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BMME5103 September 2010Answer Scheme Assignment

Question 1:

(ai)

Q1 = 150 P1 = RM5.18 Q2 = 200 P2 = RM4.38

(ii) A 1 percent increase in price will result in a 1.71 percent decrease in demand forcharcoal.

(b)

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Question 2:

(ai)

(aii)

(bi) ED = - 1.33 (independent of other variables)

(bii) Since EY = 2.0, a 3% increase in disposable income would yield an approximate

or a 6% increase in demand.

(biii) Since EA = 0.50, a 5% increase in advertising expenditures would yield anapproximate

or a 2.5% increase in demand

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Question 3:

(a)

(b)

(c)

(d)

L = 4 (L = 0 is not a maximum, since d2 (TPL)/dL2 > 0)

(e)

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(f)

(g) Stage I 0-3 APL increasing

Stage II 3-4 MPL > 0

Stage III 4- MPL 0

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Question 4:

(a)

(b)

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Question 5:

(a) (i) (ii)Output Total Cost Marginal Cost Average Total(Units) (RM) (RM/unit) Cost (RM/unit)

0 50 -- --10 120 7 12.

20 170 5 8.5030 210 4 7.40 260 5 6.5050 330 7 6.6060 430 10 7.17

(b) P = MR = RM7Profit-maximizing output level (Q*) occurs where MR = MCMC = RM7 at Q1 = 10 and Q2 = 50 units.At Q1 = 10 = (P Q) - TC = 7(10) - 100 = -RM30At Q2 = 50 = 7 (50) - 310 = RM40Therefore Q* = Q2 = 50 units

(c) Industry is not in long-run equilibrium since MC = MR = P > ATC (i.e., above"normal" profits are being earned by one (or more) firms in the industry).

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Question 6:

(a) (i)

(ii)

(iii)

(iv)

(b) (i)

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Question 7a:

i) These characteristics provide reliable indication of a patients ability to pay. Sincethey are quite fixed, a doctor can effectively use these as bases for directsegment discrimination.

ii) A potential difficulty for price discrimination arises if customers willing to pay ahigh price can buy through those offered a low price. In this case, such arbitrage

is not possible as medical treatment cannot be transferred.

iii) Since treatment is personal, the doctor can conveniently collect informationabout each individual customer (facilitating complete price discrimination).

Question 7b:

On an annual basis, we have

Capital opportunity costs: RM2,400

Upgrade costs: 4,000

Annual costs to statistician RM6,400

i) If the statistician receives RM7,000/year for the work then her economic profit is

RM600.

ii) After fixed costs are sunk, the statistician must receive RM4,000/year to justify

doing the upgrade. Knowing the statistician wont leave, the software company

can renegotiate or hold up the statistician for his sunk cost investment, and

save RM3,000/year. This is called opportunism or post-investment hold up.

iii) The company can pay for the training cost up front. But then it is vulnerable to

post investment hold up. After the statistician can refuse to do the work for

anything less than RM6,400? They must find a way to commit to not holding

each other up.

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