ASSIGNMENT ECO745

NAME: _____________________________

MATRIC NUMBER: _______________________

Please provide the answers to the following questions:

1. It is estimated that more than 2000 students will apply for the MBA programs in Malaysia this
year. Using the concept of net present value (NPV) and opportunity cost, explain when it is
rational for an individual to pursue the MBA program.
(4 marks)

2. The general demand function for good A is

Qd = 600 – 4PA – 0.03M – 12PB + 15T + 6PE + 1.5N

Where Qd = quantity demanded of good A each month, P A = price of good A, M = average

household income, PB = price of related good B, T = consumer taste index ranging in value
from 0 to 10 (the highest rating), P E = price consumers expect to pay next month for good A,
and N = number of buyers in the market for good A.

a) Interpret the intercept parameter in the above demand function.

(2 marks)

b) What is the value of the slope parameter for the price of good A? Does it have the correct
algebraic sign? Why do you say so?
(2 marks)

c) Interpret the slope parameter for income. Is good A normal or inferior? Explain.
(3 marks)

d) Are goods A and B substitutes or complements? Explain.

(2 marks)

e) Are the algebraic signs on the slope parameters for T, PE and N correct? Explain.
(3 marks)

f) Calculate the quantity demanded of good A when P A = RM5, M = RM25,000, PB = RM40,

T = 6.5, PE = RM5.25 and N = 2,000.
(2 marks)

3. What are appropriate measures of how sensitive the quantity demanded is to changes in
price, income, and prices of other goods? What affects those sensitivities?
(10 marks)

4. AmanJaya Sdn Bhd has initially established soft drinks outlets in shopping malls. The firm
hires a business analyst to determine the demand for its soft drinks in shopping malls. After a
few months, the analyst tells the company that demand for the soft drinks in shopping malls is
given by the following equation:
 Qd =5000–25Pa +30Pb +0.5I

where, Pa = Price per unit of AmanJaya Sdn Bhd soft drinks, Pb = Price per unit of the
competitor’s soft drinks, and I = Income of the consumer

AmanJaya also has an inclination to set up soft drink outlets in petrol stations. Later the firm
sets up soft drink outlets in a petrol station. The petrol station was located at a place where
there were no other soft drink outlets within a radius of 5 km. In mid-2018, the firm offered a
discount of 10% and sales jumped from 700 bottles per month to 1500 bottles per month. The
discount was withdrawn subsequently.

Happy by the response, six months later, the owner decided to permanently reduce the price
of soft drinks by 10%. Meanwhile, two new soft drink outlets were set up in the area. This time
to the owner’s dismay, the sales went up marginally from 700 bottles per month to 800 bottles
per month, and since a reduction in the price had already been announced, the owner could
not revert to the old price.

Questions:

(a) Discuss whether the pricing strategy adopted by the company in the petrol station is right
or not.
(5 marks)

(b) Calculate price elasticity of demand for soft drinks in petrol station outlets in mid-2018.
(2 marks)

(c) What factors have changed since then and what is the effect of these changed factors on
the price elasticity, and the resultant new price elasticity?
(3 marks)

5. The Zenith television company faces a demand function for its products which can be
expressed as Q = 4000 – P + 0.5Y where Q is the number of televisions, P is the price per
television, and Y is average monthly income. Average monthly income is currently equal to
RM2,000.

a) Express the inverse demand curve faced by Zenith at the current income level.
(2 marks)

b) At what price and quantity is Zenith’s total revenue (TR) maximum? State the maximum
TR value. Show the value of marginal revenue at this price and quantity.
(4 marks)

c) What is the price elasticity of demand for Zenith’s demand function at the price and
quantity derived in (b)? Interpret.
(3 marks)

d) Why might Zenith choose to produce at a price and quantity different that that derived in
(b)?
(3 marks)