ECO1003 – MICROECONOMICS

CASE STUDY QUESTIONS

Time Allowed: 120 minutes
Exam Format: Open Book,
Assessment Weighting: 20%

Each group should write / draw their answers on the blank paper provided and submit
the answers stapled into one bundle at the end of the exam.

1. Identify the determinants of demand on cars in this case study and state whether they
are shifting demand left or right. (3 determinants). Show the effect on the car market
using a labelled graph.

(6 marks for correct shifts 3x 2)

The determinants of demand on cars in this case study are unemployment due to low oil
prices in GCC and MENA regions, uncertain situations of war in Yemen and Syria and large
cash bonuses received by the executives in UAE. Let’s see each determinant one by one.

a) Unemployment due to low oil prices in GCC and MENA regions: the demand for
new cars in these markets is affected by the low oil price, which has seen
approximately 50,000 people become unemployed throughout the GCC and MENA
region over the past two years.
b) Uncertain situations of war in Yemen and Syria: the continuing unrest, particularly
the wars in Yemen and Syria means consumers are waiting for better times before
committing to large household purchases.
c) Large cash bonuses received by the executives in UAE: however, not all the news is
bad news. The UAE market for luxury cars accounted for 57,000 units in the past 12
months, an increase of 7 percent over the 2015 - 2016 figure. The UAE executives
who received large cash bonuses amounting to 5 percent of their salaries last year
have been busy updating their models, with the luxury SUV market showing the
highest growth.

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 2. The Motor Transport Authority (MTA) expects that new car sales will decrease from
48,500 cars in December to 46,950 cars in January due to 5% Value Added Tax
(VAT) in 2018, which will be completely passed on to consumers. Calculate PED,
state whether it is elastic or inelastic, and, state what manufacturers and dealers
should do to maximize revenue. (4 marks total – 2 x 2
marks)
Answer: We know that;
PED= %∆Q / %∆P
Now, %∆Q =Q2 – Q1 / (Q2 +Q1)/2 × 100
Putting the values, we get
%∆Q = 46950-48500 /( 46950+48500)/2 × 100
%∆Q = -1550/47725 × 100 = -0.032 × 100 = -3.24%
Similarly, %∆P = 5%
Putting the values of %∆Q and %∆P in equation PED= %∆Q / %∆P, we get
PED = -3.24% / 5% = -0.65 or 0.65
Here, we get that the elasticity of demand is less than 1, which shows that PED is inelastic
and is a normal good.
Since PED is inelastic, this means that a price increase will result in a smaller percentage
decrease in the number of cars sold. Therefore, manufacturers and dealers should raise the
price of their cars which will ultimately increase the total revenue.

3. If household income in the GCC has decreased 18% over the past year, and new car
sales in the region have decreased from 1.1 million to 875,000. Does this indicate that
cars are normal or inferior goods? Show your calculations. (2 marks)
Answer: It indicates that the cars are normal goods because their demand falls when
Income decreases. Normal goods are those whose demand increases as people's
incomes and purchasing power rise and vice versa the situation in our case is vice
versa.
From the information we observe a decrease of sales from 1.1 million to 875,000
which implies that the quantity demanded falls by :

(1,100,000-875,000)=225,000

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 Therefore the demand falls by 225,000 as the income in the GCC also falls by 18%
indicating that cars are normal goods

4. Given the information in the case study, calculate the cross price elasticity of demand
between personal cars and ride sharing services in the UAE.
(2 marks)

5. Explain what Uber and Careem would like to happen to oil prices in the future and
why. (2 marks)
Answer: Given the scenario, Uber and Careem would like to increase in the prices of
oil because for every 1% increase in the oil prices there is an increase of 1.75 percent
in ride sharing amongst commuters. So, as the prices of oil go up, more people will
like to use the service and their profit margin will be increased.

6. Explain the reasons why price elasticity of demand for cars in the GCC is inelastic.
(2 marks, 2x1)

7. Technological progress has most recently allowed Tesla company to provide its
electric cars at a lower price to end consumers. How does this affect car sales in GCC
and MENA region? Explain your answer. (2 marks)

Answer:

8. Using a diagram (and your knowledge of supply and demand), show how the
information about the Asian new car sales in the case study will affect price and
quantity. (4 marks total – 2 for shift + 2 for new P & Q)

9. Using the information in the case study and any of the information given to you in the
previous questions, what do you expect to happen to price and quantity of new car
sales in the region in 2017 – 2018?

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 (8 marks total – 3 x 2 for each factor discussed / drawn + 2 for a reasonable
conclusion)

10. If the public transportation ( metro and buses ) services in Dubai improve , explain the
effect on the sales of the following products;
a. Car garage services.
b. Taxi Services. (2 marks)

Answer: a) Car garage service is used by somebody when he or she owns a car. So when the
public transportation services i-e metro and buses in Dubai will improve, it is more likely to
be used these transportation services by people. Similarly, sales of car garage services is more
like to increase.

b) Unlikely, sales of taxi services are like to be decrease because people will shift to use the
improved public transportation services. Usually the fare of public transport are relatively
low as compared to the taxi services and we study in economics that consumer is rational.

11. The following information is available for USA car manufacturers. Costs are all in $.

Quantity Variable Costs Total Costs

0 0 14,500,000
10,000 18,000,000 32500000
20,000 33000000 65,500,000
30,000 50450000 115,950,000

a) What is the fixed cost for USA car manufacturers? (1 mark)

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 Fixed cost = Total cost of production - variable cost per unit × No
of units produced
= 14,500,000 - 0
=14,500,000

b) What is the difference between fixed costs and variable costs? Give examples of
each in the case of car manufacturers? (3 marks)

Fixed costs are foreordained costs that continue as before all through a
particular time. These overhead costs don't differ with output or how the business is
performing.  For example Rent, Telephone and internet costs, Insurance, Employee
Salaries.

Though Variable costs change over a predetermined period and are related legitimately
to the business movement. These depend on the business execution and the volume of
services the business creates. For example in Cars business Direct labor, Commissions,
Taxes and Operational expenses.

c) What is the average total cost when quantity is 20,000? (2 mark)

ATC = TC / Quantity
= 65500000 / 20000
= 3275

d) What is total cost when quantity is 10,000? (1 mark)

TC= TVC + TFC
=18,000,000 + 14,500,000
=32,5000,000

e) What is average variable cost when quantity is 30,000 (1 mark)

VC =115950000 - 14,500,000

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 =101,450,000

AVC =101,450,000/ 30000

= 3381.6

f) What is average fixed cost when quantity is 10,000? (1 mark)

AFC = 14,500,000/ 10000
= 1450

g) What is average fixed cost when quantity is 75,000? (1 mark)

AFC = 14,500,000/ 75000
= 193.33

h) Explain the relationship between quantity and average fixed cost. (1 mark)
There is an inverse relation between quantity and average fixed cost.
Average fixed cost is a fixed cost per quantity. As the complete number of units
of produced goods increases, the average fixed cost diminishes in light of the
fact that a similar measure of fixed cost is being spread over a bigger number of
units of output.

i) What is the marginal cost of changing production from 10,000 to 20,000 units?
(1 mark)
Difference between Total cost = 655,000,00 - 33,000,000
=325,000,00

Marginal cost = 325,000,00 / 10000

= 3250

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 j) If the US manufacturer sells cars to UAE dealers for 4000 $, what is total profit
when quantity is 30,000 units? (4 marks)
Amount after selling = 4000×30000
=120,000,000

Profit = 120,000,000 - 115,950,000

= 4050000

12.

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