TUTORIAL 3

1) Suppose demand is given by Q = 50 - 4P x + 6P y + A x , where Px = $4, Py = $2, and Ax =

$50.
What is the quantity demanded of good x?

The quantity demanded of good x

Q
= 50 − 4Px + 6Py + Ax
= 50 - 4(4) + 6(2) + 50
= 50 - 16 + 12 + 50
= 96
2) If quantity demanded for sneakers falls by 10% when price increases 25%, calculate the
absolute value of the own-price elasticity of sneakers.

Own price elasticity of sneakers

= -10%25
= │-0.4 │=0.4

Since Ed is less than 1, it is inelastic in demand. 1% increase in price will lead to 0.4%
decrease in quantity demanded.
3) The income elasticity of demand for your firm’s product is estimated to be 0.75. A recent report in
The Wall Street Journal says that national income is expected to decline by 3 percent this year.

(i) What should you do with your stock of inventories?

The income elasticity of demand for the firm’s product is estimated to be 0.75 means that it is normal
goods. The demand will decrease by 2.25 per cent, thus it is better to clear the stock of inventories by
selling now. The company may offer cash discounts or other sales methods to sell off the inventories.
Do not need to replenish the inventories.

(ii) What do you expect to happen to your sales?

My sales will decrease because the people’s purchasing power was decreased as their income dropped.

(iii) How would you answer parts (i) and (ii) if you expected a 5 percent increase in income
instead of a decrease?
• Buy more inventories as we expect there is a higher sales in the near future as they have higher
income.
• Sales are expected to increase by 3.75%.
4) The demand for good X is estimated to be Q x d = 10,000 - 4P X + 5P Y + 2M + A X, where P X is
the price of X, P Y is the price of good Y, M is income and A X is the amount of advertising on X.
Suppose the present price of good X is $50, P Y = $100, M = $25,000, and A X = 1,000 units.

(i) Is the demand for good X elastic, inelastic or unitary elastic?

Qdx= 10,000 - 4P X + 5P Y + 2M + A X
Qdx = 10,000 – 4(50)+5(100)+2(25,000)+1000
Qdx = 61,300

= (-4) ÷ (50 / 61300)

= -0.003
The elasticity demand for good X is inelastic because Ed < 1.
(ii) What is the cross price elasticity between goods X and Y?
PY
EQX , PY   Y
QX
= +5 (100 / 61300)
=+0.008
(iii) What is the relationship between goods X and Y?
d QX / d PY = 5
Cross Price Elasticity = 5 (100) / 61300 = 0.0082
Cross Price Elasticity is positive. So, good Y price and good X demand are directly related,
hence they are substitutes goods.

(iv) What is the income elasticity of good X?

M
EQX , M  M
QX

= +2(25000) ÷ 61300
= +0.82

(v) Is good X a normal or inferior good?

Good X is a normal good since the value of the income elasticity is positive (Ey >0). As
the consumer income increase, the quantity demanded for the goods will increase. 1%
increase in income, will lead to 0.82% increase in the quantity demanded.
Tutorial 4
1) Suppose the demand for product X is estimated as:

Qdx = 7,000 – 30Px + 20Py – 18Pz – 0.5M

Where,
Px = Price of product X
Py = Price of product y
Pz = Price of Product Z
M = Income.
Assume Px = 16, Py = 10, Pz = 8 and M = RM2000

(A) How many units of Product X will be purchased?

Answer: Q d x = 7,000 – 30(16) + 20(10) – 18(8) – 0.5(2,000)

= 7,000 – 480 + 200 – 144 – 1,000
= 5576 units
 (B)Derive the demand function for Product X.

Qdx = 7,000 – 30Px + 20Py – 18Pz – 0.5M

 (c)Explain the relationship between Product X and Y.

PY
=20(10/5576) EQX , PY  Y
= 0.03587 QX
EQ > 0, it means that X and Y are substitutes goods.
X,PY
 (D)Explain the relationship between Product X and Z.

= -18(8/5576)
PY
= -0.0258 EQX , PY  Y
QX
EQX,PY < 0, it means that X and Y are complements goods.
 (E) Is Product X a normal or inferior good? Why?

M
EQX , M  M
QX
= -0.5(2000/5576)
= -0.179
• Product X is a inferior good. This is because the income elasticity is negative
(EQ < 0). This means that when the consumer income increase, the
X,M
quantity demanded for the goods will decrease.
 (2)The demand for good X has been estimated by Q xd =12 - 3Px + 4Py.
Suppose that good X sells at RM2 per unit and good Y sells for RM1 per
unit. Calculate the own price elasticity.

= 12 – 3(2) + 4(1)
= 12 – 6 + 4
= 10

= -3()
=- 3()
=- =-0.6
 (3)The own-price elasticity of demand for apples is -1.2. If the price of
apples falls by 5%, what will happen to the quantity of apples demanded?

-1.2 =
-1.2-5%=
= +0.06
Quantity of apples demanded will increase by 6%.
 (4) Suppose the monthly demand for soda by a consumer is given by Q =
10 − 8P. If the price of soda is RM1 per can, how many cans of soda will the
consumer purchase in a typical month? What is the price elasticity of
demand for soda?

Given: Q = 10 − 8P, P=1,

Q = 10 − 8P
=10-8(1)
=2 units

=-8
=-4
 (5) If a price increase from RM5 to RM7 causes quantity demanded to fall
from 150 to 100, what is the absolute value of the own-price elasticity at a
price of RM7?

=
=
=-1.2
(6)If the cross-price elasticity between ketchup and hamburgers is -1.2,
how a 4% increase in the price of ketchup will affect the demand for
hamburgers?

-1.2 =

-1.2 x 4% = %∆Qxd

%∆Qxd = - 4.8%

The demand for hamburgers would fall by 4.8 percent.

 (7)If the price of pork chops falls from RM8 to RM6, and this leads to an
increase in demand for apple sauce from 100 to 140 jars, what is the cross-
price elasticity of apple sauce and pork chops at a pork chop price of RM6?

= -1.1666
 (8) Suppose the demand function is QXd = 100 - 8PX + 6PY + 3M.
If PX = RM4, PY = RM2, and M = RM10, what is the cross-price
elasticity of good X with respect to the price of good Y?

QXd = 100 - 8PX + 6PY + 3M

QXd = 100 – 8(4) + 6(2) + 3(10)
= 110 units
Cross-price elasticity
PY
EQX , PY   Y
QX

6(2 / 110) = 0.11

 (9) Suppose demand is given by QXd = 50 - 4PX + 6PY + A.
If PX = RM4, PY = RM2, and A = RM50, what is the advertising
elasticity of demand for good X?

QXd = 50 - 4PX + 6PY + A

= 50 – 4(4) + 6(2) + 50
= 96 units

Advertising elasticity of demand

Should increase advertising spending by 52%

TUTORIAL 5
 Question 1
Momo advertised through the mass media the following promotion for its pizza “Buy One Free
One. Limit one free pizza per customer”. Assume that a customer has RM100 to spend on
Momo’s pizza and Shaki’s pizza. The price of Momo’s pizza and Shaki’s pizza is RM10 each.

1. Draw the consumer’s budget line and show how the promotion alters the consumer’s budget
line.
Let's continue….

ii) Calculate the market rate of substitution between Momo’s pizza and Shaki’s
pizza.
−𝑃𝑥/ 𝑃𝑦

−9.09/10

= −0.91

iii) How does this promotion change the consumer’s opportunity set?
−𝑃𝑥 X + 𝑃𝑦Y ≤ M

5X +10Y ≤ 100
Question 2
2) Assume that there are only two goods in the market, which are Good X and Good Y. If given, the
price of Good X is RM10 per unit, price of Good Y is RM5 per unit and the consumer’s income is
RM100. Draw a budget line.
Y
Income = RM 100
Budget line
Px = RM 10 20 Y = M/Py – (Px/Py) X
Py = RM 5 M/Py Y = 100/5 – (10/5) X
100/5

X
10
M/Px
100/10
 Question 3
Two Sugar Refiners Yet to Increase Production
Required:
PUTRAJAYA: Two of the country’s four sugar refineries have yet to increase
coarse sugar production and as a result of this the Government may have to list
fine sugar as a controlled item Deputy Domestic Trade and Consumer Affairs Assume WC Coffeehouse allocate a budget of RM200
Minister Datuk S. Veerasingam said while the two companies had been “very on fine and coarse sugar.
co-operative” in meeting the ministry’s requests to supply sugar to affected
areas, it had not increased its coarse sugar production ever since Deputy Prime
Minister Datuk Seri Najib Tun Razak had made the directive two weeks ago.
"They (manufacturers) cited production costs as the reason for not increasing
their production. We cannot accept this reason because if the two other a. Using a diagram, illustrate the coffeehouse’s budget
companies can do it, so can they. We have issued them reminders and the two set where X is the quantity of fine sugar and Y is the
weeks deadline has also ended. We will give them a bit more time and hope to
see changes. If all fails, we may have to resort to other forms of action, quantity of coarse sugar.
including putting fine sugar on the controlled items list,” he told reporters after
attending his ministry’s monthly gathering on Monday. On Aug 25, the Deputy
Prime Minister reminded the four sugar refineries to increase production by 10
to 15% within two weeks to overcome the current shortage. The refineries are
Malayan Sugar Manufacturing (MSM) Penang, Central Sugar Refinery,
Selangor, Gula Padang Terap, Kedah and Kilang Gula Felda, Perlis.
Veerasingam said sugar manufacturers preferred to produce more of the fine
sugar as it could be sold at a higher price since it was not a controlled item.
“Since the price of fine sugar is not controlled there is a tendency for refiners to
produce more of this, although public demand for coarse sugar is higher. Fine
sugar is sold at RM2.50 a kg at many places. Coarse sugar is capped at RM1.90
a kg, so they realize they can make a lot of profit if they sell more fine sugar,”
he added. Asked when the Government would start to control the price of fine
sugar, he said his minister Datuk Shafie Apdal would be meeting the Deputy
Prime Minister soon, after which an announcement would be made.
Source: Adapted from The Star, dated 11 September 2006.
Next Parts

b) Write the equation for the coffeehouse’s budget line.

Y = M/Py – (Px/Py)X
Y = 200 / 1.9 – (2.5/1.9)X
Y = 105.26 – 1.3X

c) Determine the market rate of substitution between fine and coarse sugar.

Market rate of substitution = -Px / Py

= -RM2.5 / RM1.9
= -1.3
Thirdly
d) Using an appropriate diagram, show how the coffeehouse’s budget constraint change if Domestic Trade and
Consumer Affairs Minister announce to list fine sugar as a controlled item and capped at RM2.00 per kg. How
does this change alter the market rate of substitution between fine and coarse sugar?

If Domestic Trade and Consumer Affairs Minister

announce to list fine sugar as a controlled item and
capped at RM2.00 per kg, this decreased price of fine
sugar will rotate the budget line counterclockwise (P X0 >
PX1). This change will alter the market rate of substitution
between fine and course sugar become higher from -
1.3179 to -1.0526.
Old market rate of substitution: -2.50/1.9 = -1.3179
New market rate of substitution: -2.00/1.9 = -1.0526
Additionally

e) Would WC Coffeehouse better off or worse off when government controls the price of fine sugar? Explain.
WC Coffeehouse would better off when government controls the price of fine sugar. This is because the price
of fine sugar decrease from RM2.50 to RM2 when it is controlled. Thus, WC Coffeehouse is willing to buy
more amount of fine sugar without increase its budget. Another way, WC Coffeehouse can buy the same
amount of fine sugar with a lesser cost.
f) Identify and describe the type of price control mentioned by Deputy Domestic Trade and Consumer Affairs
Minister.
The type of price control mentioned by Deputy Domestic Trade and Consumer Affairs Minister is price
ceiling. A price ceiling is the government-mandated maximum amount a seller is allowed to charge for a
product or service. After Deputy Domestic Trade and Consumer Affairs Minister control the price of fine
sugar and capped at RM2.00/kg, seller are not allowed to sell fine sugar at the price above RM2.00 to
customer, which refers to price ceiling.
g) Using mathematical expression, explain the difference between “budget set” and “budget line”.
Budget Set Budget line
The set of consumption bundles that are The bundles of goods that exhaust a consumer’s
affordable. income.
PxX + PyY  M Y = M/Py – (Px/Py)X
Y = 105.26-1.316X
2.5F +1.9C  200
4. Viva Sdn Bhd is selling imported perfume in Malaysia at RM250 per bottle. If a consumer purchase up to 3
bottles, each additional bottle will be given a discount of 50%. Suppose a consumer has RM2000 to spend on
perfume and other goods. Illustrate how this marketing tactic affects the consumer’s budget set if the average
price of other goods is RM200. Before discount, if consumer spend all his or her budget of
RM2000 on perfume, consumer can get a maximum 8 bottles of
perfume, and if consumer spend all his or her budget of RM2000
on other goods, consumer can get a maximum of 10 units of other
goods. However, after the discount on the perfume, if consumer
spend all his or her budget with the same amount of RM2000, the
maximum bottles of the perfume consumer can get has increased
from 8 to 13 bottles, a decrease in price of perfume rotates the
budget line counter-clockwise from D1 to D2. This is because, as
mentioned above, each additional bottle after 3 purchased bottles
will be given a 50% discount, which means that start from the 4 th
bottles, it only takes RM125 per bottles as initially one bottle is
RM250. Therefore, with the same amount of RM2000 of budget,
consumer get to buy more bottles of the perfume.
Question 6
6. Suppose Melissa has RM500 to spend on Good X and Good Y. Given the price of Good X is RM20
per unit and the price of Good Y is RM25 per unit.

i) Draw a budget line and an indifference curve to show that Melissa is in equilibrium at a bundle
comprises 10 units of Good X and 12 units of Good Y.

15
Second Part
II) Assume Melissa receives a RM100 gift voucher valid only for Good X. If both Good X and Good Y
are normal goods, show on the same graph how the gift voucher affects Melissa’s budget line and
indifference curve.

 Melissa can purchase 10 units of Good X and 12 units of Good Y with the budget of RM500.
(Curve I)

 When Melissa received RM100 gift voucher for Good X, she can purchase more of Good X.
(Curve II)
 41

TUTORIAL 6
1.Assume that Peggy works as an administrative executive and earns RM40,000 per year. Now,
she decides to open a Yoga Training Center. To open the center, she needs to rent an office for
RM24,000 per year and spend RM100,000 on labor, materials and other operating expenses. 1
Calculate the amount of revenue where business should earn in order to break even based on:
a. accounting profit approach
b. economic profit approach

• Accounting profit: TR –
Explicit Costs
• Economic profit : TR –
• 0 = TR – Explicit Costs – Implicit costs
(RM24,000+RM100,000)
• 0 = TR –
• TR = RM124,000 (24,000+100,000+40,000)
• TR = RM164,000
 F V1 FV2 FVn
NPV    . . .  C0
1  i  1 1  i  2 1  i  n 2

NPV= 100,000/ – 50,000

2. Ali works as a Project Manager for DD firm.
Recently, he is assigned to handle a two year = RM 9,171.6
investment project that costs RM50,000 today
and expected to generate RM100,000 after
two
years. The director of DD firm is very
concerned about the firm’s cash flow problem
due to
the 30% per annum interest rate charged by
the bank on the firm’s two years loan. Do you
think DD firm should undertake the project?
Why? DD firm should accept the project since the NPV earn by the
firm which is RM9,171.60, which is greater than zero,
hence, DD firm need to accept the project.
 3. The manager of an automation company is considering to purchase three computers,
which will cost RM15,000. the computers are expected to generate profit of RM8,000 each
during the first two years and RM5,000 in the third year. The computers can be resold at the
end of third year for RM3,000. Alternatively, the manager can invest the RM15,000 at a
guaranteed interest rate of 3%. Should the manager purchase the computers or invest the
money at a interest rate of 3%?

F V1 FV2 FVn
NPV    . . .  C0
1  i  1 1  i  2 1  i  n

FV
PV 
FV = 15,000 =1RM16390.905
 i
n

RM16390.905-RM15000 = RM1390.905

The manager should purchase the computers because the NPV is RM7628.89 which
greater than investing the money at a interest rate of 3%. (RM1,390.905)
4. Suppose a director seek your advice to decide on which of the three options to take to maximize the
value of the firm over the next three years. Each option costs RM150,000 today. The following table
shows the expected year-end income generated from each option. Interest rates are expected to be 4
stable at 7 percent over the next three years. Which option will you advise the director to choose?
Explain.
Option Profits in Year 1 Profits in Year 2 Profits in Year 3
Option A:
A RM60 000 RM70 000 RM90 000
NPV = + + – RM150,000 = RM 40682
B RM80 000 RM70 000 RM60 000

C RM50 000 RM80 000 RM100 000

Option B:
NPV = + + – RM150,000 = RM 34885

Option C:
NPV = + + – RM150,000 = RM 48234
 5

Q4 ANS
I'll advise the director to choose Option C since it has a positive and highest NPV of
RM 48234 among the three options. It means Option C is the most profitable. To
maximize the firm's value over the next three years, the director must take Option C
into operation.
5. Units Produced Total Revenue (RM) Total Costs (RM)
0 0 0
1 100 50 A. What is the marginal net benefit of producing the 5
2 180 110 fourth unit?
3 250 180
4 290 270 B. What is the level of net benefits when four units are
5 310 380 produced?
(a)

B C
(a) MB  MC 
Q Q
Units Total Revenue Total Costs Marginal Marginal
(b) Level of net benefits when four units
Produced (RM) (RM) Benefits(RM) Cost(RM)
0 0 0 0 0 are produced = Total Revenue - Total Cost of fourth units
1 100 50 100 50 = 290 - 270
2 180 110 80 60 = 20
3 250 180 70 70
4 290 270 40 90
5 310 380 20 110

Marginal net benefits for the fourth unit = MB

of fourth unit - MC of fourth unit
= 40 - 90
= -50
6. Determine MR.
c) TR = 16 + 17Q + 10Q2
6
a) TR = 42Q – 19Q 2
TR = 16 + 17Q + 10Q2
TR = 42Q – 19Q2 TR = 17Q + 10Q2
MR = MR = (d𝑇𝑅)/(d𝑄)
= 42 – 38Q
= 17 + 20 Q

b) TR = 100 + 25Q - Q2
d) TR = 38Q + 15Q2
TR = 100 + 25Q - Q2
TR = 25Q – Q2 TR = 38Q + 15Q2
MR = (d𝑇𝑅)/(d𝑄) MR = (d𝑇𝑅)/(d𝑄)
=25 – 2Q = 38 + 30Q
e) TR = 27Q2 + Q – 200 g) P = 18 - 2Q

TR = 27Q2 + Q – 200
TR = Q + 27Q2 P = 18 – 2Q
MR =
TR = P x Q
= 1 + 54Q
= (18 x 2Q) Q
f) P = 300 - 3Q
= 18Q – 2Q2
P = 300 - 3Q
TR = P x Q TR = 18Q-2Q2
= (300 – 3Q) Q
= 300Q – 3Q2 MR =
= 18 – 4Q
TR = 300Q – 3Q2
MR =
= 300 – 6Q
 i) Q = 40 - 4P
h) P = 24 – 5Q

P = 24 – 5Q Q = 40 - 4P
TR = P x Q
= (24-5Q) Q 4p = 40 – Q
= 24Q – 5Q2 P=
TR = 24Q – 5Q2 TR = P x Q

MR = TR = Q
=
= 24 – 10Q
= 10Q - Q2

MR =

= 10 - Q
6. Determine MR. (continue) 51

j) Q = 300 - 12P

Q = 300 - 12P
12P = 300 – Q
P = (300−𝑄)/12
TR = ((300−𝑄)/12) Q
= ((300𝑄−𝑄2)/12)
= 25Q - 1/12 Q2
MR =

= 25 - 1/6 Q
 d) C = 800 + 20Q – 2Q2
7. Determine MC. MC = 20-4Q
7

a) TC = 104 – 24Q + Q2 e) C = 28 + 68Q + Q2

MC=-24+2Q MC = 68+2Q

b) TC = 99 + 50Q – 6Q 2 + 12Q3
MC =50-12Q+36Q2

c) C = 6000 + 7Q2
MC=7Q2
=14Q
Tutorial 10

1. With an example, explain what is meant by “organic growth”.

ANS: Organic Growth is by developing the existing operations internally. E.g. A manufacturer
builds a new factory.

2. Define “diversified portfolio”.

ANS: Diversified portfolio is a mix of distinct( 截然不同的 ) asset types and investment vehicles in an attempt at limiting
exposure to any single asset or risk. The diversified portfolio of business activities off setting income streams and spread
the risks of business. / Diversified growth occurs when a firm moves into related or unrelated market.

3. With an appropriate example, explain how “hold-up problem” occurs.

ANS: Hold up problem may happen when only one supplier or only one buyer exists. This is because when there is only
one supplier or buyer, they will have the power and fully control over the merchant/service and they may want to
renegotiating of contracts involving specific assets. This will lead to other party reduced their own profits.

4. Define “economies of scale” and describe why it is an important factor for a horizontal
growth.
ANS: As a company increases its scale of operation (produce more), its average costs fall. The company can has lower
average cost because costs decrease as the amount produced increases, and when the marginal cost of a unit become
lower, represent increasing company’s profit margins.

5. With appropriate examples, explain the differences between “vertical growth” and “diversified growth”. Explain any
TWO (2) reasons for each growth strategy.
Tutorial 11

1. Define ‘third degree price discrimination’ and give ONE (1) example. State the conditions to implement this type of price
discrimination
ANS: The practice of charging different groups of consumers different prices for the same product. For examples include
student discounts and senior citizen’s discounts. The group must have observable characteristics for third-degree price
discrimination to work.

2. Suppose Alice wishes to use block pricing strategy to market facial treatment service. Given that the inverse demand
function for facial treatment is P = 300 − 0.2Q and the marginal cost is constant at RM20. Using an appropriate diagram,
determine the optimal price and quantity of units per package.
ANS: P=MC 300 − 0.2Q = 20
Q = 1400 units

0.5x (300-20) x 1400 = 196,000

20 x 1400 = 28000
P= 196,000 + 28000 = RM224,000

3. Using appropriate examples, distinguish between ‘commodity bundling pricing’ and ‘block pricing’ strategies.
ANS: Commodity bundling pricing is the practice of bundling two or more different products together and charging one price
for the bundle. Meanwhile, block pricing is the practice of packaging multiple units of an identical product together and
selling them as one package.