Section – A 1.

The whole MBA Tuition Fee – 20,000

Books fee- 2000

Transport -500

Explicit cost of Mr Rahim – 22500 RM

Current salary – 2500 per month

Course duration – 18

The salary he will earn for 18 months- 2500*18= 45000 RM

Implicit cost- 45000

Financial Cost – 22500 RM

Economic cost = Explicit cost + Implicit cost

= 22500+ 45000

= 67500 RM

2.0

The cost function and revenue of a firm.

TR=60 Q-Q2

TC =Q 2+30Q+30

TR =60 Q-Q2

TC=1/2 Q2 + 30 Q +30

100+60Q = 0.5Q2 +60Q

100=0.5Q2

0.5Q2=100

Q2 =100/0.5

Q2=200

Q=√200

Q=14
MR=MC So,

MR = αTC/αQ

= 1/2Q2 + 30Q + 30

14

=( 1/2 x 142) + ( 30 x14 ) +30

14

= ( 1/2x28) + 420 +30

14

= 14+420+30

14

= 464

14

MR= 33.14

Base on this calculation, we realize that, we can have maximum profit of 33.14 with the quantity of 14.

If we keep selling in this rate, we can have a little profit in future. In order to maximize the profit, we must
find a better way to have long term profitable business.

3.0

Optimal sales price=Marginal cost* (Price elasticity/Price elasticity+ 1)

OP =M* (PED /PED+1)

= 200* -3/(-3+1)

=200* (-3/-2)

=200* 1.5= 300

The optimal sales price must be 300 when the price elasticity is -3 and Marginal cost is 200 RM.
4.0

Price discrimination is an approach which sets different Prices to same goods or service which are sold in
reasonable and possible prices to the customers. It includes same products which are sold in different prices,
to different buyers in both individual or group. Discrimination of price differs in 3 different types.: First-
Degree of Price Discrimination, Second-Degree of Price Discrimination and Third-Degree of Price
Discrimination.

Degree of Price Discrimination

First-Degree Price Discrimination is the least common since it has tight and rare informational requirements.
The purpose of First- Degree Price Discrimination is to take out from the total amount of consumer surplus
from each customer. Consumer surplus indicates the difference between the customer’s willingness of
purchasing the goods and the price he purchased. Second- Degree Price Discrimination is unlike the First-
Degree Price Discrimination. It strives to maximize the profits by packaging into good condition instead of
selling and distributing each product or service a time. Third- Degree Price Discrimination reflects varieties
of Prices of different groups of consumers. It occurs when different groups of consumers are set with
different stages of prices for the similar product and service. It’s the most common type of pricing in
different way.

Influencing factors on Airline industry

With price discrimination, the firm can identify the use of the product in market. For instance, domestic use
or industrial uses with different price elasticities. Market can be separated by circumstances of period,
distance or the nature of usage of the goods. For example: for educational institutions, the new edition of
Microsoft office software is available with lower price than to other buyers. In this situation, the buyers who
got the goods in cheaper price from elastic sub- market can sell at a higher and more profitable price with
inelastic sub-market. To make price discrimination visibly effective, the company also must possess
monopoly power. Price discrimination can happen under above mentioned degree if it meets certain
conditions.

First, the firm must be in imperfect competition as in perfect competition, there is no possibility for producer
to control prices. It needs to have certain level of monopoly power to allow producer to set price not to take
price. Price discrimination strategy is mostly applied in many industries like airline industry, entertainment
industry and pharmaceutical industry and hotel and tourism field. They give regular customers and to special
discount. For instance; Airline industry give lower price offer to those who buy tickets several months in
advance than those who buy at the last moment of travelling If the demand of some flight is high, the flight
fare will be increased whereas demand is low, they reduce the price to increase the sales. Many passengers
like to fly on weekends as they are going back home. So, weekends flight fare is higher than weekdays flight
fares.
Thus, timing is key for airline industry’s price changes. When passengers who want to travel in peak months
will plan to buy several months in advance with lower offer of price. For those who don’t plan in advance
and travel in peak time have to pay more than plan ahead people.

As a consequence, airlines use the mechanism known as inter-temporal pricing, which allows them to
target both “price sensitive” and “price insensitive” consumers. This represents a form of price
discrimination, particularly evident among low-cost airlines.

For the traveler, it is really an annoying thing to experience the rises of airfare and hotel charges day by day,
hour by hour in holiday seasons. This happens as the airlines aim to attract passengers who are price-
sensitive. Thus, they set aside several numbers of economy class tickets sell them in low price. If these seats
are sold, the airlines start increasing price for the rest of seats. The price of airfare depends on the months
especially in Myanmar Country, students from high school and university have summer holiday from March
to May 3 months. Especially, April is the water festival which is the longest and most important traditional
festival of Myanmar. People tend to return to their native town as well as visit foreign on these days. For
these people, summer vacation is the only option to travel and they pay more to get flight ticket. This
become peak season in Myanmar. Another time is Thadingyut which is lighting festival. In this period,
domestic planes are more in demand as they go back to their native town rather than going abroad. Charging
higher in high demand period is known as peak-load pricing.

A form of price discrimination called versioning is also being applied in airline to classify the quality of
transport service they provided. For business class, there are some more flexibility to adjust flight dates and
can even cancel without having to pay fines. And more space, better meal, carry more luggage, can board on
less- crowded queue and more spacious and comfortable seats than economy class. Besides, quantity
discount and frequent-flyer loyalty services are also available in airlines.

Overall, Price discrimination can’t always be negative thing as it can bring a lot of benefits to consumers.

5.0 a

The law of diminishing marginal returns states that employing an additional factor of production will
eventually cause a relatively smaller increase in output. This occurs only in the short-run when a minimum
factor of production is fixed such as, (capital) and so increasing a variable factor (e.g. labor) will result in the
extra workers getting in each other’s way, reducing productivity. Hence the short run cost curve at first falls
as increasing marginal returns are enjoyed (from specialization and division of labor) but then there comes a
point when the increased variable factor results in rising costs because productivity is hampered.

When a firm employs one employee to maximize the productivity, the output increases it the firm keep
appointing new employees. After rising for some extent, it remains constant and starts falling. This falling
point is diminishing point. Although the firm keeps increasing manpower, fixed cost such as furniture, office
asset and other non-labor asset are kept as fixed cost. Thus, no matter how variable cost are added, if the
fixed cost isn’t added in short-run, the firm can’t maximize the production. [ CITATION Law171 \l 1033 ]

Data and curve

Employee Output/ Total product Marginal product Average

product
0 0 O
1 6 6 6 Increasing returns
2 14 8 7
3 21 7 7 Diminishing returns
4 24 3 6
5 22 -2 4.4 Negative returns

Diminishing rates
Negative rates

Increasing rates
Total Output

Labor

In this figure, when 2 employers are appointed, the productivity increases in double initially. When the third
and fourth employee are added, the total product increases but the marginal product decreases. When the
fifth employee is added total product and marginal product both decreases. Although the employees are
homogenous who have same efficiency and skills, the production is decreased, it is because although
variable cost are changing, the fixed cost remain unchanged. This diminishing marginal returns law is used
in the short-run situation. Labors are the main variable cost in a firm when workers can maximize their
productivity, the firm can minimize the cost. but when the diminishing of marginal returns begins in the
firms, the productivity will decrease, and the cost of additional output unit will start rising.
 The diagram above illustrates how costs and productivity related in the short-run costs and how the it
can be shaped by the law of diminishing marginal returns. For example, using a small amount of fertilizers
in the farmland will bring a sharp increasement in output. However, a large amount of using fertilizer can’t
bring more output. This make a diminishing point in farm business.

5.0 (b)

Economies of scale is the situation when the output quality of particular goods go up, per unit of the goods’
price go down. As a result, the average cost of small factory is larger than larger factory. On the other hand,
the larger factories produce goods in smaller average cost than smaller factories. As it can be changed in
production It’s a long-run cost curve as it is able to accept changes in production factors.

On the other hand, short-run cost curve allows changes only on variable costs and fixed costs are not
changed. The efficiency of a firm depends on its size as larger firms have more efficiency than smaller
firms. However, when it is vast firm it will lead to diseconomies of scales. Most firms expand their
operation scales to move towards to long term achievement. Such expansion can be obtained through
inspection on the changes of average cost in every production stage. There are two ways of expansion in a
firm which are organic growth which is also known as internal growth and integration which known as
external growth. External growth means getting merged or acquiring with other firms. While striving to
grow, the firm tries to cut down its average costs and to have competitive advantages. The cost reduction
process in a firm expansion is known as economics of scales.

When the firm starts to expand, the long run curve illustrates what is occurring to average cost. In the
following figure, it describes, the long run and short run cost curve along with tangent point.
The long run curve can choose to work with any average cost curve as all the costs are variable. Therefore,
the short-run cost curve is the base of long-run cost curve. For any output level, the long-run cost curve will
be the least expensive one. Furthermore, in the long-run curve, the production technology can be chosen
which makes all cost to be variable. Thus, firm can substitute other relative inputs which is less expensive to
maintain the least cost. This is why, the long-run cost curve is the least cost which allows the firm to choose
the production technology. The economies of scale is shown with downward-sloping and diseconomies was
shown in upward-sloping.

5.0 (C)

Economic globalization refers to the mobility of people, capital, technology, goods and services
internationally. It is also about how integrated countries are in the global economy. It refers to how
interdependent different countries and regions have become across the world. There are three economic
development except GDP growth which are well-being of people, the life expectancy and literacy of people.

The economic globalization is being expanded rapidly for two to three decades under the setting of GATT
(General Agreement Tariffs and Trade) and World Trade Organization. Many countries are filling the
barrier of trades in as fast as possible and their capital and current accounts are being opened. This kind of
open global economies help to develop the globalized operation such as Toyota car company. The parts of
Toyota company are produced from many different countries and sold across the world. Current automobile
industry across the world produce the parts of vehicles and assemble them in many integrated regions. There
is a dramatic rises of automobile parts production in those regions over 2 decades of periods.

Such kind of integrating in production emerges the rapid growth in global economies. Some are done
through direct investment from foreign and some through cross- border immigration which can reduce the
barrier in trades of a nation.

In European Union, almost across the whole continent have free and open movement of service, capital,
goods and labors. And the North American Free Trade Agreement also have free goods and services
movement policy. However, labors are not included in this title. The integrated global economy brings rich
and great wealth to a nation and globalization is associated to greater inequality too.

According to the motto of Unites Nations (UN), Economic globalization depicts the rises of interdependence
of global economies which is the result of growing rate of commodities and services, wide range of applying
technology and international capital flow in cross-border trade. Besides, UN says the main reason of the
rapid growth of world economies in recent decade is the fast and rapid growth of science and technology.
The electronics communication devices and internet connection enable to explore and access people
throughout the world which helps us to work together from any part of the world. Technology aids to cut
down costs of trading, transportation and communication. Additionally, it also gives smoother trading to
other countries without having to have branches in there. With the help of technology, many people are
employed as outsourced and offshore service which is one of the main factors of economies growth.

However, there seems to have some dispute that globalization brings more inequality as the is globalized
economically, there are some inequality of income and wealth within the nation. Employees from
international company earn with the international pay which is quite more than local farmers or labors.
Nevertheless, the inequality of wealth is just a small portion when it is compared to the growth of advanced
economies.

6 (a)

Perfect competition describes situation of market where there are many buyers and sellers dealing in
homogenous products. Furthermore, there aren’t any technological, social and legal barriers on existing or
newly entered perfect competition. Under perfect competition, there is full price stability and equal price as
the sellers and buyers are aware of the present market price. Thus, the sellers or buyers can’t play game with
price increasing or decreasing. There isn’t price rigidity under this situation. Industry set price and buyers
and sellers follow it in full satisfaction. The market force: market demand and supply are mainly considered
to determine the price. In fact, demand and supply work interrelated in setting market price.

In perfect competition, the goods are homogeneous which mean the sellers are selling the same goods or
service and every business in the market has equal access to key factors of production and there are many
buyers and sellers and the new sellers can easily enter or exit the market.
In perfect competition, supply and demand curve intersect in a point which is called equilibrium point.

Demand curve under Perfect Competition:

The quantity of a product that consumers want to buy a certain and reasonable price while other facts remain
unchanged is called Demand. In this situation, at cheaper and lower price, buyers want to buy more
quantities and when at a higher price, they are willing to buy less quantities. Thus, demand can change
according to price.

The demand curve under perfect competition:

In this diagram, consumers want to buy more quantity in lower price
P & Q. When the price goes up, they buy less. P1 & Q1. Thus, in this perfect competition, the demand curve
is downward trend. This is because the consumers and get more at little price and it’s profitable for them.
Therefore, under perfect competition, the demand curve (DD’) slopes downward.

Supply under Perfect Competition:

Supply is the quantity that a seller wants to sell at a particular price. Unlike demand, sellers want to sell
more quantities at higher price and fewer quantities at lower price.

The supply curve under perfect competition:

In the above-mentioned figure, when the price is in low stage, sellers want to sell fewer (P&Q) and when the
price increases, sellers sell more quantity. (P1 & Q1). This is because that sellers make more profit at higher
price and a less profit at lower price. This is because the producers are able to earn large profits by supplying
products at higher price. Therefore, , the supply curves will appear as upwards slope under perfect
competition.

Equilibrium under Perfect Competition:

As discussed earlier, in perfect competition, the price of a product is determined at a point at which the
demand and supply curve intersect each other. This point is known as equilibrium point. At this point, the
quantity demanded and supplied is called equilibrium quantity.

The equilibrium under perfect competition:

In Figure-3, as we can see that supply is more than the demand. Therefore, price starts to fall down to OP.
Similarly, at price OP2, demand is more than the supply. Similarly, the prices will rise to OP. Thus, the
point that meets demand and supply curve is equilibrium (E) and the equilibrium price is OP and
equilibrium quantity is OQ.

6.0 (b)

Pricing Determination under Oligopoly Market | Economics

Meaning
Oligopoly is a market situation in which there are a few firms selling homogeneous or differentiated
products. It is difficult to pinpoint the number of firms in the oligopolist market. There may be three, four or
five firms.

It can be assumed as competition among the few. As there are a few firms in the market, the action of the
particular firm has impact on the other. This oligopoly market mainly produces both homogenous which is
similar product or heterogenous which is mixed products. Homogenous products are perfect and pure
oligopoly and heterogenous are imperfect or differentiated oligopoly.

Price Determination under Oligopoly:

IT is considered that if the oligopolistic firm reduce the price, it’s competitors will also adjust the price.
Unless they do, they will lose their customers. Therefore, the demand of won’t be increased if the firm
reduced the price and it’ demand curve will appear to be relatively inelastic. Contrarily, the oligopolistic
firm increases price and its competitors remained unchanged. In this situation, the buyers will purchase from
other firm and its demand will considerably decreased. In this situation, it’s demand curve will appear to be
in relatively elastic. However, in Oligopolistic industry, there are only a few firms with close substitution
product of other firms. The products have no significant differentiation with same quality. These products
don’t need a lot of amount for advertising cost. They already had a prevailing and satisfying market price
which they already agreed to sell. Each seller reacts on the movement of their competitors. Thus, any
attempt of each seller’s increasing or reducing price will be counteracted by other sellers to keep in track
with this seller. If Seller A rises price, the other sellers won’t follow, and they will sell with prevailing
market price which lets Seller A to leave the market. In this situation, the marginal cost curve passes through
the dotted point of marginal revenue curve. So, this changes in marginal cost curve have no impact on output
and price.

Reasons for Price Stability and rigidity in Oligopoly market

1. Individual sellers in oligopoly market had experience and witnessed the price wars which make them
prefer price stability.
2. They are content with current prices to avoid unnecessary uncertainty and risk.
3. By sticking to current price can prevent new firms entering easily to the industry.
4. They can increase their sales promotion activities at the current price rather than reducing it as non-
price competition is better than price-competition.
5. Sellers can do business without fear or anxiety of insecurity and instability as the other sellers can’t
disturb by price war.

Although the oligopolistic sellers want to keep the price stable, they may play with the quality and quantity
of the product. Thus, the price stability becomes unreal.

 Collusive Oligopoly
Collusive oligopoly is formed when firms in certain industry joins together as a single firm to increase profit
and negotiate among themselves in the market. There is also another type in oligopolistic firms which is
leadership firm which set the price for all firm and the rest of the firm follow the leadership firm price.
However, the Price leadership is imperfect collusion in oligopoly market as all firm follow the
lead of big farm. The big farm established the uniform price to homogenous quality of goods. The price
changes is informed to all firms to be uniform. There are three most common price leadership models: The
low-cost Leadership.

The low-cost Price

This type of leadership is that firm- A reduces the price lower than the other firm and other firm follow him.
Thus, Firm-A becomes price leader.
The Dominant Firm Price Leadership
This type of price leadership is a typical firm where the big firm set price and small firms follow. The
dominant firm fixes price and the small firm follow.
3. The Barometric Price Leadership:
In this price of leadership, there is no leader, but the wisest management leader announces the changes of
price which led other firms to follow. The type of leadership may not be dominant, biggest or lowest cost.
However, this type of firm act like barometer in forecasting the cost changes and condition of demand in
economy. Base on the formal and informal agreement, the other firms willingly accept to this type of firm as
a leader.

Non-Price Competition in Oligopoly:

In oligopoly market, the price is set as uniform. Thus, there is no price competition instead there is non-price
competition. They tend to compete in product quality, stylistic, selling on credit, installment, packaging.
And sales promotion including warranty and discounts.

7.0

a. The supply curve shifts to the left due to the cost of oil production increases and it makes a large sum of
cost to dig oil from the ground.

b. The demand curve shifts to the left due to the other substitution fuels are available in the market.
c. Demand curve shift to the left when there is a war in oil producing country and it can’t supply as before.

Section -B

1.0

Decision making is a vital role in a business firm as it can have serious impact on the business. When
making business decision, local factors derived from macroeconomics, National and international issues and
trends are also important factors to consider. Macroeconomics includes aggregate economic variables which
concerned with national income, employees’ number, government intervention, business cycle, consumption
and investment issues. Although firms seem to be small, they certainly react to external environment.
Macroeconomics bring extensive knowledge on licensing policy, economic planning, monetary and fiscal
framework, and changes in industrial policy. These factors have great impact on microeconomics firms.

To have a sustainable firm, it should look into the stability of overall business environment. If a firm’s
experiencing high rate of unemployment and almost facing bankruptcy, we can predict the consumers are
cautious on purchasing the services or goods. When there is higher unemployment rate, consumers spend
lower on buying goods. That makes the demand of the firm’s input less. Thus, firm tries to reduce their
production rate which again impact on employment circle.
The local trends also play a vital role is firm decision. Thus, investigating the environment of your
customers as well as business environment have strong impact on business. Currently, the outbreak of
Covic19 have strong impact on China’s export and other business field. Local firms within China and
outside China which have business relation with China industries start to suffer.

Media interventions can also have strong impact on firm’s business when it appears as negative feedback or
health impact result. For instance, when the health articles recently described that fish oil has high risk of
liver cancer, the fish oil industry suffer from sales decline.

The Fall of Interest rate can also have impact on business activities and buyers’ habits. As the buyers want
to take loans in low interest rate and the demand of the product becomes higher.

When the government have high expense, they receive higher taxation. At the same time, consumer have
lower income left in their hand. It leads to reduce their expense on goods. Which again affect the taxation of
government.

When there is high inflation, the income as well as the purchasing power of people drop which also affect
the demand of the product. Due to inflation, employees demand for higher wages and salary. The rises in
labor cost make the profit lower for a business.

Every business has relationship and interaction with the government policy and macroeconomy. There are
many factors that affect the business such as legal, social, technology, government policy and political
factors.

2.0

Aggregate demand indicates the total demand of final services and goods in economy. As it is measured by
total Expenditure of goods and services it can be defined as the amount of total money spent on household,
government and firms when buying a service or goods.

It can be assumed that it is the total expenditure which a firm intended to experience while buying the
necessary goods and services. Therefore, in economy, aggregate demand is similar to aggregate expenditure.
When the total intended expenditure of buying the output is bigger than previous time, it can be called as
higher aggregate demand. On the other hand, it appears a fall aggregate demand when the firm spend less on
the output. Clearly, aggregate demand response on the expenses and investment.

The main components of aggregate demands are: household spending on goods and services (C ), Gross
capital investment spending and the value of the change in stocks (I ), government spending on public
services ( G) , export of goods and services (X ), imports of goods and services ( M) . This all together make
AD= C+ I + G ( X- M).
Household demand includes the value of services and goods that each family wish to buy. The daily
expenses including accommodation and medical expenses are household demand. Private Investment
Demand refers to the expenditure of private entrepreneurs which include capital assets like raw materials,
building and machines, construction works and pants. However, it doesn’t include purchasing the existing
shares or security. It intends that production doesn’t refer to present production level, it intends to accelerate
the capacity of production in future. The demand of investment focus on machinery. The relationship
between interest rate and investment demand is known as investment demand functions. There are 3 main
portions of investment: revenue, cost and expectation of profit.

The total demand for all completed goods and services produced at a particular level of price in an economy
is called aggregate demand. It includes exports, imports and government expenses and factories and
equipment costs, capitals of goods.

Among these, household expenditure is the largest element of expenditure which is also known as private
consumption expenditure. If individual personal disposal consumption is higher, the private consumption
expenditure will also be higher. The investment expenditure by firms refer to planned expenditure by private
entrepreneurs. This kind of investment increase the number of outputs. If the market rate of interest in
higher, the investment expenditure becomes lower. Generally, Gross capital investment is the most volatile
when a firm decide to invest in capital spending for their future conditions. The business environment can be
changed depending on the nation’s income, investment of government, business cycle and interest rate. The
low interest rate raises up the demand investment due to the fall of investment cost at interest rate.
Consequently, the decline of price level can reduce the rate of interest which can make the increase in
investment demand and aggregate demand.

3.0

Not only inflation and interest rates, the exchange rate of currency is also one of the important factors in a
country’s trade. The currency which have higher value leads the import value less and high export value. A
rate with higher exchange can probably make the trade balance of a country worse. On the other hand, the
lower rate of exchange can make the trade balance improve.

3.1 Differentials in inflation

Generally, a country with lower inflation rate experiences rises in currency value because the purchasing
power increases. Higher inflation countries face depreciation which is accompanied by higher rate of
interest.

3.2 Differentials in Interest Rates

Exchange rates, inflation and interest rates are interrelating each other. Central banks dominant over
exchange rates and inflation which have impact on currency values and inflation. Higher interest rate makes
the exchange rate high and attracts capital of foreign investment.

3.3 Public Debt

When a country experiences large-scale of financial shortage while having to pay for public sectors and
government funding, it experiences inflation due to large debt. When it goes worse, the government starts to
produce money to return the debt that increases the inflation.

Depreciation is mainly related to the currency rate. As for Malaysian Ringgit rate, following factors cause
depreciation recently.

Low interest rate makes selling out ringgit and buy other currencies. Besides, buying ringgit in international
exchange encourages investors to draw back their currencies from Malaysia and invest in countries with
high-interest rate. The value of currencies declines when the currency market soars and leads to
depreciation. In conclusion, a country’s exchange rate, financial background, interest rate

The other factor is lower oil price which is the main export goods of Malaysia. The lower in price of crude
oil makes lower income in export which brings the result of lower demand of ringgit in international foreign
exchange market. In conclusion, a country’s exchange rate, interest rate, financial background and inflation
are the key factors to lead to depreciation.