UNIVERSITY OF MALAYA EXAMINATION FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION ACADEMIC SESSION 2012/2013: SEMESTER 2 CFGB6101: ECONOMICS FOR MANAGERS JUNE 2013 TIME: 3 HOURS INSTRUCTIONS TO CANDIDATES: ANSWER FOUR (4) QUESTIONS ONLY — TWO (2) FROM SECTION A AND TWO (2) FROM SECTION B. Diagramiillustration must be drawn clearly. (This question paper consists of 6 questions on 10 printed pages)CFGB6101 SECTION A: ANSWER TWO (2) QUESTIONS ONLY, Question 4 Prices of seafood and greens soar KUALA LUMPUR: The monsoon season has played havoe with retailers as vegetable and seafood prices escalated due fo a drastic fall in supply. Federation of Vegetable Sellers Associations Malaysia president Datuk Soo Cheng Kee said the prices of almost all vegetables had increased by between 30 and 50 per cent. Federation of Vegetable Growers Association chairman Tan So Tiok said prices of leafy vegetables, such as bayam (spinach), kangkung (water spinach), sawi (mustard leaves), and kailan (chinese broccoll) had spiked due fo the weather and massive floods in the east coast. Kuala Lumpur Vegetable Wholesalers Association president Chong Tek Keong said retailers have not faced such an acute shortage of vegetables in the vast 30 years. "If the rain persists, there will ikely be a further rise during the Chinase New Year. Farmers cannot ensure a steady supply due to the unpredictable weather,” he told the New Straits Times yesterday. National Fishermen's Association general manager Norizaman Ghazali, however, said! there was only a slight increase in seafood prices. "Normally, during the monsoon season, the prices of seafood will increase as fishermen, especially in Kelantan, Terengganu and Pahang, do not go aut ta fish." A check by the New Straits Times at several wet markets in the Klang Valley revealed that vegetables and seafood prices had drastically increased. The prices of leafy vegetables shot up as high as RM6 fo RM7 per kg from RM2.50 at some places like the Taman Tun Dr Ismail wel market. Retailers at the TTDI wet market were selling spinach, mustard leaves and water spinach for RM6 per kg, while coriander at RM25 per kilo. Coriander used to be available at RM8 per kg. Vegetable seller Tan Kai Hiong, 39, said the erratic weather has made it difficult for them to get their vegetable supply. “The prices have been increasing since October. If the weather is good, smell farmers will be able to yield an average of 100 kg of harvest a month, During this rainy season, they can only produce between 40 and 50 kg." Seafood seller Ng Kel Penn, 42, said the price of fishes, prawns, crabs and squids had gone up by 15 per cent. 2110CFGB6101 Chow Kit wet market vegetable sellers, Lau Zui Le, 62, and Jeff Kweh Chun Sian, 26, said the price fluctuated according to demand and quality. "The vegetables we used to sell for RM2 now cost RM4.” A vegetable seller at the Selayang wet market, who declined to be named, said ner business was not hugely affected despite the hike in vegetable prices."Consumers continue to buy vegetables, although they cost double the price now. The only difference is that they buy them in small quantities." Source: The New Straits Times, 1 Jan 2013 a. According to the article, why did vegetable prices increase? Explain using supply-and demand diagram. (4 marks) b. Calculate the are price elasticity of spinach demand assuming that the price increased from RM2.50 per Kilogram to RNG per kilogram, and the quantity dropped from 100 kilograms to 40 kilograms. (4 marks) ¢. From the last paragraph of the article, a vegetable seller claimed that her business was not hugely affected despite the hike in vegetable prices. However, she mentioned that “they cost double the price......fand] the only difference is that they buy them in small quantities". Thus, how can the seller claim that her business was not affected? What can you say about the elasticity of the vegetables sold at her store and her total revenues? Explain clearly (7 marks) d. According to the article, why did seafood price increase? Explain using a supply- and-demand diagram. (4 marks) e. It was mentioned in the article that the price of fish, prawn, crab and squid had gone up by 15 per cent. Assume that the quantity demanded for these seafood dropped by 20 percent. What can you say about the own-price elasticity of seafood? Predict what will happen to seller's total revenue as @ result of the increase in seafood price. (8 marks) (Total: 25 marks) 30CFGB6101 Question 2 a. Below is an excerpt from an article published in The Star Online on 1 March 2012: PETALING JAYA: National carrier Malaysia Airlines Bhd (MAS) posted a shocking RM2.52bil net loss for its financial year ended Dec 31, 2011 the biggest-ever loss in its corporate history led by higher expenses, despite revenue rising 2% to RM13.9biL "The company is in crisis. The accounts for 2011 recognizes provisions and escalating operational costs which, although painful, gives us a holistic snapshot of the organization.” group chief executive officer Ahmad Jauhari Yahya said at the briefing of its results yesterday. Ahmad said that group expenditure had gone up by 21% mainly due to higher fuel costs. MAS' fuel bill for 2011 swelled by 33%, or RIM1.46bi, to RMS. B5bil from Rid. 36bil a year earlier. Jet fuel prices have risen from USS95 a barrel at the end of 2010 fo US$133 at end-2011. Currently, it is hovering around the US$137-US$138 per barrel range. For 2011, MAS saw a 6% improvement in passenger revenue, while yields were up 4% to 24.7 sen per revenue passenger kilometre. But the improvement, according lo Ahmad, was insufficient to offset the rising costs, espectally fuel. “The bottonline group losses for 2017 underscore the need for MAS to adopt strong measures to stop the bleeding, and they include staff redeployment, increasing productivity and efficiency, relentless cost control and making further route review,” he said, adding that thus far the airline had implemented 9% route cuts. i, After being in the Malaysian airline industry for more than six decades, itis clear from the article that MAS is in a crisis due to increasing operational costs. Explain the three (3) factors that may be the reason MAS may be experiencing diseconomies of scale. (6 marks) ii. MAS has faced stiff competition from AirAsia since the debut of the award- winning low-cost carrier in 2001. Discuss three (3) factors behind AirAsia’s economies of scale. (6 marks) 4/10CFGB6101 b. Ozzkozz Apparel Shoppe has the following cost schedule: Quantity | Variable Cost Tolai Cost 0 0 30 1 [ 10 40 | 2 “25 55. { aU 45 75 4 70 100 5 400 130 6 135 165) i) Caloulate the average total cost, average variable cost, and marginal cost for each quantity of output. (6 marks) ii) Graph all three curves on the same diagram. (3 marks) ii) What is the relationship between the marginal cost curve and the average total cost curve? Between the marginal cost curve and the average variable cost curve? Explain, (4 marks) (Total: 25 marks) Question 3 a. Consider the market for petrol. Suppose the government imposes a price ceiling on petrol to protect consumers and that this price ceiling is binding. i) Explain what price ceiling is and why governments implement it (3 marks) ii) What is the effect of price ceiling on consumer and producer surplus? Show this graphically. ( marks) Consider the market for diamond rings. Supposing the market had an inelastic supply and elastic demand, how would the burden of a tax imposed hy the government on diamond rings be shared between consumers and producers? Use the tools of consumer surplus and producer surplus in your answers. (S marks) 5/10CFGB6101 Suppose that the market for good Y is described by the following demand and supply equations: iy iv) Qs = -700 +8P Qd = 300 - 2P. What is the equilibrium price and quantity of good Y? (3 marks) Suppose that a tax of RM3.00 is placed on buyers of good Y, resulting ina new demand curve: Qd= 300 - 2(P+3) Solve for the new equilibrium. Calculate the price received by sellers, price paid by buyers and the quantity sold. Support your answers graphically (5 marks) Tax revenue is RM3 x Q. Use your answer in part (i) to solve for tax. (2 marks) Calculate the deadweight loss caused by the RM3 tax. (2 marks) (Total: 25 marks) 6/10CFGB6101 SECTION B: ANSWER TWO (2) QUESTIONS ONLY, Question 4 a Indicate whether each of the following statements is true or false, and explain your answer, i) When a monopolist maximizes profits, the price is greater than the marginal cost of producing the output. This means that consumers are willing to pay more for additional units of the product than these additional units cost to produce. Thus the monopolist should produce and sell additional units of output. (3 marks) ii) in a monopolistically competitive market, a firm has the market power because it produces a differentiated product. This means that the firms earn positive economic profit in the long run. (3 marks) A firm sells its products in a perfectly competitive market where other fims charge a price of RM80 per unit. The firm's total cost are TC = 40 + 8Q +207 i) At what output should this firm produce in the short run? (3 marks) ii) Calculate the total profit earned by the firm? (3 marks) ili) What do you think would start to happen in the long-run? Explain, (3 marks) ‘The CEO of a major automaker overheard one of its division managers make the following statement regarding the firm’s production plans; “in order to maximize profits, it is essential that we operate at the minimum point of our average total cost curve." If you were the CEO of the automaker, would you praise or chastise the manager? Explain. (4 marks) You manage a company that competes in an industry that is comprised of five equal-sized firms, A recent industry report indicates that a tariff on foreign imports would boost industry profits by RM3G million and that it would take M5 million in expenditures on (legal) lobbying activities to induce federal government to implement such a tariff. Discuss your strategy for improving your company’s profits. Give at least 3 strategic plans. (6 marks) (Total: 25 marks) TAOCFGB6104 Question 5 a. The figure beiow illustrates the components of aggregate planned expenditure on Semosa Island. Semosa Island has no imports or exports, the people of Semosa Island pay no incomes taxes, and the price level is fixed etGO? pa 2008 clot Calculate autonomous expenditure and the marginal propensity to consume, (4 marks) ii, Whats aggregate planned expenditure when real GDP is $6 billion? (1 marks) ili, Ifreal GDP is $4 billion, what is happening to inventories? (2 marks) iv. If real GDP is $6 billion, what is happening to inventories? (2 marks) v. Explain the difference between induced consumption expenditure and autonomous consumption expenditure. Why isn't all consumption expenditure induced expenditure? (4 marks) 810CFGB6101 b, Explain whether each of the following events shifts the short-run aggregate- supply curve, the aggregate-demand curve, both, or neither. For each event that does shift a curve, draw a diagram to illustrate the effect on the economy. i. Households decide to save a larger share of their income ii. Kedah rice fields suffer a prolonged period of flood. il, Increased job opportunity overseas cause many people to leave the country (6 marks) ¢ Can any government of a democratic country maintain stable prices, full employment, and adequate economic growth over time? Explain (6 marks) (Total: 25 marks) Question 6 a. Below are some data from the land of milk and honey. Year Price of Milk Quantity of Price of Quantity of ee Milk (lite) | Honey _|_ Honey (Litre) 2006 RM1 100 RM2 50 2007 RM1 200 RM2 100 2008 RM2 4 200 RM4 100 — —_ i i) Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2006 as the base year. (6 marks) ii} Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2007 and 2008 from the preceding year. (3 marks) iil) Did economic well-being rise more in 2007 or 2008? Explain. (2 marks) iv) Why do economists use real GDP rather than nominal GDP to gauge economic well-being? (2 marks) v) Why is it desirable for a country to have a large GDP? Give 2 economic factors that would raise GDP and yet be undesirable? (4 marks) 9/10CFGB6101 b. The figure below shows the economy of Freezone. The aggregate demand curve is AD, and the short-run aggregate supply curve is SASa. Potential GDP is $200 billion, FIGURE 14.7 Problems 3 and 4 g g vs SASq a9 g SAS. 20] a 5 uo i 100 é so ° 100 200, «300-400 500 eal GOP (ilions of 2008 dello) What are the price level and real GDP? (2 marks) ii. Does Freezone have an unemployment problem or an inflation problem? Why? (2 marks) What monetary policy action should the central bank to take and what is the predicted effect of that action? (4 marks) (Total: 25 marks) END 100