BHMH 2105 Business Economics

23/24 Semester One

Individual Assignment One

Guidelines:
 Attempt all questions.
 Please handwrite your answers and it must be in ENGLISH.
 Clearly label and identify all diagrams (if any).
 Please ensure the originality of your work. Plagiarism is prohibited.
 Please review your grammar and sentence structure before submitting
your assignment. Marks will be deducted for poor English writing.
 Please use the Answer Sheets provided when you hand in your
assignment.
 Please hand in your answer script during the tutorial lesson specified.

Deadline:
On: 18 Oct 2023 (Wednesday)
Tutorial Group: A04A / A04B

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Question 1 (20 marks)

The minimum wage policy is considered as a kind of price restriction of price floor imposed
by a government to intervene the labor market. In Hong Kong, since 1 May 2011, Statutory
Minimum Wage (SMW) has come into force. With effect from 1 May 2023, the SMW rate
has been raised to $40 per hour.

The following job advertisement was posted outside a fast-food restaurant in August 2023.
It was indicating that the hourly rate for hiring part-time workers was $50 or above.

a. Based on the given information, the Hong Kong Government imposed a new legal price
of minimum wage $40 per hour in in May 2023 and a restaurant posted a job
advertisement with $50 or above hourly rate in August 2023. Do you think the Statutory
Minimum Wage (SMW) is not effective to cause a binding effect in the labor market?
Explain with a well-labelled diagram. (8 marks)
b. Assume you were a newly appointed consultant of the Labor Department of Hong Kong.
You were required to re-launch the price floor in the labor market. Use ANOTHER
well-labelled diagram to propose a new effective legal price to ensure a binding effect
observed. Explain. (7 marks)
c. Suppose you could impose an effective price floor in the labor market of Hong Kong
finally. Comment on the efficiency status of the labor market. Illustrate your
explanation with the help of your diagram in part (b). (5 marks)

Question 2 (8 marks)
A bank in Hong Kong is now promoting a 5-Year Life Insurance Plan. The customers need to
make payment# today and will be given both the princpal and interest in 5 years*. All the
information is indicated in the following table.

Option A Option B

Total payment# HK$68,000 HK$340,000

Principal and interest after 5 years* HK$81,500 HK$407,000

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 According to the announcement made by the Bank of China (Hong Kong) on 21st
September 2023, the prime rate was 5.875%.
a. Based on the given information, which option should be recommended? Explain.
(Round your answers to two decimal place, if applicable) (4 marks)
b. Suppose there is a personal loan scheme with a privileged interest rate of “Prime rate –
2.5%”. Which option should then be recommended? Explain. (Round your answers to
two decimal place, if applicable) (4 marks)

Question 3 (12 marks)

Metflix is a streaming service provider offering a wide choices of TV shows, movies, anime,
documentaries, and others on internet-connected devices. With one monthly price, the
subscribers could watch as much as they want.

In the last quarter, the marketing department of Metflix proposed to develop a demand equation
for its streaming service. It gathered average monthly number of subscribers and other relevant
data it believed that they are affecting the demand of streaming service. When these data are
entered into a spreadsheet with regression analysis, it looks like the following summary table.

Coefficients T-statistic P-value

Intercept 50 5.30 0.022
Price of ‘Metflix’ (PMet) -5 -3.69 0.028
Price of streaming services provided by its 2 3.29 0.002
competitor (PC)
Price of movies provided in cinemas (PMC) 0.2 1.45 0.140
Incomes of subscribers (M) 1.5 2.2 0.020
Monthly dollar expenditures on advertising (A) 0.3 2.69 0.025
R2 = 0.81 F=36.9 Significance F = 0.012
The assumed values of the variables are:
PMet = $150, PC = $100, PMC = $50, M = $500 and A = $400

a. Based on these estimates, write an equation that summarizes the demand for Metflix.
(1 mark)
b. Comment on how well the regression line fits the data, its overall significance as well as the
significance of each coefficient. (4 marks)
c. Based on your answer in part (a), compute the own price elasticity of Metflix. Justify why
Metflix is having the elasticity you calculated in part b. (Round your answers to two decimal
place, if applicable) (3 marks)
d. Based on your answer in part (a), compute the cross price elasticties of “streaming services
provided by its competitor” and “movies provided in cinemas”. (Round your answers to two
decimal place, if applicable) (2 marks)
e. Suggest ONE more variable that should be included in the demand equation of Metflix. Explain
the relationship between Metflix and the suggested variable. (2 marks)

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