RMIT, Vietnam ECON 1267 Dept.

Econ and Fin

Semester 2, 2020 Quantitative Analysis QA Team

Assessment 3 (Individual case analysis (40%))

Due: Week 12, Thursday Sept 17, 2020 @ 5:00 pm

Course Learning Outcomes (CLO):

• Critically analyse and synthesise data to formulate effective economic and business deci-
sions.

• Apply technical and analytical knowledge to provide specialist advice to people from busi-
ness disciplines in diverse business contexts.

• Apply reasoned judgements to solve a variety of statistical and econometric problems in

business disciplines such as Accounting, Economics, Finance and Marketing, with reference
to business, government policy and global perspectives.

Your submission:

• requires worked solutions be typed in a Word file

• submitted to Turn-it-in for similarity assessment

• cannot be handwritten nor photos of worked solutions -these will not be accepted
(see Mathpix.com for digitisation software of handwritten text)

• should include

(i) your name

(ii) your student ID
(iii) your lecturer’s name

1
1. [15 points] Vietnam-based company VietBook specialises in digital book printing for academic and
educational publishers across Europe. Every year, its automated workflow produces several hundred
thousand short-run and single-copy books for customers in the Netherlands, Belgium and Germany.
Technology has revolutionised printing for the firm, and given them a huge boost in efficiency. With
this increased efficiency and consistency, VietBook can print several million book pages each week.

In the future, VietBook is considering a labour-less workforce but knows that technology must in-
crease so that the same level of productivity can be maintained. Currently, VietBook has the following
production function

Q(K, L) = A [bK α + (1 − b)Lα ]1/α (1)

Where

(i) A denotes firm’s technology (constant)

(ii) b is a constant (0 < b < 1)

(iii) K and L denote capital and labour, respectively

(a) What is the marginal rate of technical substitution?

Note:

• MRTS: M PK /M PL
• M PK is the marginal products of capital
• M PL are the marginal products of labour

(b) Show that the marginal products satisfy the following relationship:

∂Q ∂Q
K +L = Q.
∂K ∂L

(c) Provide an interpretation of the production function equation.

2
2. [15 points] Gamaleya Institute in Moscow claims to be first pharmaceutical company to have
created a vaccine for Covid-19. Accordingly, the firm plans to sell its vaccine in two different markets:
domestic and foreign. The corresponding demand functions are

P1 + 2Q1 = 100 (1)

2P2 + Q2 = 2a (2)

The total cost function is

TC = 500 + 10Q (3)

where

• Equation 1 is the domestic market

• Equation 2 is the foreign market

• Q = Q1 + Q2

• a is a positive constant.

(a) Determine, in terms of a, the prices needed to maximise profit

• with price discrimination

• without price discrimination.

(b) Show that the profit with price discrimination is always greater than the profit without discrimi-
nation, irrespective of the value of a.

3
3. [10 points] It is known that a typical Utopian citizen consumes only two goods: tobacco and food.
Extensive time-series research on the Utopian consumer has yielded the following utility function:
√
U (x1 , x2 ) = x1 x2 ,

Where:

• x1 denotes the monthly consumption of tobacco

• x2 denotes the monthly consumption of food

• unit prices of these goods are $2 for x1 and $4 x2

• the total monthly expenditure on these goods is $300.

(a) Show that if the budgetary constraint is satisfied, the maximum value of U is 500 and state the
corresponding values of x1 and x2 .

4
4. [5 points] RMIT is considering the cost of campus expansion to Danang. Campus costs are com-
posed of three different items: land, construction, and outfitting for educational purposes. Further
details on each component of the campus follows:

(i) Land. Assume cost to be $10, 000, 000

(ii) Construction: Assume cost to be $250, 000 for each floor

(iii) Education outfitting: Assume costs of ten thousand x dollars per floor.

(a) In the construction of the campus, calculate how high (in number of floors) should the campus
be built in order to minimise the average cost of each floor

(b) Confirm the answer given has minimised the costs

5
5. [20 points] As a RMIT Eco/Finance major (in addition to being a shrewd investor), you wish to
invest in two mutual funds so as to maximise your expected earnings while limiting the variance of
your earnings to a given value s2 .

• The expected yield rates of Mutual Funds 1 and 2 are r1 and r2 , respectively

• The variance of earnings for the portfolio (x1 , x2 ) is σ 2 x21 + ρx1 x2 + σ 2 x22 .

Thus the problem is

Max r1 x1 + r2 x2 ,
{x1 ,x2 }

such that σ 2 x21 + ρx1 x2 + σ 2 x22 = s2 ,

(a) Use the method of Lagrange multipliers to compute the optimal investments x1 and x2 in Mutual
Funds 1 and 2 respectively. Your expressions for x1 and x2 should not contain the Lagrange
multiplier λ.

6
6. [15 points] A Vietnamese coffee producer is reconsidering his/her growing operation. With your
knowledge on consumer and producer surplus, you have been asked to evaluate their operations.
Accordingly, you have been given the following

Ps (Q) = 10 + Q2 (1)

Pd (Q) = 210 − Q2 (2)

Where:

• Ps (Q) is the supply price

• Pd (Q) is there demand price

(a) Find the consumer surplus, producer surplus, and total social gain at market equilibrium.

(b) If the coffee producers can form a cartel and restrict the available quantity to 5, selling at the
demand price for 5 (for a price of 185), what are the consumer surplus, producer surplus, and
total social gain?

(c) Interpret the value of total social gain calculated from (a) and (b).

7
7. [5 points] Prior to Covid-19, the aviation sector in Vietnam was undergoing a prolonged boom that
opened up the country to rapidly growing tourism sector, which put strains on airlines and airports.
With the many recent changes in the domestic aviation industry, Vietjet is reconsidering its business
model and accordingly has done some market assessment.

Vietjet finds the demand q, in thousands, for their economy seats to be

q = 400 − p2 (1)

Where p is the price in dollars.

(a) Interpret the elasticity of demand when the price is $5

(b) Find the price that will maximise revenue.

8
8. [15 points] Danang city recently had a second outbreak of Covid-19. With a population of 1.1
million people, assume the city decided not to introduce any measure to contain the spread of the
virus.

Assume the following model describes the number of infected residents y at time t.

dy
= ay(K − y) (1)
dt
Where the following are constraints:

1. α is positive

2. K is positive

Given the nature of the virus, assume that when 80 percent of the city’s population is infected, herd
immunity has been achieved and the virus no longer spreads.

At time t = 0, there are 6 people infected in the city, and 3,000 people infected after 30 days.

(a) Solve the differential equation to determine an expression for y(t)

(b) Derive the number of days before fifty percent of the population is infected using the above
model

(c) Suggest how your answer might differ if herd immunity is not achieved

- End of the Assessment -