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ASSIGNMENT
JANUARY 2018 SEMESTER

SUBJECT CODE : MEC 604

SUBJECT TITLE : MANAGERIAL ECONOMICS

LEVEL : MASTER DEGREE

STUDENT’S NAME : Ahmed Hassan Hajji Ahmed

MATRIC NO. : M60101170069

PROGRAMME : MBA

ACADEMIC FACILITATOR : ABDIAZIZ AHMED IBRAHIM

LEARNING CENTRE : MOGADISHU UNIVERISTY

INSTRUCTIONS TO STUDENTS

1) This assignment consists of Two(2)Parts. Answer ALL questions.

2) Plagiarism in all forms is forbidden. Students who submit plagiarised assignment will be
penalised.
3) This assignment carries a 60% weightage toward final grade.
4) The submission date for this assignment is BEFORE OR 24 April 2018.
5) Please submit your assignment answer via pgraduate@mu.edu.so.

THERE ARE FOUR (4) PAGES OF QUESTIONS, EXCLUDING THIS PAGE

DECLARATION BY STUDENT

I certify that this assignment is my own work and is in my own words. All sources have been
acknowledged and the content has not been previously submitted for assessment to Asia e University or
elsewhere. I also confirm that I have kept a copy of this assignment.

Signed: _____________________________
 INSTRUCTION: Answer ALL questions given.
PART A: (70 marks)

QUESTION 1
MsRozina is planning to do shopping at Kuala Lumpur or Klang (40-50 km away). The relevant
data is as follows-
Basket of goods Rozina wish to buy– cost in Kuala Lumpur RM 400
Basket of goods Rozina wish to buy – cost in Klang RM 350
Cost of transport to Kuala Lumpur RM 20
Cost of transport to Klang RM 50
Time to Kuala Lumpur 2 Hours
Time to Klang5 Hours
Value of Rozina’stimein other pursuits RM 20 per hour

Please compute the financial and economic cost of shopping by Ms. Rozina.
Considering the economic costs, which is a more economical place for shopping – Klang or Kuala
Lumpur.
(Note: Above data is just an example)
[10 marks]

Answer 1.

For manual computation, Ms. Rozina will incur the following costs for doing shopping

Kuala Lumpur Klang

Description Cost Description Cost

RM 400
cost in Kuala Lumpur cost in Klang RM 350

RM 20 Cost of transport to
Cost of transport to Kuala Lumpur Klang RM 50

Time to Kuala Lumpur 2 Hours* RM RM 40 Time to Klang 5

20 per hour Hours * RM 20 per RM 100
hour

Total Kuala Lumpur RM 460 Total Klang RM 500

ASSIGNMENT_ MEC 604_ MANAGERIAL ECONOMICS_2018 Page 1

Financial costs of Kuala Lumpur = RM 460

Financial costs of Klang = RM 500

Economic cost = Financial cost + Opportunity cost

= 460+500 = RM 960

QUESTION 2
A firm has the following revenue and cost functions.
TR = 30 Q – Q2
1 2
TC = Q +60 Q + 30
2
Determine the quantity level at which the firm maximizes its total profit.
(Hint: use marginal revenue = marginal cost rule)
[10 Marks]
Answer 2

Givens

TR = 30 Q – Q2
1 2
TC = Q +60 Q + 30
2
MR = MC

∆ tc 1 2
MC= = × Q+60
∆Q 2 1

∆ tr
MR = =30−2Q
∆Q

1 2
30−2Q= × Q+60=30−2 Q=Q+6 0
2 1

2 Q+ Q=30-603 Q=−30∴ Q=−10

The quantity level at which the firm maximizes its total profit is -10.

ASSIGNMENT_ MEC 604_ MANAGERIAL ECONOMICS_2018 Page 2

QUESTION 3

Explain the term price elasticity of demand? Howis it measured?If the price elasticity is -3 and
RM 300 isthe marginal cost of product X, what should be the optimal sale price?
(Hint: apply the mark-up rule)
[10 Marks]
Answer 3

Price elasticity of demand is an economic measure of the change in the quantity demanded or
purchased of a product in relation to its price change. Expressed mathematically, i
Price elasticity of demand (PED) measures the responsiveness of percentage change in the
quantity demanded of a good with respect to a percentage change in the price of a good. It

is measured by the formula: %change in quantity demanded/ % change in price.

Givens:

Price Elasticity = -3

Marginal Cost (MC) = 300

Optimal sale price, P = ?

We solve the problem by using this formula:

( 1ε )=MC
P 1+

Let us substitute

1 −2 −2 3 2 3
(
P 1+
−3 )
=300P
−3 ( )
=300P
−3 ( )
=300 × P=300 ×
2 3 2
P = 450

ASSIGNMENT_ MEC 604_ MANAGERIAL ECONOMICS_2018 Page 3

QUESTION 4

What is meant by price discrimination? What are the conditions to make price
discrimination effective? Discuss your answers with examples from the Airline Industry.

[10 Marks]
Answer 4

Price discrimination occurs when company selling identical products in two or more markets
charges different prices to its customers. The major element in price discrimination is that the
products must be identical which means the cost of producing and delivering must be same. If it
is not so, there is no price discrimination. In other words, price discrimination means products
with identical costs are sold in different markets at different prices [ CITATION Kea13 \l
1033 ].

The practice of price discrimination is not rare event; it is a familiar practice among the
business firms. Companies believe that price discrimination can enhance profits, so they are
involved in this practice. Consumers are different in their socio-economic situations, so different
pricing strategies may be highly recommended practice. On the price discrimination, in the
consumers’ perspective those who are in the lower-price market may take advantage compared
to the situation where uniform price is conducted. On the other side; consumers in the higher-
price market are at a disadvantage [ CITATION Kea13 \l 1033 ] . Examples for price
discrimination are found in many industries. In the Airline industry, an Adult and Child are
charged different prices for tickets.

Price discrimination to become effective, it must fulfill conditions necessary for market
arrangements. first, The two or more markets in which the product is sold must be capable of
being separated. Specifically, this includes the requirement that there can be no transfer or
resale of the product (or service) from one market to the other. That is, there is no leakage
among the markets[ CITATION Kea13 \l 1033 ]. Second, the demand curves in the segmented
markets must have different elasticities at given prices. Without this condition, price
discrimination would not be in the firm’s best interest [ CITATION Kea13 \l 1033 ].

Price discrimination has different degrees; economists identify three degrees of discrimination.
First degree discrimination is the most profitable for the seller, but is used infrequently. Second
degree discrimination involves differential prices charged by blocks of services. Third degree

ASSIGNMENT_ MEC 604_ MANAGERIAL ECONOMICS_2018 Page 4

discrimination, which is not profitable, is the most commonly observed in the
markets[ CITATION Kea13 \l 1033 ].

QUESTION 5

Write short notes on:

a. Law of diminishing returns and the short-run cost curve
b. Economies of Scale and the long run cost curve
c. New Economies of Globalization [ 10 marks]

Answer 5

a) Law of diminishing returns and the short-run cost curve: The law of diminishing returns states
that additional variable units of input combined with fixed input at some point will cause
additional output starts to diminish[ CITATION Kea13 \l 1033 ]. In other words, as units of
input are added resulting additions to output will eventually begin to decrease [ CITATION
Sam12 \l 1033 ]. In the short run, some of the inputs of the firm are fixed (etc. capital), so the
firm has the choice to select the variable inputs to minimize the cost of producing a given
amount of output. The shape of the average variable cost curve is determined by increasing and
diminishing marginal returns to the variable input[ CITATION Sam12 \l 1033 ].

b) Economies of scope is an economic concept that the unit cost to produce a product will
decline as the variety of products increases. That is, the more different-but-similar goods you
produce, the lower the total cost to produce each one

Economies of scope are cost advantages that result when firms provide a variety of products
rather than specializing in the production or delivery of a single product or service. Economies
of scope also exist if a firm can produce a given level of output of each product line more cheaply
than a combination of separate firms, each producing a single product at the given output level.
Economies of scope can arise from the sharing or joint utilization of inputs and lead to
reductions in unit costs. [ CITATION Kea13 \l 1033 ].

c) New economies of globalization: growing cross border trade & investements, flow of the
capital in international level and advancements in the technology made the economies in the
world interdependent to each other and produced what we call economics of globalization
(Shangquan, 2000; Frankel, 2000). The globalization of the economy implies that managers to
be aware of how the world of economy is changing, and that they are involved in global market

ASSIGNMENT_ MEC 604_ MANAGERIAL ECONOMICS_2018 Page 5

rather than local market. One of the risks associated with the economic globalization is that
your company may become a victim of external factors such as economic conditions etc. since
the economy is in global the external factors which can affect the business are large in numbers
(Shangquan, 2000; Frankel, 2000)..

QUESTION 6

1) Complete the following table

Quanti Total Fixed Variable Average Average Average Marginal
ty cost cost cost fixed cost variable total cost cost
cost

0 $ 3.00 $3 $0.00 0 0 0 0
1 $ 3.30 $3 $0.30 $3.00 $0.30 $ 3.30 $0.30
2 $ 3.80 $3 $0.80 $1.50 $0.40 $ 1.90 $0.50
3 $ 4.50 $3 $1.50 $1.00 $0.50 $ 1.50 $0.70
4 $ 5.40 $3 $2.40 $0.75 $0.60 $ 1.35 $0.90
5 $ 6.50 $3 $3.50 $0.60 $0.70 $ 1.30 $1.10
6 $ 7.80 $3 $4.80 $0.50 $0.80 $ 1.30 $1.30
7 $ 9.30 $3 $6.30 $0.43 $0.90 $ 1.33 $1.50
8 $ 11.00 $3 $8.00 $0.38 $1.00 $ 1.38 $1.70
9 $ 12.90 $3 $9.90 $0.33 $1.10 $ 1.43 $1.90
10 $ 15.00 $3 $12.00 $0.30 $1.20 $ 1.50 $2.10

2) Briefly explain how firms compete/set price under-

a. Perfect competition

Perfect competition exists in the market where there is very large number of
relatively small firms which produce identical products. In the perfect
competition there are no barriers to entry or exit, you can enter in every time
and you can exit. Firms in the perfect competition market are price takers; it is
set by market forces (demand and supply), competition in the price is not
possible (Keat, Young, & Erfle, 2013; Samuelson & Marks, 2012). Markets of
agricultural products, electronic stores, and small retailers can be referred to as
perfect competition markets.

In the perfect competition market firms are price takers not price makers,
because they have no control over the market. The price is set by the market

ASSIGNMENT_ MEC 604_ MANAGERIAL ECONOMICS_2018 Page 6

 forces (demand and supply) because the market is competitive no firm has the
power to set the price.

b. Oligopoly

Oligopoly is the market dominated by small number of large firms. They sell
products which are identical or differentiated. There are barriers to enter and
exit. The market power in the oligopoly market comes from sheer size and the
market dominance of the firm (Keat, Young, & Erfle, 2013; Samuelson & Marks,
2012). Telecommunication industry, Electricity industry and Cable TV industry
are examples of Oligopoly market.

Firms in the oligopoly market compete against each other by differentiating their
products, dominating market share; but when it comes to the price they set by
explicitly considering the reaction made by the competitors to the price set. This
method of price setting is called Mutual interdependence [ CITATION Kea13 \l 1033 ].

QUESTION 3
What determines the foreign exchange rate? Discuss critical factors which may have
caused the recent depreciation of the Malaysian Ringgit. (10 marks)

Answer 3

Foreign exchange rate is the unit price of foreign currency in terms of domestic
currency[ CITATION DrM06 \l 1033 ]. The exchange rate is the rate exchanged one
currency to another, when it comes to the foreign exchange rate it is the price of foreign
currency in terms of domestic. There are two situations which the local the currency.
Determinants of the foreign exchange rate are inflation rates, interest rates, money
supply & demand, government debt and the political stability.

As a result of the Asian crisis in 1997, the value of the Malaysian Riggit become priced
RM4.72 per US Dollar. The policy makers in the Malaysia intervened the scenario; they
pegged the Malaysian riggit RM3.8 Per US Dollar[ CITATION Qua17 \l 1033 ]. However,
the currency appreciated in 2012 when the value of Malaysian Ringitt become RM3.0

ASSIGNMENT_ MEC 604_ MANAGERIAL ECONOMICS_2018 Page 7

per US Dollar, but in October 2015 the Malaysian Ringitt depreciated to its lowest level
since the Asian crisis 1997, the value of the Ringitt become RM4.26 Per US
Dollar[ CITATION Qua17 \l 1033 ].

The depreciation of Malaysian Ringitt has been the topic of research, results of the
studies identified determinants of Malaysian Ringitt exchange rate. For example,
Quadrya, Muhammad, & Yusof (2017) found that falls in crude oil prices and increased
supply of British Pound are the causes of Malaysian Ringitt depreciation.

ASSIGNMENT_ MEC 604_ MANAGERIAL ECONOMICS_2018 Page 8

QUESTION 7
In last few years, the price of oil has shown substantial ups and downs.
Explain the possible reasons for this phenomenon by using economic concepts/tools.
(Hint: Search through the material on oil pricing in the global market) [10 marks]
Answer/=:

Supply and Demand Impact

As with any commodity, stock or bond, the laws of supply and demand cause oil prices
to change. When supply exceeds demand, prices fall and the inverse is also true when
demand outpaces supply. The 2014 fall in oil prices can be attributed to a lower demand
for oil in Europe and China, coupled with a steady supply of oil from OPEC. The excess
supply of oil caused oil prices to fall sharply. Oil prices have fluctuated since that time,
and are valued at approximately $54 per barrel as of September 2019.
While supply and demand impact oil prices, it is actually oil futures that set the price of
oil. A futures contract for oil is a binding agreement that gives a buyer the right to buy a
barrel of oil at a set price in the future. As spelled out in the contract, the buyer and
seller of the oil are required to complete the transaction on the specific date.
Natural Disasters and Politics Weigh
Natural disasters are another factor that can cause oil prices to fluctuate. For example,
when Hurricane Katrina struck the southern U.S. in 2005, affecting 19% of the U.S. oil
supply, it caused the price per barrel of oil to rise by $3. In May 2011, the flooding of the
Mississippi River also led to oil price fluctuation.
From a global perspective, political instability in the Middle East causes oil prices to
fluctuate, as the region accounts for the lion’s share of the worldwide oil supply. For
example, in July 2008 the price of a barrel of oil reached $136 due to the unrest and
consumer fear about the wars in both Afghanistan and Iraq.
Production Costs, Storage Have Impact
Production costs can cause oil prices to rise or fall as well. While oil in the Middle East is
relatively cheap to extract, oil in Canada in Alberta’s oil sands is more costly. Once the
supply of cheap oil is exhausted, the price could conceivably rise if the only remaining
oil is in the tar sands.
U.S. production also directly affects the price of oil. With so much oversupply in the
industry, a decline in production decreases overall supply and increases prices. The U.S.

ASSIGNMENT_ MEC 604_ MANAGERIAL ECONOMICS_2018 Page 9

has an average daily production level of 9 million barrels of oil, and that average
production, while volatile, has been trending downward. Consistent weekly drops put
upward pressure on oil prices as a result.
There are also ongoing concerns that oil storage is running low, which impacts the level
of investments moving into the oil industry. Oil diverted into storage has grown
exponentially, and key hubs have seen their storage tanks filling up rather quickly. More
than 77% of storage capacity is being used in Cushing, Okla., one of these hubs.
However, slowing production and pipeline network improvements will reduce the
chance that oil storage will reach its limits, which helps investors shed their fears of too
much supply and a rise in oil prices.
Interest Rate Impact
While views are mixed, the reality is that oil prices and interest rates have
some correlation between their movements, but are not correlated exclusively. In truth,
many factors affect the direction of both interest rates and oil prices. Sometimes those
factors are related, sometimes they affect each other, and sometimes there's no rhyme
or reason to what happens.
One of the basic theories stipulates that increasing interest rates raise consumers' and
manufacturers' costs, which reduces the amount of time and money people spend
driving. Fewer people on the road translates to less demand for oil, which can cause oil
prices to drop. In this instance, we'd call this an inverse correlation.
By this same theory, when interest rates drop, consumers and companies are able to
borrow and spend money more freely, which drives up demand for oil. The greater the
usage of oil, which has OPEC-imposed limits on production amounts, the more
consumers bid up the price.
Another economic theory proposes that rising or high-interest rates help strengthen the
dollar against other countries' currencies. When the dollar is strong, American oil
companies can buy more oil with every U.S. dollar spent, ultimately passing the savings
on to consumers. Likewise, when the value of the dollar is low against foreign
currencies, the relative strength of U.S. dollars means buying less oil than before. This,
of course, can contribute to oil becoming costlier to the U.S., which consumes
almost 25% of the world's oil.
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REFERENCES

Frankel, J. (2000). Globalization of the Economy.

Keat, P. G., Young, P. K., & Erfle, S. E. (2013). Managerial Economics: economic tools for
today’s Decision Makers. Pearson Education.

Mankiw, N. G. (2011). Principles of Economics . South-Western Cengage Learning .

Quadrya, M. O., Muhammad, A., & Yusof, Y. (2017). On the Malaysian Ringitt exchange
rate determination and recent depreciation . International Journal of Economics,
Management and Accounting , 1-26.

Samuelson, W. F., & Marks, S. G. (2012). Managerial Economics. John Willey & Sons.

Shangquan, G. (2000). Economic Globalization: Trends, Risks and Risk Prevention.

Suthar, D. M. (2006). Determinants of Exchange Rate in India .

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