CONFIDENTIAL 1 BA/FEB 2022/ECO539

FACULTY OF BUSINESS AND MANAGEMENT

FINAL ASSESSMENT

COURSE : INTERMEDIATE MICROECONOMICS/

MICROECONOMICS ANALYSIS
COURSE CODE : ECO539
EXAMINATION : FEBRUARY 2022
TIME : 3 HOURS
PLATFORM :

INSTRUCTIONS TO CANDIDATES

1. This question paper consists of four (4) questions.

2. Answer ALL questions and show ALL of the calculations, where applicable.

3. Answer ALL questions in English.

4. Submit your hand-written answers in PDF or JPEG format.

DO NOT TURN THIS PAGE UNTIL YOU ARE TOLD TO DO SO

This examination paper consists of 4 printed pages

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each question should cover 25 marks

QUESTION 1

Given the following equations for good A:

Demand: P = 460 – 10QD and Supply: P = 100 + 8QS

a) i. Determine the market price and quantity for good A and show the equilibrium
condition for good A in a fully labeled diagram.

(5 marks)

ii. Suppose the government imposes a unit tax on sales of good A and the new
supply curve becomes Q1 = 0.125P - 19.25. Calculate the new price and quantity
for good A. Show the new supply curve and new equilibrium in the same diagram
(i) above. Calculate the total tax collected by the government, the new amount of
producer surplus and new amount of consumer surplus after tax is imposed.

(8 marks)

b) Using a single diagram, illustrate and explain how subnormal profit of a perfectly
competitive firm can change to supernormal profit, when the market price increases in
the short-run (assume its’ costs remain unchanged).

(12 marks)

QUESTION 2

a) Briefly describe why the long-run average cost curve is ‘U-shaped’.

(5 marks)

b) Using diagrams, explain the relationships between total production, average production
of labour and marginal production of labour; as given by the theory of short-run
production.

(8 marks)

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c) The diagram below shows four (4) isoquants (IQ) for four different levels of production
and OX is the expansion path. C1, C2, C3 and C4 are the isocost lines for those four (4)
productions levels. The price of labour is RM50 per person and price of capital is RM20
per hour.

Capital, K (unit)

C3

C2
X

C1
38
30
IQ3 = 60
20
IQ2 = 40

IQ1 = 20

0 20 30 38 Labour, L (person)

i) Identify the type of return to scale at all levels of production experienced by this
firm when expanding its production from 20 units to 40 units, and from 40 units to
60 units.

(6 marks)

ii) Calculate the average cost incurred at those three (3) levels of production.
Describe the relationship between the type of return to scale experienced by this
firm and its’ average cost.

(6 marks)

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QUESTION 3

a) Explain why the demand curve for a monopolistically competitive firm slope downwards.

(10 marks)

b) A monopolist faces a demand curve P = 210 - 5Q and initially its’ marginal cost is
constant at 20 (MC = 20).

i) Calculate the profit- maximizing monopoly price and quantity.

(5 marks)

ii) Suppose the average cost at the equilibrium level for this firm is RM 8. Compute
the monopolist total revenue and total cost at the optimal price. Explain the
economic profit for the monopolist market.

(5 marks)

iii) If the firm’s marginal cost increases to RM30 (MC = 30); verify that the firm’s total
revenue goes down.

(5 marks)

QUESTION 4

a) Define public good. State and explain two categories of public good. (5 marks)

b) Briefly explain positive and negative externalities. (5 marks)

c) Briefly discuss TWO (2) characteristics of oligopoly market structure. (5 marks)

d) Using a diagram, illustrate and explain kinked demand curve model of oligopoly.

(10 marks)

END OF QUESTION PAPER

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