2013 S1 BM0007 Set 2 REVISION QUESTIONS Question 1 (a) Determine if the following statements are correct or incorrect and

d explain your answers: (i) When Johns salary increased from $2000 to $2500, he bought more electronic products. The change in demand for electronic products as a result of higher salary is an example of income effect. (2 marks)

(ii)

When price of good A increases, the demand for good B also shifts to the left. We can conclude that good A and good B are substitute goods in consumption. (2 marks)

(iii)

When the price of an inferior good increases, consumers will react by buying more of the good as they face limited budget for normal goods. (2 marks)

(iv) The product price and the production quantity of a good are inversely related. (2 marks)

(v)

When a person consumes more and more amount of a good, his utility from each unit of this continuous consumption will get smaller and smaller. (2 marks)

(b)

Illustrate with a separate demand or supply curve diagram, the effects on the following sector due to the changes in tourist arrivals in Singapore, ceteris paribus: (i) The impact on hotel rooms due to Great Singapore Sales promotions. (3 marks) The impact on local tour services as the government imposed a tourist tax payable by all tour operators based on the number of signed up tourists. (3 mark) The impact on the total revenue of a luxury tourist hotel as it decides to reduce its room rates significantly through a promotion. (3 marks)

(ii)

(iii)

(c)

An article reported the following: The volcano was spewing tones of gaseous particles to the atmosphere from Ice-Land since 16 April 2010, resulting in closures of all major European airports. As such, many European travelers were trapped in Singapore and the demand for the Singapores hotel rooms increased significantly. (i) Using only demand diagram, briefly explain the impact of the natural disaster in Ice-Land on the demand of the hotel rooms in Singapore. (4 marks)

(ii)

Assume that the government did not allow the hotels to increase the price of the room charges as the result of the natural disaster. Using market equilibrium diagram, briefly explain the impact on the hotel rooms. (4 marks) Assume the government decided to set a price floor on the room charges for all hotels in Singapore following the increased in demand. Illustrate and explain the price floor with a market equilibrium diagram. (4 marks)

(iii)

Question 2 The tables below indicated a change in the price of good A and its impact on the consumption of good B and good C: Year 2007 2008 (i) Price of good A $7 $10 Demand for good B 100 120 Demand for good C 250 200

Calculate the cross elasticities of good A and good B, and good A and good C between 2007 to 2008 using mid-point formula (2 decimal points). (4 marks)

(ii)

With your answer in above (i), calculate the change in the quantity of good B and good C when price of A increased by 2.1%. (2 marks) With a separate demand diagrams, sketch the impact on the demand of good B and good C when the price of good A decreased. (4 marks)

(iii)

(d)

The tables below show the demand and cross elasticities of the following goods: Good Demand elasticity Good X Y Z Good Income elasticity (i) A -1.20 B -2.3 C -0.85

Cross elasticity with respect to the price of good A -1.30 -1.51 0.70 D -0.60 E 2.73 F 0.00

State the impact on the total revenue of good A, B and C if all the prices of the three goods increase substantially. (3 marks)

(ii)

With your answers in question 2(bi), sketch the impact of the total revenue with demand diagrams for the good A and good C. (6 marks)

(iii)

Calculate the impact on the demand for good Y if the price of good A increase by 11%. (2 marks)

(iv) With demand diagrams, sketch the impact on the demand for good X and good Z if the price of good A decreases. (6 marks)

(v) Give an appropriate example for good D, E and F. (3 marks)

Question 3 TKK is a small producer of product Z and it operates in perfect competition market structure. TKK is making sub-normal profit in the short run and it is considering whether it should continue production given its profit level. (a) (b) Describe THREE (3) characteristics of the above market structure. (6 marks) Illustrate the economic loss of TKK with a market structure diagram using average total cost and marginal cost curves. (4 marks)

(c)

Describe THREE (3) conditions which could help TKK to decide if it should continue or close down its production. (6 marks) Explain that all firms will earn normal profit in the long run regardless whether they are earning supernormal or subnormal profits in the short run. (4 marks)

(d)

Question 4 In one of the briefing sessions, an analyst said that the demand curve for an oligopoly competitive firm is a kinked demand curve. He also told the audience that the oligopolistic firms are mutually dependent and hence, will likely to watch each other very closely. (i) Define the term mutually dependent and hence, explain the need to watch each other closely. (4 marks) Explain the derivation of a kinked demand curve for an oligopoly firm and hence, determine the price set by the firm. (6 marks) Describe TWO (2) ways for an oligopoly firm e.g. petrol retail kiosk to increase its price legally taking the kinked demand curve into consideration. (4 marks)

(ii)

(iii)

(a)

Below is a payoff matrix between two rival firms in pricing their product. For instance, if company B sets a low price and company A sets a high price, the pay off for B is $10 million and for A is -$2 million. If both companies set a low price, then both will earn $3 million.

Company B High Low Price Price High Price Company A Low Price 10 6 -2 3 6 -2 3 10

Determine and explain the likely pay off for company A and B based on the matrix above assuming the two firms cannot communicate. (4 marks) Determine and explain the likely pay off for company A and B if both firms are allowed to communicate and collude. (2 marks)

(i)

Question 5 Container Corporation of India Ltd. (CONCOR) used to be a monopoly in the container transportation business in India. It was the only rail-based container cargo transportation player in India, as this sector was not opened for private players even after the liberalization of the Indian economy in 1991. The authority had since opened up the container cargo transportation business to private players. (b) Describe the barrier of entry that CONCOR used to enjoy and explain TWO (2) possible reasons behind the setting up of such barrier. (6 marks) CONCOR used to make supernormal profit. Using relevant average cost curves, sketch the supernormal profit of CONCOR. (4 marks)

(c)

Briefly describe TWO (2) possible impact on CONCOR with the opening up of the rail way services for competition. (4 marks)

(d)

CONCOR might still enjoy some advantages over the new comers. Suggest TWO (2) ways that CONCOR could defend its market share from its rivals. (4 marks) List TWO (2) benefits that the users of railway services would enjoy with the opening of the market for more competitions. (2 marks)

(e)

Question 6 (20 marks) The table below represents the production costs of a firm XYZ Limited. Assume that each hired worker is paid $20 per day. Labour Output 0 0 1 12 2 36 3 50 4 62 5 63 (a) TFC 100 TVC TC MC AFC AVC ATC

Define the term short run. (2 marks)

(b)

Provide a reason that the firm XYZ is operating in a short run production time frame. (2 marks)

(c)

Copy and complete the table in your answer booklet. All calculated numbers must be carried to two decimal places. (7 marks)

(d)

Explain law of diminishing marginal returns and state the range of outputs where it occurs based on your answers in question 3(c). (3 marks)

(e)

Illustrate the relationship between marginal product and marginal cost with appropriate diagrams. (6 marks)