UNIVERSITI TUNKU ABDUL RAHMAN
FACULTY OF ACCOUNTANCY AND MANAGEMENT
ACADEMIC YEAR 2012/2013
TUTORIAL 1: INTRODUCTION TO ECONOMICS
Topic to discuss:
1.
Economics defined.
2.
Why study economics.
3.
Three basic economics problems.
4.
The scope of economics.
a. Economics philosophy
b. Major field & specific field of economics study
c. Economics method
5.
Economics systems.
TUTORIAL 2: PRINCIPLES OF ECONOMICS
Structure:
1.
Explain the difference between positive economics and normative economics.
2.
In an economy, what are the basic economic problems? Briefly explain how the
different types of economic systems solve the economic problems.
3.
The table below represents five points on the production possibility frontier for
the small country of Bistro, which produces only crackers (measured in
thousands of boxes) and cheese (measured in thousands of pounds):
A
B
C
D
E
Crackers
40
30
20
10
0
Cheese
0
5
10
15
20
Does the production possibility frontier demonstrate the law of increasing
opportunity cost? How can you tell?
4. Suppose a country produces two goods: corn and cars. New technology is
developed that increases the amount of corn that can be produced. Use a
graph to show the effect of this graph on the country’s production possibility
frontier. Explain what occurs in the graph.
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5. Suppose that a simple society has an economy with only one resource, labor.
Labor can be used to produce only two commodities – X, a necessity good
(food) and Y, a luxury good (music and merriment). Suppose that the labor
force consists of 100 workers. One laborer can produce either 5 units of
necessity per month (by hunting and gathering) or 10 units of luxury per
month (by writing songs, playing the guitar, dancing, etc).
a. Draw the economy’s production possibility frontier (PPF). Where does the
PPF intersect the Y-axis? Where does it intersect the X-axis? What
meaning do those points have?
b. Suppose the economy produced at a point inside the PPF. Give at least two
reasons why this could occur. What could be done to move the economy to
a point on the PPF?
[Case & Fair (2004: 41)]
6. China’s economy has been growing rapidly for the last decade. An economist
claimed that actually, China economy is not growing. It is the numbers of
multinational firms in China that are growing rapidly. Evaluate that
economist’s claim.
Essay:
1.
Figure 1 illustrated the Production Possibility Frontier (PPF) for the allocation
of resources in Malaysia. Assume that the Malaysia only produces agricultural
products and industrial products.


(a)
What is the respective opportunity cost for moving the production from:
(i) Point A to Point B
(ii) Point B to Point C
(iii) Point C to Point D
(b)
Does the production possibility frontier demonstrate the law of
increasing opportunity cost? Give brief explanation for your answer.
(c)
If there is an improvement in biotechnology in Malaysia, what happen to
the PPF? Illustrate this scenario in the same PPF diagram. Mark a new
possible production point as “F”. Give your explanation.
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TUTORIAL 3:
DEMAND, SUPPLY AND MARKET EQUILIBRIUM
Structure Questions:
1. Do you agree or disagree with each of the following statements? Briefly explain
your answers and illustrate with supply and demand curves.
a. The price of a product rises, causing the demand for another product to fall.
The two products are therefore substitutes.
b. A shift in supply causes the price of a product to fall. The shift must have been
an increase in supply.
c. During 2003, income rose sharply for most Americans. This change would
likely lead to an increase in the prices of both normal and inferior products.
d. Two normal products cannot be substitutes for each other.
e. If demand and supply increases at the same time, price would clearly rise.
[Source: Case & Fair 2004: 69]
2. Market research has revealed the following information about the market for
chocolate bars. The demand schedule can be represented by the equation Qd =
1600 – 300P, where Qd is the quantity demanded and the P is the price. The supply
schedule can be represented by the equation Qs = 1400 + 700P, where Qs is the
quantity supplied. Calculate the equilibrium price and quantity in the market for
chocolate bars.
3. What is the difference between a “change in demand” and a “change in
quantity demanded”? Graph and explain your answer.
4. This question deals with demand and supply and refers you to the table below.
a. Given the table below, graph the demand and supply curves for flashlights.
Make certain to label equilibrium price and equilibrium quantity.
b.
c.
d.
2.
Price
Quantity Demanded/Month
Quantity Supplied/Month
RM5
RM4
RM3
RM2
RM1
6,000
8,000
10,000
12,000
14,000
10,000
8,000
6,000
4,000
2,000
What is the equilibrium price and equilibrium quantity?
Suppose the price is currently at RM5. What problem would exist in the
economy? What would you expect to happen to price? Show this on your
graph.
Suppose the price is currently RM2. What problem exists in the economy?
What would you expect to happen to price? Show this on your graph.
Figure 1 illustrated the Production Possibility Frontier (PPF) for the allocation
of resources in Malaysian. Assume that Malaysia is currently producing at Point
“C”.
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Essay:
Figure 1: Production Possibility Frontier for Malaysia
(a) What is the respective opportunity cost for moving the production from
(i) Point A to Point B
(ii) Point C to Point D
(b) Based on Figure 1,
(i) How does the PPF demonstrate limited resources?
(ii) How does the PPF demonstrate choices due to limited resources?
(iii) Is Malaysia fully and efficiently using its resources at Point “C”?
(c) Flood hit the northern states of Peninsular Malaysia, which has destroyed
some farms and paddy fields causing lost of crops and livestock production
ability. However, the flood did not affect the production of other products.
Sketch a production possibility frontier (PPF) showing Point “C” and the
new possible production combination after the flood happened. Mark a new
possible combination point as “E”. Give your explanation.
TUTORIAL 4:
MARKET EFFICIENCY & ELASTICITY
Structure Questions:
1. When Frank's income rises from RM29,000 to RM34,000 per year, he increases
his purchases of tomatoes from 20 pounds to 28 pounds per year. What is Frank's
income elasticity of demand for tomatoes? According to Frank, are tomatoes an
inferior or normal good?
2. If Q = 12 – 2P, what price and quantity will maximize total revenue? [Hint: Total
revenue will be maximized at unitary elasticity. Elasticity, ε = (p/q)*(∆q/∆p). Refer
to Equation 3.2 & 3.3 as in the lecture.]
3. A sporting goods store has estimated the demand curve for Brand A running
shoes as a function of price. Use the following diagram to answer the question as
follow.
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(a) Calculate demand elasticity using the
midpoint formula between points A and
B, between points B and C and between
points C and D.
(b) If the store currently charges a price of
$50, then increase to $60, what happen
to total revenue from shoe sales
(calculate P*Q before and after the price
change)? What happen to total revenue if
price is increased from $30 to $40?
a. Explain why the answer to (a) can be used to predict the answer to (b). Will
the revenue increase or decrease if the price is increased from $10 to $30?
[Case & Fair 2004: 98 & 99]
Essay:
1.
Given the demand curve for vacation package to Langkawi, use the diagram to
answer the question as follow:
(a)
Calculate price elasticity of demand using the midpoint formula:
(i) Between points A and B
(ii) Between points E and F
(iii) Based on elasticity of a linear demand curve, what can you
comment on the two elasticity calculated in (i) and (ii)?
(b)
If the firm wishes to increase its revenue, should it rises or drops the
price if it is operating the following points? Give your explanation.
(i) Between Point A & Point B
(ii) Between Point E & Point F
(c)
If the price of the vacation package to Langkawi is RM800, what is the
consumer surplus?
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(d)
2.
(a)
After the tsunami tragedy, consumers have changed their preference by
less preferring to visit Langkawi. Using demand and supply analysis,
sketch a graph to illustrate the situation. Give your explanation.
Table below shows Joey’s price elasticity of demand, income elasticity of
demand and cross-price elasticity for various types of fruits. Based on the
table, answer the questions.
Type of
fruits
Mango
Banana
Orange
Price elasticity
of demand
Income elasticity
of demand
– 0.6
– 3.0
– 1.0
1.5
– 2.1
3.5
Cross-price
elasticity with
Apple
1.8
– 1.5
2.5
(i)
Is banana an inferior product or normal product for Joey? Explain.
(ii)
What is the relationship between banana and apple for Joey? Explain.
(iii)
If Joeys income increases by 20%, how much is the increase or decrease
of her demand for orange?
(iv) How would an increase in the price of orange affect Joey’s expenditure
on orange?
(v)
Assume that all consumers have the same cross price elasticity with
apple as Joey. If the price of mango increases, use supply and demand
analysis to explain the equilibrium (price & quantity) change for apple.
Sketch a graph to explain your answer.
(vi) If Amber’s price elasticity of demand for mango is – 3.5, sketch both
Joey’s and Amber’s demand curves for mango in a same graph. Explain.
TUTORIAL 5:
THE PRODUCTION PROCESS OF FIRM
Essay:
2. (a) Briefly explain the relationships between total product (TP), average product
(AP) and marginal product (MP). Illustrate the relationships in a graph.
(b) Briefly explain the relationships between marginal cost (MC), total variable
cost (TVC) and average variable cost (AVC). Illustrate the relationships in a
graph.
2. Rubber Dinghies’ total product schedule is as follow:
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Labor (workers per week)
1
2
3
4
5
6
7
8
9
10
Output (rubber boats per week)
1
3
6
10
15
21
26
30
33
35
a. Give a brief definition and calculate the average product of labor and the
marginal product of labor.
b. What is the relationship between average product and marginal product when
Rubber Dinghies’ produces (i) fewer than 30 boats a week and (ii) more than
30 boats a week?
Given is the price of labor is $400 a week and total fixed cost is $1,000 a week.
c. Give a brief definition and calculate total cost, total variable cost and total
fixed cost for each output.
d. Give a brief definition and calculate average total cost, average variable cost,
average fixed cost and marginal cost for each output.
e. Suppose that Rubber Dinghies’ total fixed cost per week increases, explain
what changes occur in the short-run average and marginal cost curves.
[Source: Parkin 2005: 235]
TUTORIAL 6:
MARKET STRUCTURE: PERFECT COMPETITION
Essay:
1. (a) Describe briefly about the characteristics of perfect competition market
structure.
(b) Use a graph to demonstrate the circumstances that would prevail in a perfectly
competitive market where firms are experiencing economic losses. Identify
costs, revenue, and the economic losses on your graph. Using your graph,
determine whether this firm will shut down in the short run, or choose to
remain in the market. Explain your answer.
(c) If perfect competitive firms are having positive economic profit in the short
run, how does free entry and exit help firms to achieve long run equilibrium?
Illustrate your answer graphically.
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2. The table below shows the quantity demanded and quantity supplied of a new
apple drink. Based on the table, answer the following questions.
3.
Price (RM per unit)
Quantity demanded (Unit)
1
2
3
4
5
6
7
60
54
43
31
20
12
6
Quantity supplied
(Unit)
7
11
22
31
40
51
66
(i)
What is the equilibrium price and quantity of apple drink?
(ii)
Suppose the current market price for the apple drink is RM6 per unit,
what situation is the market experiencing? Explain the adjustments that
will bring it to equilibrium.
(iii)
If the demand for apple drink increases 20 units at every level of price,
what is the new equilibrium price and quantity?
Based on the table below, answer question (i) and (ii).
Yummy Company: Production Costs for Nasi Lemak
Production Total Cost
Variable
Average
Marginal
Quantity
(RM)
Cost
Total Cost
Cost
(Unit)
(RM)
(RM)
(RM)
5
5.20
3.20
0.40
6
5.80
3.80
7
6.60
4.60
8
7.60
5.60
9
8.80
6.80
(i)
Calculate the fixed cost, average total cost and marginal cost.
(ii)
If nasi lemak is in a perfect competition market with market
price of RM1.00, what is the profit maximizing output for
Yummy Corporation?
(iii)
Why firms maximize profit at marginal cost (MC) equal
marginal revenue (MR)?
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TUTORIAL 7:
MARKET STRUCTURE: MONOPOLY
Structure Questions:
1. A monopoly firm is producing where its marginal revenue is equal to marginal
cost. At this level of output, the firm's price is $3.75 and its average total cost is
$4.50. Is the firm earning a profit? Explain. How could this firm determine
whether it should continue to operate in the short run or if it should shut down?
2. Explain how by restricting output (as compared to perfect competition
structure), monopoly is said to cause deadweight loss. Illustrate your
explanation with graph(s).
3. What is the different between monopoly and perfect competition market
structure? (Use a table to organize your comparison).
Essay:
1.
(a) Give and explain 4 examples of barriers to entry.
(b) Briefly explain the difference between second-degree price discrimination
and third-degree price discrimination.
(c) Why a natural monopoly is better than many small perfect competition firms
if the market has economies of scale?
2.
(a) Briefly compare the characteristics of perfect competition market structure
with monopoly market structure. Present your answer in a table.
(b) In the short-run, a monopoly firm that suffers losses will always shut down.
Do you agree? Explain the cases where [(i) P > AVC] and [(ii) P < AVC].
(c) How do you differentiate between “short-run” and “long-run”?
TUTORIAL 8:
MARKET STRUCTURE: MONOPOLISTIC COMPETITION & OLIGOPOLY
Structure Questions:
1. Compare perfect competition and monopolistic competition. In what ways are
they similar? In what ways are they different?
2.
The firm sells its output in a monopolistically competitive market. Show the
firm's profit-maximizing level of output, assuming the firm is earning economic
losses. Show your answer on the graph and explain what happen in the long-run.
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Essay:
1. Based on the following payoff matrix, answer the questions.
Firm A
Payoff profit (RM’
million): (A, B)
Lower price
(Top)
Maintain price
(Bottom)
Firm B
Lower price (Left)
Maintain price (Right)
(0, 0)
(3, 1)
(-3, 0)
(5, 5)
a. Assume that there are only two firms in the market, which are Firm A and Firm B.
Under the Bertrand model and assume both firms aim to maximize profit, what
will be the equilibrium?
b. Firm A is to choose first and it chooses the “Maintain price” strategy. Then, Firm
B chooses the “Lower price” strategy even though “Maintain price” choice will
give Firm B higher profit. Briefly explain Firm B “reason” for choosing “Lower
price.”
c. Firm A is to choose first. If Firm A chooses “Maintain price”, the possibility for
Firm B to choose “Maintain price” is 20% (therefore, possibility to choose
“Lower price” is 80%). If Firm A chooses “Lower price”, the possibility for Firm
B to choose “Maintain price” is 50% (therefore, possibility to choose “Lower
price” is 50%). If you were Firm A owner, what strategy should you choose and
explain your reason.
d. Base on the same situation as in (e), what would be your decision if the possibility
for Firm B to choose “Maintain price” is 80% (therefore, possibility to choose
“Lower price” is 20%) when you chooses “maintain price” strategy? Explain your
reason.
e. Base on the same situation as in (e), what would you choose if there are equal
chances (50% possibility) for Firm B to choose any strategy, regardless what you
choose? Explain your reason.
f. What would you choose if you did not know the possibility of Firm B’s choices?
Explain your reason.
2. Based on the following payoff matrix, answer the questions. Assume that there are
only two firms in the market, which are Airline -A and Airline -B.
Airline -A
Payoff Revenue (RM’
million): (A, B)
Airline –B
Lower price (Left)
Maintain price (Right)
Lower price
(Top)
(5, 5)
(8, 4)
Maintain price
(Bottom)
(7, 12)
(10, 10)
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a. What can you tell about the price elasticity of demand for Airline –A? Explain
your answer.
b. Assume both firms aim to maximize revenue and operating under the Bertrand
model. Using the payoff matrix, what will be the equilibrium? Give your
explanation.
c. Applying the relationship of price elasticity of demand with revenue, explain
your choice (answer) of equilibrium as in (b).
d. Airline -A is to choose first. If Airline -A chooses “Maintain price”, the
possibility for Airline -B to choose “Maintain price” is 10% (therefore,
possibility to choose “Lower price” is 90%). If Airline -A chooses “Lower
price”, the possibility for Airline -B to choose “Maintain price” is 80%
(therefore, possibility to choose “Lower price” is 20%). If you were Airline -A
decision maker, what strategy should you chooses and explains your reason.
e. Base on the same situation as in (e), what would you choose if there are equal
chances (50% possibility) for Firm B to choose any strategy, regardless what
you choose? Explain your reason.
f. Explain the Kinked Demand Curve model.
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