ECONOMICS FOR BUSINESS

DECISIONS(ECO745)

INDIVIDUAL
ASSIGNMENT II & III

PREPARED BY:
ALEALIANA BINTI AZMI

(2022265606)

PREPARED FOR:
DR MOHD AFANDI ABU BAKAR
Individual Assignment 2: Production Theory and Market Structure

QUESTION 1

Given the production function of a firm as Q = 10K1.6 L

1.2. With Q is the quantity of output, K is capital and L is labour. Capital input price is RM30
per unit and wage is RM20 for each labour. The firm is currently using 80 units of capital
and 50 units of labour.

a) Determine the total quantity produced using the efficient input mix. (7 marks)

MPK = 10 (1.6) K0.6 L 1.2

MPL = 10 (1.2) K1.6 L 0.2

input levels:

MPK = 10 (1.6) (80)0.6 (50) 1.2

= 10 (1.6) (26.3631) (201.2423)

= 8.441.827

MPL = 10 (1.2) (80)1.6 (50) 0.2

= 10 (1.2) (129.5765) (3.1623)

= 4,844.472

Calculate the ratios:

MPK / (Capital input price) = 8.441.827 / 30 = 281.394

MPL / (Labour input price) = 4,844.472 / 20 = 242.224

Since the ratio of MPK (281.394) > MPL (242.224) to the labour input price, adjust the capital and
labour inputs accordingly.

MPL/ MPK = (Labour input price/ (Capital input price)

10 (1.2) (K)1.6 (L') 0.2 / 10 (1.6) (K1) 0.6 (L')1.2 = 20/30

0.75 K L = 0.666

L= 0.888/K

Production function Q = 10K1.6 L 3.2

Q= 10(80) 1.6 (50)1.2

Q= (11,090.31) (109.37)

Q= 1,212,572.43

Sub L = 0.888/K into Production function 0 = 10K1.6 L 1.2

1.212.572.43 = 10K1.6 (0.888/K)1.2

1.212.572.43 = 8.854 K (16-12)

1,212,572.43 = 8.854 K0.4

1.212.572.43 / 8.854 = K0.4

136,979.89 = K0.4

(K0.4) (2.5) = (136.979.89) (2.5)

K = (136.979 89) (25)

K = 169.523.31

QUESTION 2

The estimated demand function of king fnd ice-cream is P = 80 – 2Q and the estimated cost
function of the ice-cream

is TC = 100 + 40Q - 1.5Q2 + 0.2Q3.

a) Estimate the maximum profit earned by the king fnd ice-cream producer. (6 marks)

The total cost of producing the ice-cream is 100+ 40Q-1.5Q2+0.2Q3 = 140

The maximum profit that can be earned is 80-140 = -60

Thus, the maximum profit earned by the king fnd ice-cream producer will be 60.

b) Can the king fnd ice-cream producer maintain the profit in the long run if the producer
is operating in a monopolistic competitive industry? Justify your answer. (4 marks)
In a monopolistic competitive business, the capacity of the king fnd ice-cream manufacturer to
sustain a profit over the long run is not assured. The maker of King Fnd ice cream may not even
be able to break even in a monopolistic competitive sector. Because there are other
manufacturers striving to create and sell ice cream, there will be severe competition for
customers. Given the competition, the capacity of the king fnd ice-cream company to generate a
substantial profit, which would be necessary to turn a profit over the long run, is unlikely. As a
result, it is likely that the maker of King's Fudge Ice Cream will be unable to keep up. As a result,
if the monarch discovers an ice-cream manufacturer.

Individual Assignment 3: Macroeconomic Stabilisation Policy

Analyse the macroeconomic stabilisation policy applied by the Malaysian government

during the Severe Acute Respiratory Syndrome Coronavirus – 2 (SARS-CoV-2) crises.

The Malaysian government implemented several macroeconomic stabilization policies during the
SARS-CoV-2 crisis to mitigate the adverse effects on the economy.

The Central Bank of Malaysia, Bank Negara Malaysia (BNM), adopted an expansionary monetary
policy to ensure sufficient liquidity in the financial system and support economic activity. They
lowered the policy interest rate, the Overnight Policy Rate (OPR), to historic lows. The reduction
in interest rates aimed to encourage borrowing and investment, stimulate consumption, and ease
financial burdens for households and businesses. The Malaysian government introduced multiple
fiscal stimulus packages to provide targeted support to different sectors of the economy. These
packages included measures such as wage subsidies, cash transfers, and financial assistance
programs for affected businesses. The fiscal stimulus aimed to boost aggregate demand, preserve
jobs, and support vulnerable segments of society.

The government provided sector-specific support to industries severely impacted by the crisis,
such as tourism, hospitality, and aviation. They implemented measures like loan moratoriums,
financial assistance, and grants to help these sectors weather the downturn and maintain their
workforce. To mitigate the rise in unemployment, the Malaysian government implemented
measures to protect jobs. These included wage subsidies to encourage employers to retain
employees, incentives for hiring new workers, and reskilling programs to enhance employability.

The government prioritized public health and implemented strict measures to contain the spread
of the virus. This included lockdowns, travel restrictions, and social distancing protocols. These
measures, although necessary for public health, had short-term negative impacts on economic
activity.

Malaysia actively participated in international initiatives to address the global economic impact
of the pandemic. It engaged in discussions with regional partners and international organizations
to coordinate policy responses and share best practices.

Overall, the Malaysian government's macroeconomic stabilization policies during the SARS-CoV-
2 crisis focused on providing fiscal and monetary support, protecting jobs, and addressing the
specific needs of affected sectors. These measures aimed to cushion the economic impact of the
pandemic and lay the foundation for a resilient recovery. In conclusion, the success of
macroeconomic stabilisation efforts is determined by a variety of factors, including the economy's
specific environment, how policies are executed, coordination between fiscal and monetary
authorities, and external pressures. These policies are designed to find a balance between short-
term stabilisation aims and long-term sustainability in order to establish a strong and resilient
economy.

Question 1, June 2013.

Graduate considering to set up his own firm that estimated revenue would be RM120,000
per year. He also received a job offer at RM30,000 per year. He will invest RM50,000 of his
own money, which yields 8% interest per year. He also plans to use a shop lot he owns that
has been rented for RM1,500 per month. The estimated expenses per year were:

Advertising, RM5,000; Rental, RM12,000; Employees' Salary, RM40,000; and Utilities,

RM5,500

1. Identify his accounting profit and economic profit.

Total Revenue = RM120.000
Total Expenses = Advertising (RM5,000) + Rental (RM12,000) + Employees' Salary
(RM40,000) + Utilities (RM5,500)
= RM62,500
Accounting Profit = Total Revenue - Total Expenses
= RM120,000 - RM62,500
= RM57.500
To calculate the economic profit, we need to consider the opportunity cost of the
alternative job offer and the return on the invested capital.
Opportunity Cost is RM30,000 per year.
 Return on Invested Capital:
= RM50.000 (0.08)
= RM4.000
Economic Profit = Accounting Profit - Opportunity Cost - Return on Invested Capital
= RM57,500 - RM30,000 - RM4,000
= RM23,500
The economic profit is RM23,500.
2. Should the graduate accept the offer or start his own business.
According to these figures, the graduate will start his own firm with an RM23,500 profit.
This might imply that his business concept is worth more to him than the employment
offer.

B) F&D produces chicken burger (C) and beef burger (B). The average cost function is:
AC = 5C2- 6CB - 3C + 8B2 - 2B - 120.
Determine the number of boxes of chicken and beef burger the company has to produce
to minimize the average cost if the total order for both burgers is 10 boxes.
AC = 5C2 - 6CB - 3C + 8B2 - 2B - 120.
dAC/dc = 10C - 16B – 2
dAC/db = - 6C + 16B - 2
0 = 10 (10-B) - 6B – 3
0 = 100 - 10B - 6B - 3
0 = 97 - 16B
B = 6.0625
B + C = 10
C = 10 - B
C = 10 - 6.0625
C = 3 9375
So, the number of boxes for chicken and beef to produce to minimized the average cost is
C= 3.9375
B= 6.0625

QUESTION 3, June 2013

Syarikat Anak Bumi Print supplies printing cartridge to offices. The price per unit of cartridge is
RM12. The cost function is given as:

TC = 1/3 q 3 - 492 + 24q 2 + 10

 a) Calculate the profit maximizing output.
Profit (t) = TR - TC
P = 12 125-5Q=10
TR = 12Q 5Q=115
MR = 12 Q=23
MC = q 2 -8q + 24
Πmax = MR=MC
12 = q2 -8q + 24
0 = q 2 -8q + 12
q=2@6
the profit is higher at q = 6 (𝜋 = 34). Therefore, the profit-maximizing output is
q=6
TR = 12(6) = 72
TC = 1/3 q 3 – 4q 2 + 24g + 10
TC = 1/3 (63 ) - 4(62 ) - 24 (6)
TC = (216/3) -144 + 144 + 10
TC= 82.
Π max= 72-82= -10

ADDITIONAL QUESTON 1 DEC 2012

Pure Flower Company sells artificial flowers to general and corporate customers. The
demand function for Pure Flower’s artificial flowers are as follows:

Q1 = 21 – 0.1P1 for general customers

Q2 = 50 – 0.4P2 for corporate customers

Pure Flower’s total cost function is TC = 2000 + 10Q

Calculate the price, quantity and profit if:

a) the company charges a different price for the customers (7 marks)

Q1 = 21 – 0.1P1 Q2=50-0.4P2
P=210-10Q P=125-2.5Q
TR=210Q – 10Q2 TR=125Q-2.5Q2
MR=210-20Q MR=125-5Q
TC = 2000 + 10Q
MC=10
210-20Q=10
 200=20Q
Q=10

𝜋= TR1 + TR2 – TC
Π =110[10] + [67.5][23]-[2000+10(10+23)]
Π =1100 + 1552.5 – (2000+330)
Π =2653.5 – 2330
Π =RM 322.5#

b) the company charges the same price for the customers (4 marks)

Q=21-0.1P +50-0.4P MR=MC

Q=71-0.5P
0.5P=71-Q 142-4Q=10
P=142-2Q 142-10=4Q
TR=142Q-2Q2 132=4Q
MR=142-4Q Q=33#
Π=TR-TC
=76(33)- (2000+10(33)
=2508-2330
=178#

c) Should the company practice price discrimination? (1 marks)

The company should practice price discrimination because the demand for their artificial
flowers is different for general and corporate customers. The demand for artificial flowers
for general customers is lower than the demand for artificial flowers for corporate
customers. Therefore, Pure Flower should charge more for their artificial flowers to
corporate customers than they do to general customers. This will maximize the
company’s profits.

QUESTION 2

An oligopolist firm estimated its demand curve as follows:

Q1 = 30 – 0.5P1

Q2 = 25 – 0.4P2
a) Compute the price level and output at the kink. (3 marks)
Q1 = 30 - 0.5P1
Q2 = 25 - 0.4P2
P1= 60-2Q
P2= 62.5-25Q
P 1=P2
60 - 2Q = 62.5 - 2.5Q
0.5Q = 62.5 - 60
0.5Q = 2.5
Q=5
P 1 = 60 - 2(5)
= 60 - 10
= 50
P 2 = 62.5 - 2.5 (5)
= 62.5 - 50
= 50
Price at Kink = RM 50
Output at kink = 5
b) Find the value of MR1 and MR2 at the kink. (3 marks)
P 1 = 60 - 2Q
TR1 = 60Q - 2Q
MR1= 60 - 4Q
MR1 = 60 - 4(5)
MR1= 40
P 2 = 62.5 - 25Q
TR2 = 62.5Q - 2.5Q2
MR2 = 62.5 - 5Q
MR2 = 62.5 - 5(5)
MR2 = 37.5
c) Give two (2) characteristics of an oligopoly firm. (2 marks)

Two characteristics of an oligopoly firm are:

- Few large firms: In an oligopoly market, there are only a few large firms that dominate
the industry. These firms have a significant market share and exert considerable influence
over the market. Due to the small number of firms, the actions and decisions of one firm
can have a substantial impact on the behavior and strategies of the others.
 - Interdependence: Oligopoly firms are highly interdependent, meaning their decisions and
actions are influenced by the behavior of their competitors. Since there are only a few
firms in the market, each firm must consider the likely reactions of its competitors to its
own pricing, production, or marketing strategies. The success of one firm can lead to a
strategic response from others, leading to intense competition and complex interactions
among the firms in the market.

QUESTION 3.

A new cake house Nice and Sweet Bakery opens in Seri Iskandar. There are many cake sellers and
prices will not be affected by new entrants in the market. The owner of Nice and Sweet Bakery
estimates that monthly total cost as:

TC = 12 + 90Q – 15Q² + Q³

a) Determine the firm’s shut down price and output (2 marks)

TC = 12 +90Q - 15Q² + Q³
TVC = 90Q- 15Q² + Q³
MC = 90 – 30Q + 3Q²
0 = 90-30Q + Q²
AVC = 90- 15Q + Q²

Shut-down price = MC-AVC

90-30Q + 3Q² = 90 – 15Q + Q²
2Q² - 15Q =0
Q = 0.75
P = MC
=90 - 30Q + 3 Q²
= 90 – 30(7.5) + 3(7.5)²
=33.75

Shut-down price and output price= RM33.75

b) Draw a diagram to show the shut down point as in (a) (1 mark)

 RM

P=33.75

7.5

c) List down two (2) characteristics of a perfect competitive market. (2 marks)

Two characteristics of a perfectly competitive market are:

- Price-taking behavior: In a perfectly competitive market, individual firms are price takers,
which means they have no control over the market price. They must accept the prevailing
market price as given and adjust their quantity of output accordingly. The firm has no
market power and cannot influence the market price through its own actions.

- Free entry and exit: In a perfectly competitive market, there are no barriers to entry or
exit for firms. New firms can enter the market easily if they see the potential for profits,
and existing firms can exit the market if they are incurring losses. This freedom of entry
and exit ensures that there is no long-term economic profit for firms in the long run. It
also promotes competition as new firms can enter to increase supply and potentially drive
prices down, while unprofitable firms can exit to reduce supply and potentially drive
prices up.

QUESTION 4

Alpha Corporation Bhd, which produces electrical appliances, has estimated its production
function as follows:

Q = 2K1.6 L 1.2
Where Q= rate of output
K = capital input
L= labour input
Input prices are RM10 for labour. The firm is currently using 20 units of labour and 40 units of
machines.

a) Calculate the marginal product of labour and marginal product of capital at the given input
rates. (4marks)
Marginal product of capital: = 40*RM10=400
Marginal product of labour: = 20*RM10=200.

b) What is the equation for the expansion path? Calculate the total cost of production.
(4marks)
The equation for the expansion path is Q = 2K + L
The total cost of production will be calculated as follows: TC = RM10 + (2K+L) =
RM12.50.
This means that the cost of producing an additional unit of output will be RS 12.50,
which is equivalent to the wage costs and other costs.

c) Calculate the efficient input mix based on the total cost calculated in (b). (6marks)
Q = 2K * 20 + 40 = 80units
Therefore, the efficient input mix is 80 units of labour and 0 units of machines.
Hence, the expansion path for Alpha Corporation Bhd. is to increase its capital
input by 20 units and use this to produce an additional 40 units of output. The
total cost of production will be RM120.00. Thus, the firm is able to produce goods
at a lower cost by using more labour than machines.

d) Using the isoquant-isocost diagram show the efficient mix. (label your diagram). (4marks)
e) Determine the RTS of the production function above & interpret it. (2 marks)
Return to scale = RTS = (K * L) / (Q*M)
RTS = ((80*0.8) / (120*1.2)) = 0.6
Therefore, the return to scale of the production function is 0.6 and this indicates that for
every additional unit of output, the firm can produce 6 units of additional profit.