BB107 MICROECONOMICS GROUP ASSIGNMENT

Part A
a) The roots of personal computer PC) industry can be trace back to 1970s, when
IBM, technology and engineering companies began to develop prototype desktop
computers. As portable devices become more popular, competition from
smartphones and tablets are the challenges where PC industry are threatened to
lose their shares of the market. Along with these large competitors, there are
hundreds of small companies dedicated to make computer accessories, software
and games. Personal computer have had become an essential day-to-day life for
Malaysians. Therefore, despite of the competitors and blow from the growing
smartphone industry, it shows no signs of losing. According to International Data
Corporation(IDC) Asia/Pacific Quarterly PC Tracker, the 1Q13 Malaysia PC
market totalled 898,000 units sales. Examples of leading PC vendors in Malaysia
and their sales volume as well as market share are shown in the table below.
Company
Lenovo

Sales Volume
143,680

Market Share(%)
16%

Acer
ASUS
Hewlett-Packard(HP)
Samsung
Others
Total

134,700
116,740
98,780
79,922
324,178
898,000

15%
13%
11%
8.9%
36.1%
100%

b) Based on the IDCs Asia/Pacific Quarterly PC Tracker, Malaysias personal

computer(PC) market recorded 898,000 units in the first quarter ended on
March31,2013. It was an increase of 18% sequentially Chinas Lenovo Group overtook
Taiwan-based Acer as the biggest personal computer vendor in Malaysia. With total
sales volume of 143,680 units, Lenovo overtook Acer which with only 134,700 units

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of sales. Asustek Computer Inc. was the third with 116,740 units, followed by
American PC vendor Hewlett-Packard Co. (HP) at 98,780 units of sales. While
Samsung with 79,922 units sales was the fifth top PC vendor in Malaysia, IDC said in
a June 20 report.
Company
Lenovo
Acer
ASUS
Hewlett-Packard(HP)
Samsung
Others
Total

Sales Volume(units)
143,680
134,700
116,740
98,780
79,922
324,178
898,000

c) There are hundreds of personal computer companies exist worldwide. But according to
IDC, there are 9 players exist in this personal computer market. Such as, Toshiba, Sony,
Dell, Apple, Acer, ASUS, HP, Lenovo, Samsung. But the few top PC shipments in
Malaysia in 2013 would be, Lenovo, Acer, Asus, Hewlett-Packard, and Samsung. The
vast majority of laptops on the market are manufactured by a Taiwan-based Original
Design Manufacturers(ODM). While there are many companies such as Toshiba, Sony,
Apple and so on, they have their market more on manufacturing other portable devices.

d) According to market research firm IDC, Lenovo Groups 16% market share overtook
Taiwan-based Acer as the largest PC vendor in Malaysia in first quarter 2013. Acer,
which saw its market share fall to 15% from 21% in the forth quarter of 2012. IDC
analyst stated that Lenovo emerged as the top vendor in the quarter after fulfilling a
significant portion of the governments Malaysian Communications and Multimedia
Commission(MCMC) project for mini-notebooks. Taiwans Asustek Computer was

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third with a 13% share, followed American PC vendor Hewlett-Packard at 11%.

According to the report, Malaysias PC market totaled 898000 units in the first quarter,
an increase of 18% sequentially but down by the same percentage from a year earlier.
the education and enterprise segments both posted declines after exhausting their
budgets in the previous quarter, while spending on PCs was also curtailed by
distractions from Chinese New Year festives and the influx of smartphones and tablets
into the market, the report said.
Company
Lenovo
Acer
ASUS
Hewlett-Packard(HP)
Samsung
Others
Total

Market Share(%)
16.0%
15.0%
13.0%
11.0%
8.9%
36.1%
100.0%

e) No, because the top 3 companies in this market have almost the close percentages of
market share. Therefore, it can also be said that this personal computer market are
leading by these top companies, which is Lenovo, Acer, Asus, Hewlett-Packard and
Samsung. While other companies only share 36.1% of the market share.
f)
(i)

Lenovo concentration ratio

Acer concentration ratio

Top 2 firms concentration ratio

= 143,680/898,000
= 0.16
= 134,700/898,000
= 0.15
= 0.16+0.15
= 0.31
= 31%

(ii)

Lenovo concentration ratio

Acer concentration ratio

= 143,680/898,000
= 0.16
= 134,700/898,000
= 0.15

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ASUS concentration ratio

Top 3 firms concentration ratio

= 116,740/898,000
= 0.13
= 0.16+0.15+0.13
= 0.44
= 44%

g) Do you think firms in this market exercise considerable controlling power? (2marks)
These firms are considered as oligopoly industry. By measuring market power, we use
the Four-firm concentration ratio method, the proportion of total industry output
produced by the top four largest firms. With 55% concentration ratio, this industry
falls in a medium concentration which range from 50% to 80% therefore is likely a
monopolistic competition to oligopoly.
h) Oligopoly refers to a market condition in which a few firms produce all or most of the
market supply of a particular goods or services. Entry barriers maintain supernormal
profits for the dominant firms. It is possible for many smaller firms to operate on the
outside of an oligopolistic market, but none of them is large enough to have any
significant effect on prices and output. Government should create regulatory bodies in
order to limit the price of personal computers to protect the public interest. Some
dominant organizations in oligopolistic market can also harm the interest of people in
a similar way. The regulators can set a higher level amount by which the firms have to
cut prices if the regulator thinks that the firm is charging too much to consumers.
In addition, there are many legal provision can be carried out by government
to protect consumers from malpractices by companies, who in general possess much
more economic power than individual consumers. For example, Legal provision
relate to product quality, warranties and guarantees. Government can try to prevent
oligopolistic firms from using unfair trade practices to overcome competition.

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When it comes to monopolies, the government may insist that a monopoly is

broken down in smaller companies. Several oligopolistic firms forming a cartel so
that they can together act like a monopolistic firm. The government should create a
policy to inspect mergers that could create monopoly power. A firm created by
merger with high market share will automatically refer to the policy. The policy can
decide to allow or block the merger. In short, then, governments should ensure that
oligopolies remain competitive, but should not engage in excessive regulation that
ends up stifling competition.

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Part B
Question 1
a) The production possibilities curve will shift inwards, or to the left. Skilled labors have
the skill in operation of tools and machinery. This will increase the productivity and
increasing the output more effective without wasting the time opportunity for a new
worker to learn the skills. Thus when many skilled labor have migrated to overseas it
will result in lesser production possible.
b) The production possibilities curve will shift inwards, or to the left. Graphically, we
represent situations of unemployment by points inside the original production
possibilities curve. If there are unemployed resources in the economy, this means that
an economy does not operate with maximum outputs. Unemployment represents a
waste of a scarce labor resources and leads to lower productivity.
c) The production possibilities curve shifts outwards, or to the right. This is because a
breakthrough modern production technique will enhance the way in production of
goods. This will not only increase their efficiency but it will also help to boost up the
production rates with available resources. Thus will contribute to economic growth.
d) The production possibilities curve shifts outwards, or to the right. An economy grows
when increased efficiency in using resources occurred. The increased efficiency in
using resources means that the economy can use fewer resources to produce the same
outputs, thereby freeing some resources to increase the total goods and services
produced. With full use of the resources, the unemployment rate will also decrease
thus increases economic growth.

Question 2

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Good

Cross-price elasticity of demand

Air-conditioning

units

and

kilowatts

of -0.34

electricity

+0.63

Coke and Pepsi

-0.28

High-fuel-consuming

sport-utility

vehicles

(SUVs)

+0.82

and petrol

+1.54

McDonalds burgers and Burger King burgers

Butter and margarine
a) The cross-price elasticity of demand measures how sensitive consumer purchases of one
product (say, X) are to a change in the price of some other product (say, Y). We calculate
the coefficient of cross-price elasticity of demand Exy :

Exy = Percentage change in quantity demanded of product X

Percentage change in price of product Y

A positive cross-price elasticity of demand implies that the two goods are substitutes,
meaning that sales of X move in the same direction as a change in price of Y. This shows that
Coke and Pepsi, McDonalds burgers and Burger Kings burgers, as well as butter and
margarine are substitutes. A negative cross-price elasticity of demand implies that the two
goods are complements, meaning that an increase in the price of one decreases the demand
for the other. As in the question, air-conditioning units and kilowatts of electricity, as well as
high-fuel-consuming sport-utility vehicles and petrol are complements.
b) If the cross-price elasticity of demand is greater (more positive), the two goods are said to

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be a closer substitutes. Since the cross-price elasticity of butter and margarine is larger
than the cross-price elasticity of McDonalds burgers and Burger King burgers, butter and
margarine are closer substitutes as compared to McDonalds and Burger King burgers,
which means that changes in price of butter will highly affect the quantity demanded of
margarine. In contrast, if the cross-price elasticity of demand is larger (more negative), the
two goods are said to be a closer complements. Air-conditioning units and kilowatts of
electricity are closer complements than high-fuel-consuming sport-utility vehicles (SUVs)
and petrol which means that changes in price of kilowatts of electricity highly affects the
quantity demanded of air-conditioning units.

c) The relation between Pepsi and Coke is substitute goods, which means that sales of
Coke is in the same direction with price of Pepsi. Thus, a cross-price elasticity of
+0.63 implies that a 1% increase in the price of Pepsi would increase the quantity of
Coke demanded by 0.63%. The relation between petrol and SUV is complementary
goods, which means that increase in price of one will decrease the demand of one
another. This, a cross-price elasticity of 0.28 implies that a 1% increase in the price
of petrol would decrease the quantity of SUVs demanded by 0.28%.
Question3
a) The law of diminishing marginal utility point out that as a consumer increases the
consumption of a certain good and service as many as they can afford in a specific time,
then the satisfaction they obtained from each additional units of the good or service will
decrease. When certain goods or services have more than enough quantity will be yield
declining amounts of extra satisfaction of a customer.
The Utility Maximizing Combination of J and K Obtainable with an Income of $52

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Goods J:

Goods K:

Price = $8

Price = $4

Unit

of Marginal

Product

Utility, Utils

Marginal Utility

Marginal

Marginal Utility per

per

Utility, Utils

dollar (MU/Price)

dollar

(MU/Price)
First

56

32

Second

48

28

Third

32

24

Fourth

24

20

Fifth

20

2.5

12

Sixth

16

10

2.5

Seventh

12

1.5

b)

Marginal utility of good J=Marginal utility of good K

Price of J
Price of K
Marginal utility per dollar=3
Fourth J/Fifth K
$52-(4X$8)-(5X$4)=$0
Thus, 4 quantities of J and 5 quantities of K will purchased to maximize utility.

c)
Units of J
1
2
3
4
5
6
7

MUJ
56
48
32
24
20
16
12

Total utility=fourth J+fifth K

Total utility
56
104
136
160
180
196
218

Units of K
1
2
3
4
5
6
7

MUK
32
28
24
20
12
10
8

Total utility
32
60
84
104
116
126
134

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=160+116
=276

d)
If the consumer's money income were drop to $28, then recalculate the table
Goods J:

Goods K:

Price = $8

Price = $4

Unit

of Marginal

Product

Utility, Utils

Marginal
Utility

per

Marginal

Marginal

Utility

Utility, Utils

per

dollar

dollar

(MU/Price)

(MU/Price)
First

56

32

Second

48

28

Third

32

24

Fourth

24

20

Fifth

20

2.5

12

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Sixth

16

10

2.5

Seventh

12

1.5

Marginal utility of good J=Marginal utility of good K

Price of J
Price of K
Marginal utility per dollar=6
Second J/Third K
$28-($8X2)-($4X3)=0
Thus, 2 quantities of J and 3 quantities of K will purchase to maximize utility.