UNIVERSITY OF TECHNOLOGY

JAMAICA

INTRODUCTION TO MICRO-ECONOMICS

GROUP PRESENTATION K

A project submitted in partial fulfilment of the requirements for the Bachelor of Science degree
in Business Administration.

GROUP MEMBERS:

Author Note

This paper is prepared for ECO1001, Introduction to Micro-Economics, taught by

Orville Brown
 Summary and Introduction

Solid Baking Company is a producer of rock cake in the small community of Mocho, Clarendon.
Rock cake has become an irreplaceable staple for the many residents in this community and the
firm is considering expanding to other sections of Jamaica. The cost and revenue information for
Solid Baking Company are shown in Table 1.

(i). Table one show’s Marginal Cost (MC), Average Total Cost(ATC), Total Revenue(TR)
and Marginal Revenue(MR) with relation to price and output.

Question 1

A. Complete the marginal cost, average total cost, total revenue and marginal revenue
columns in Table 1.
Cost Revenues
Quantity
Quantity Marginal Average Demand Total Marginal
Produced Total cost ($) Cost($) Total Cost ed Price Revenue Revenue

- $ 100 - - - $ 170 - -
1 $ 140 $ 40 $ 140 1 $ 160 160 160
2 $ 184 $ 44 $ 92 2 $ 150 300 140
3 $ 230 $ 46 $ 77 3 $ 140 420 120
4 $ 280 $ 50 $ 70 4 $ 130 520 100
5 $ 335 $ 55 $ 67 5 $ 120 600 80
6 $ 395 $ 60 $ 66 6 $ 110 660 60
7 $ 475 $ 80 $ 68 7 $ 100 700 40
8 $ 575 $ 100 $ 72 8 $ 90 720 20

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 B. Use the completed in part A to construct the Demand Curve, Marginal Revenue Curve,
Average Cost Curve and Marginal Cost Curve for this company. Label your graph
carefully and completely.

C. Based on your response from parts (A) and (B) answer the following

I. What is the firm’s economic profit/loss?

To determine the firm’s profit first we have to identify the firms profit maximization output level
quantity which is (MR=MC) or where (MR>MC). Once that is accomplished we deduct Total Revenue
from Total Cost (TR-TC).

So, Profit=TR-TC,

$660-$395=$265

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II. How do you compare the profit maximizing price and output of this firm with that of a
perfectly competitive firm?

In a Perfectly Competitive Firm, Price and Output have an inverse relationship, i.e., Price will be low
while output is greater (increase). This happens in a PC market, as the numbers of firms are many, so a lot
of output will be available thus having no control over the price (price takers). Perfectly Competitive
firms are said to be elastic as Demand curve = Marginal Cost

Solid Baking Company is a monopolistic firm. In figure 1, and profit is maximised where MR=MC. If
cost curves are the same in monopoly and perfectly competitive industry, the monopoly with produce a
lower output and a higher price than the perfectly competitive.

Question 2

A. Use the cost schedule in Table 1 to calculate the average variable cost of the 4th unit
produced.

Average variable cost is equal to variable cost divided by quantity (AVC=AC/Q)

Therefore, the variable cost is implicit (VC) so we have to calculate it from the total cost (TC). To
calculate total cost it is variable cost (VC) added to fixed cost (FC). So to calculate average variable
cost of the 4th unit it is as follows:

VC=TC-FC; $280-$100= $180. ,

So, AVC= VC/Q, $180/4=$45.

B. Use the demand schedule from Table 1 to

A. Calculate the price elasticity of demand when the price of bread increase from $150 to
$160 and interpret your result. (Use the midpoint formula)

Q2 – Q1 x100 ÷ P2 – P1 x 100 1-2 x100 ÷ ($160-$150)

(Q2+ Q1)÷2 (P2 + P1) ÷2 (2+1) ÷2 ($150+$160) ÷2

-1 x100 ÷ $10 x100 -66.67 = -10.33

1.5 $155 $6.45

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 The answer is -10.33 therefore we use the universal value which is 10.33 and the PED is elastic as the
demand reacts strongly to the change is price of bread.

B. Determine the value of the consumer surplus if the maximum price a consumer is
willing to pay is $170 and the amount they actually pay is $130

PRICE

$170

Consumer surplus

$130

D
Quantity demanded

1 2 3 4

A consumer surplus occurs when the consumer is willing to pay more for a given product than the current
market price.

Formula ½ bh
=1/2 (4) (170 – 130)
= (2) (40)
= $80

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C. Given that Solid Baking Company operates in a monopolistic competitive market
structure, compare the characteristics of this market structure with that of a perfectly
Market Type Perfect Competition Monopolistic competition
Number Of Firms Numerous Many

Freedom of entry No barriers to enter or exit market Few Barriers to enter the market

Different products (might seem the

same but are still different) Example
Nature Of Product Homogenous, same fast food restaurants.
Horizontal: This firm is a price
Implications of taker and the demand curve is
Demand curve perfectly elastic. Downward sloping. Relatively Elastic
Average size of
firms small Small-Medium
Demand is potentially unlimited. Demand will depend on what
Possible consumer Demand will rely on what is differentiation the Competition
Demand available through supply. provides.
In the short run it’s possible to
make a economic profit. In long run In short run it is possible to make a
Profit Making it’s impossible for this market type profit however in the long run there
Possibility to make an economic profit. will be zero economic profit.

Government Very little regulations, depending on

Intervention Very little limitations. industry (e.g. Food permits)
Clothing Stores-Urban behaviour,
A new Example gold, silver, copper Stitches, sirens.
Buyers can easily switch between
Specific trait to sellers with little to no difference in Brand loyalty aids the firm when prices
market product and price. are raised to increase revenue.

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 D. Suppose Ben has a monthly income of $8,000 which he allocates between two goods
rock cake and sodas. The price of a soda is $100 and the price of a rock cake is $150.

I. Graph Ben’s budget line with soda on the horizontal axis.

PRr+PSs=Income; $100s+$150r=$8,000 therefore when S=0 R is $8000/150=$53.33 and when

R=0, S=$8000/100=$80
Rock cake
I/px
53.33

I/Py
80 Soda

II. What is the slope of the budget line?

Answer: The Slope of a budget is Rise/Run 53.33/80 = -0.67
So the opportunity cost of 1Rockcake = -0.67 soda

III. If the marginal utility for the last unit of soda is 500 utils and that of rock cake is 400
utils. What should Ben do to maximize his utility?

Answer: To maximize one’s utility, the following must be considered.

MUs = MU r
Ps Pr

The Law of Diminishing Marginal Utility states that as a person increase consumption of a
product, while keeping consumption of the other good constant, there is a decline in marginal
utility for each additional unit of that product.

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 Ben’s Utility is;

MUs ≠ MUr
Ps Pr

500 = 400
100 150

= 5 2.67

For Ben to maximize his utility, he will have to;

Increase 5 units and decrease by 2.67 units according to the law of diminishing MU.

E. Describe the integration strategy Solid Baking Company would employ to grow the
business if should expand its operation to produce hard-dough bread, buns, biscuits,
and snacks.

If Solid Baking Company decides to add other products to its firm, it will be following a Horizontal
Integration Strategy. This strategy focuses on one firm producing multiple outputs of common qualities or
same field. This acquisition will flow along the secondary (output) level.

Example: A hotdog company starts selling hamburgers.

It is not a Vertical Strategy as this will involve Solid Baking Company acquiring /merging with another
company that aids in the production of the good it already have. The movement will be from primary –
secondary – tertiary, i.e. they will acquire/merge with a primary firm (the producers)

Example: A Shoe Store acquiring or merging with a Shoe Making Firm.