MR at Q* and charges price at P*.
#price rigidity = price stuff = sticky price / price remains stable
2.
(i)
Oligopoly market, because the demand curve is kinked / twisted 扭曲.
(ii)
Equilibrium price = RM 15
Equilibrium quantity = 10 units
(iii)
Assumptions:
(1) When one firm increases the price, others will not follow.
*reasons: consumer sensitive to price, consumers will switch to other firm’s product
(2) When one firm drops the price, others will follow.
*reasons: avoid losing customers
(iv)
Profit (𝝅) = Total revenue (TR) – Total cost (TC)
TR = P × Q = RM 15 × 10 = RM 150
TC = ATC × Q = RM 10 × 10 = RM 100
Profit (π) = RM 150 – RM 100 = RM 50
(v)
Supernormal profit / Positive profit (+ve value)
Subnormal profit / Loss (-ve value)
Normal profit / Zero profit (zero value)
3.
(i)
Disagree, because of barriers to entry, firms in oligopolistic market will either
earn supernormal profits or subnormal profits in the long run.
#without calculating 时
(ii)
Disagree, as long as there is a few dominant firms in the industry that able to
control the price, therefore it will be consider as oligopoly market.
eg: sport wear/shoes market share is big, dominant by Nike, Adidas
(iii)
Disagree, in the kinked demand curve model, each firm believes that if it lowers
price, its competitor will follow.
*reasons: avoid losing the customer
(iv)
Agree, firm in an oligopolistic market are interdependent, thus action of one
firm is depending on the action of its rival.
**will no simply reduce price, because when price reduced, competitors will also reduced
the price