BHMH2002 Introduction to Economics

Individual Assignment II (S2, 2021)

Suggested Solution
Question 1
(a)

Quantity Total Cost Marginal Cost Average Total

(liters per month) ($) ($) Cost ($)
0 50,000 N.A. N.A.
1,000 102,000 52 102
2,000 138,000 36 69
3,000 278,000 140 93
4,000 438,000 160 110
5,000 625,000 187 125

(b) As a price-taker, Sweetie Juice should sell the watermelon juice at the equilibrium price,
which is $140 per liter. It is the price at which the quantity demanded equals the quantity
supplied at 1,200,000 liters per month.

For profit maximization, Sweetie Juice should produce up to the quantity at which
marginal revenue equals marginal cost at $140. Sweetie Juice should produce at the
profit-maximizing quantity of 3,000 liters of watermelon juice per month. The Economic
profit is $142,000 / $141,000 [($140x3000 - $278,000) / [($140-$93) X 3000].

(c)
(d) As a recent medical research reported that watermelon juice is high in carbohydrates and
can cause blood sugar spikes, there is an unfavorable change in consumer preference
towards watermelon juice / there is a decrease in the number of buyers of watermelon
juice. Demand for watermelon juice decreases and its demand curve shifts leftward.
Equilibrium price and equilibrium quantity of watermelon juice decreases.
Marginal revenue decreases as equilibrium price of watermelon juice decreases. The
profit maximizing quantity reduces to q2 at which the new marginal revenue equals
marginal cost at the last unit. As the average total cost is higher than the new price,
Sweetie juice records an economic loss.

Question 2
(a) (i) A monopoly exists when there is only one producer in the market. There is no close
substitutes for the anti-cancer drug, as the cost of research and development is high. It
enables one firm to meet the entire market demand at lower price.
(ii)

Quantity
Marginal Cost Marginal Revenue
(Number of bottle per ($) ($)
month)
100 1000 650
200 200 550
300 150 450
400 350 350
500 400 250

(iii)
Healthy Ltd.

$
MC

ATC

500
Profit
450

350

MR D
Q (Output)
400
(b) (i) The annual accounting profit of the snack business
= Revenue – Explicit Costs
= $790,000 (Revenue) – $380,000 (Purchase cost) - ($19,000 X 12) (Rent)
= $790,000 - $608,000
= $182,000

(ii) Ashley has to consider her wages forgone and the economic profit of the proposed
business. In consideration of the economic depreciation of the four sets of computer
[$14,000 = ($7,000 X (1-50%) X 4], Ashley should start her snack business if her annual
wages forgone is $168,000 ($182,000 - $14,000). If so, she could enjoy a zero economic
profit that all opportunity costs of using the resources could be covered. / In
consideration of the economic depreciation of the four sets of computer [$14,000 =
($7,000 X (1-50%) X 4], Ashley should start her snack business if her annual wages forgone
is less than $168,000 ($182,000 - $14,000). If so, she could enjoy a positive economic
profit that all opportunity costs of using the resources could be covered and she could
earn a higher rate of return than normal.