Student ID No.

: 202305D0025 - NAZIRUL HAZIQ BIN MOHD RIZAL

IC No. / Passport No. : 010523-01-2019
Subject Code : BBCE 1013
Subject Name : PRINCIPLES OF MICROECONOMICS
Programme : BACHELOR OF BUSINESS ADMINISTRATION
Lecturer Name : AIN FARHA BINTI SALAHUDDIN
Date (dd/mm/yy) : 03/09/2023
Semester : 202305

Instruction to Candidates:
1. Ensure all information filled is clear and correct.
2. All answer sheet must be combined together into ONE document before submission.
3. All answer must be type in ARIAL font size 12 OR written in blue or black ball point pen.
4. Any hand written or illustrations must be insert within this answer sheet document.

For Examiner’s use only

1st examiner’s 2nd examiner’s

Questions
recommended recommended
attempted
grades grades
1
2
3
4
5
6
7
8
9
10
Total grade
SECTION A –STRUCTURED QUESTIONS
QUESTION 1

Page 1 of 20
QUESTION 2
(a)
To determine the market demand and market supply for each price level, we need to calculate the
total quantity demanded and total quantity supplied at each price level.

Given:
Number of households (N) = 100
Number of suppliers (S) = 5

We can calculate the market demand (Qd) and market supply (Qs) as follows:

1. Price per bottle (RM) = 1.00:

Quantity demanded per household at this price level = 35
Quantity supplied per supplier at this price level = 300
Market demand (Qd) at RM 1.00 = (Quantity demanded per household) x (Number of households)
= 35 x 100 = 3500 bottles
Market supply (Qs) at RM 1.00 = (Quantity supplied per supplier) x (Number of suppliers) = 300 x
5 = 1500 bottles

2. Price per bottle (RM) = 2.00:

Quantity demanded per household at this price level = 30
Quantity supplied per supplier at this price level = 350
Market demand (Qd) at RM 2.00 = (Quantity demanded per household) x (Number of households)
= 30 x 100 = 3000 bottles
Market supply (Qs) at RM 2.00 = (Quantity supplied per supplier) x (Number of suppliers) = 350 x
5 = 1750 bottles

3. Price per bottle (RM) = 3.00:

Quantity demanded per household at this price level = 25
Quantity supplied per supplier at this price level = 500
Market demand (Qd) at RM 3.00 = (Quantity demanded per household) x (Number of households)
= 25 x 100 = 2500 bottles

Page 2 of 20
Market supply (Qs) at RM 3.00 = (Quantity supplied per supplier) x (Number of suppliers) = 500 x
5 = 2500 bottles

4. Price per bottle (RM) = 4.00:

Quantity demanded per household at this price level = 15
Quantity supplied per supplier at this price level = 650
Market demand (Qd) at RM 4.00 = (Quantity demanded per household) x (Number of households)
= 15 x 100 = 1500 bottles
Market supply (Qs) at RM 4.00 = (Quantity supplied per supplier) x (Number of suppliers) = 650 x
5 = 3250 bottles

5. Price per bottle (RM) = 5.00:

Quantity demanded per household at this price level = 10
Quantity supplied per supplier at this price level = 700
Market demand (Qd) at RM 5.00 = (Quantity demanded per household) x (Number of households)
= 10 x 100 = 1000 bottles
Market supply (Qs) at RM 5.00 = (Quantity supplied per supplier) x (Number of suppliers) = 700 x
5 = 3500 bottles

6. Price per bottle (RM) = 6.00:

Quantity demanded per household at this price level = 0
Quantity supplied per supplier at this price level = 850
Market demand (Qd) at RM 6.00 = (Quantity demanded per household) x (Number of households)
= 0 x 100 = 0 bottles
Market supply (Qs) at RM 6.00 = (Quantity supplied per supplier) x (Number of suppliers) = 850 x
5 = 4250 bottles.

Page 3 of 20
Now, you have the market demand and market supply for each price level:

Price per bottle (RM) Market Demand (Qd) Market Supply (Qs)

1.00 3500 1500

2.00 3000 1750

3.00 2500 2500

4.00 1500 3250

5.00 1000 3500

6.00 0 4250

These figures represent the quantities demanded and supplied at each price level in the market
with 100 households and 5 suppliers.

(b)
To find the equilibrium price and quantity:

1. Identify the price level where the quantity demanded (Qd) equals the quantity supplied (Qs).
This is the equilibrium price.

2. Read the corresponding equilibrium quantities (Qd and Qs) at the equilibrium price.

Based on the table, the equilibrium price and quantity are as follows:

 Equilibrium Price (P): RM 3.00

 Equilibrium Quantity (Q): 2500 bottles

So, the equilibrium price is RM 3.00 per bottle, and the equilibrium quantity is 2500 bottles. At this
price, the quantity demanded by consumers matches the quantity supplied by suppliers, resulting
in a market equilibrium.

Page 4 of 20
(c)
If the government sets a minimum price of RM2.00 per bottle for vitamin drinks, we need to
compare this minimum price with the equilibrium price to determine whether there will be a
shortage or surplus of vitamin drinks.

The equilibrium price, as determined previously, is RM3.00 per bottle, and the equilibrium quantity
is 2500 bottles.

Now, let's consider the government-imposed minimum price of RM2.00 per bottle:

 Minimum Price (RM): RM2.00

 Equilibrium Price (RM): RM3.00

Since the government has set the minimum price below the equilibrium price, which means
RM2.00 < RM3.00, there will be an excess supply or surplus of vitamin drinks in the market.
Suppliers are willing to supply less at RM2.00 than consumers are willing to buy at this lower price.
This situation results in a surplus.

In practical terms, suppliers are not willing to produce and supply as many vitamin drinks at
RM2.00 as they were at the equilibrium price of RM3.00. However, consumers are more willing to
buy vitamin drinks at the lower price of RM2.00, leading to a situation where the quantity supplied
(Qs) exceeds the quantity demanded (Qd).

In summary, if the government sets a minimum price of RM2.00 for vitamin drinks, there will be a
surplus of vitamin drinks in the market.

Page 5 of 20
(d)
To calculate the price elasticity of demand (PED) for vitamin drinks when the price increases from
RM2 to RM4, you can use the following formula:

First, calculate the percentage change in quantity demanded and the percentage change in price.
Percentage Change in Quantity Demanded:

New Quantity Demanded (at RM4) = 1500 bottles

Old Quantity Demanded (at RM2) = 3000 bottles

Percentage Change in Price:

New Price (RM4) = RM4.00

Old Price (RM2) = RM2.00

Now, you can calculate the price elasticity of demand (PED):

The price elasticity of demand for vitamin drinks is -0.5 when the price increases from RM2 to
RM4. Since the value is negative, it indicates that vitamin drink demand is inelastic. Inelastic
demand means that the percentage change in quantity demanded is proportionally smaller than
the percentage change in price, suggesting that consumers are not very responsive to price
changes, and total revenue may increase when the price increases.

Page 6 of 20
(e)
Based on the calculated price elasticity of demand (PED) of -0.5, we can determine whether the
demand for vitamin drinks is elastic or inelastic:

 If the absolute value of PED is less than 1 (|PED| < 1), it indicates inelastic demand.
 If the absolute value of PED is greater than 1 (|PED| > 1), it indicates elastic demand.

In this case, the absolute value of PED is | -0.5 | = 0.5, which is less than 1. Therefore, the
demand for vitamin drinks is inelastic.

So, based on the calculated PED of -0.5, the demand for vitamin drinks is inelastic, meaning
consumers are not very responsive to price changes, and total revenue may increase when the
price increases

(f)
If the seller plans to increase total revenue, they should increase the price of vitamin drinks,
assuming the demand for vitamin drinks is inelastic. Inelastic demand means consumers are not
very responsive to price changes, and increasing the price can lead to a net gain in total revenue

(g)
To calculate the income elasticity of demand (YED) for vitamin drinks when the income increases
from RM3000 to RM4000, you can use the following formula:

First, calculate the percentage change in quantity demanded and the percentage change in
income.

Percentage Change in Quantity Demanded:

New Quantity Demanded (at RM4000 income) = Quantity demanded at RM3.00 (which is 2500
bottles, as determined earlier)
Old Quantity Demanded (at RM3000 income) = Quantity demanded at RM3.00 (which is also
2500 bottles)

Page 7 of 20
Percentage Change in Income:

New Income (RM4000)

Old Income (RM3000)

Now, you can calculate the income elasticity of demand (YED):

The income elasticity of demand for vitamin drinks is 0. Since the YED is 0, it indicates that vitamin
drinks are an income-inelastic good. This means that the quantity demanded for vitamin drinks
does not significantly change in response to changes in income. Vitamin drinks are likely
considered a necessity or a normal good, where consumers continue to purchase them even
when their income increases.

Page 8 of 20
SECTION B – ESSAY QUESTIONS
QUESTION 1 (10 MARKS)
(a)
The market structure described above is known as a Perfectly Competitive Market Structure. Here are five
characteristics of a perfectly competitive market structure with reference to fruits, vegetables, and other
agricultural goods:

 Many Small Firms: In the agricultural sector, there are numerous small-scale farmers and producers,
each cultivating and selling a relatively small share of the total output. These farmers are typically
independent and do not have a significant market share individually.

 Homogeneous Products: Agricultural goods such as fruits and vegetables are often considered
homogeneous or identical. For example, a bushel of apples from one producer is usually
indistinguishable from a bushel of apples from another producer in terms of quality or variety.

 Price Takers: Individual farmers or producers in the agricultural market are price takers. They have no
influence over the market price for their products. Instead, they must accept the prevailing market price
for fruits and vegetables, which is determined by the overall supply and demand in the market.

 Free Entry and Exit: In the long run, new farmers can enter the agricultural market relatively easily, and
existing farmers can exit if they choose to do so. There are typically no significant barriers to entry or
exit, allowing for flexibility in response to market conditions.

 Perfect Information: Both buyers (consumers and wholesalers) and sellers (farmers) have access to
perfect information about market conditions. Prices are transparent, and all participants are aware of
the prevailing market prices for various agricultural products. This transparency helps ensure fair
competition.

In summary, a perfectly competitive market structure in the agricultural sector is characterized by many
small-scale farmers producing homogeneous products, each acting as a price taker with the ability to enter
or exit the market freely and access to perfect information about market conditions.

Page 9 of 20
 QUESTION 2 (10 MARKS)

(a)
Internal economies of scale refer to the advantages and cost savings that a firm experiences
as it grows larger and expands its operations. These advantages are typically associated with
the firm's internal processes and activities. Here are five examples of internal economies of
scale:

 Technical Economies: Larger firms often have access to more advanced and efficient
production technologies. They can invest in state-of-the-art machinery and equipment,
which can lead to increased productivity and lower production costs per unit. For example,
an automobile manufacturer may benefit from economies of scale by using automated
assembly lines.

 Managerial Economies: Larger firms can afford to hire specialized and experienced
managers and professionals. These managers can lead to better decision-making, more
efficient resource allocation, and improved overall management practices. For instance, a
large multinational corporation may have a dedicated team of financial experts to manage
complex international operations.

 Marketing Economies: As firms grow larger, they can achieve economies of scale in
marketing and advertising. They can spread their marketing expenses over a larger
volume of output, reducing the cost per unit of advertising or promotion. For example, a
global consumer goods company can advertise its products across multiple markets,
benefiting from bulk advertising rates.

 Financial Economies: Large firms often have better access to financial resources and can
secure loans or capital at more favorable terms. They may also benefit from economies of
scale in financial management, such as reduced administrative costs related to accounting
and financial reporting. Large corporations can issue bonds or stocks more cost-effectively.

 Risk Diversification: A larger firm can diversify its operations across different markets,
products, or regions. This diversification can help mitigate risks associated with economic
fluctuations or changes in market conditions. For example, a large agribusiness company
with diversified agricultural products is less vulnerable to the impact of adverse weather
conditions affecting a single crop.

Page 10 of 20
These internal economies of scale enable larger firms to produce goods or services more
efficiently and cost-effectively than smaller competitors, which can lead to competitive
advantages and increased profitability. However, it's important to note that there are also
potential diseconomies of scale that can arise as firms become too large and complex, such
as coordination challenges and bureaucracy.

Page 11 of 20
 QUESTION 3 (10 MARKS)

(a)
Yes, diminishing returns will likely be a factor in a farmer's decision-making process when
determining how many times to plant a new crop and how far apart to space the plants.
Diminishing returns refer to the concept that as additional units of a variable input (in this
case, additional plants or crops) are added while keeping other factors constant, the
additional output or yield gained from each additional input starts to decrease.

Here's how diminishing returns may affect a farmer's decisions:

 Planting Frequency: Farmers need to consider the optimal planting frequency based on
factors such as the crop type, climate, soil conditions, and market demand. Initially,
planting more crops may lead to increased overall yield. However, there comes a point
where the additional costs (e.g., labor, seeds, and maintenance) of planting another crop
may outweigh the additional revenue generated. Beyond this point, the farmer may
experience diminishing returns, and it may not be economically viable to plant more
frequently.

 Plant Spacing: Proper spacing between plants is crucial for optimal growth and yield.
Initially, spacing plants closer together may increase the overall yield per unit of land.
However, as the plants become overcrowded, they may compete for resources such as
sunlight, water, and nutrients. This competition can lead to reduced individual plant growth
and yield, resulting in diminishing returns. Farmers need to find the right balance between
spacing plants for maximum yield and avoiding overcrowding.

 Resource Allocation: Farmers must allocate their resources efficiently to avoid diminishing
returns. This includes managing inputs like fertilizers, irrigation, and pest control. Overuse
of these resources beyond their optimal levels can lead to diminishing returns and
increased production costs.

 Crop Rotation: To mitigate the impact of diminishing returns, farmers often practice crop
rotation. Crop rotation involves planting different crops in a field in successive seasons.
This helps improve soil fertility, reduce pest and disease pressure, and manage the effects
of diminishing returns associated with continuous planting of the same crop.

Page 12 of 20
 In summary, diminishing returns can significantly impact a farmer's decision-making process
when determining planting frequency and plant spacing. To maximize overall yield and
profitability, farmers must carefully consider the point at which diminishing returns set in and
make informed decisions regarding crop management, resource allocation, and crop
rotation.

(b)
Isoquants, in microeconomics, represent different combinations of inputs (typically labor and
capital) that can produce the same level of output. These isoquants exhibit several key
properties, which can be described using relevant figures:

 Downward Sloping: Isoquants slope downward from left to right, indicating the principle of
diminishing marginal returns. This means that as one input increases while the other is
held constant, the additional output produced gradually diminishes.

 Convexity: Isoquants are typically convex to the origin. This convex shape reflects the
concept of diminishing marginal rate of technical substitution (MRTS). It means that as you
substitute one input for another, the MRTS decreases, indicating that inputs are not perfect
substitutes for each other.

 No Intersecting Isoquants: Isoquants for different output levels do not intersect. This
ensures that each isoquant represents a unique level of output. If they intersected, it would
imply that the same combination of inputs could produce different output levels, which is
not consistent with economic theory.

 Higher Isoquants Represent Higher Output: Higher isoquants, located further from the
origin, represent higher levels of output. Moving from one isoquant to another in an
outward direction signifies an increase in output.

These properties of isoquants are crucial for understanding production theory, input
substitution, and cost minimization in microeconomics. They provide insights into how firms
can efficiently allocate their inputs to produce a desired level of output and minimize
production costs.

Page 13 of 20
 QUESTION 4 (10 MARKS)

(a)
In a mixed economy, which combines elements of both market capitalism and government
intervention, the main economic decisions revolve around what to produce, how to produce, and
for whom to produce. Here's an elaboration on these economic decisions in the context of a mixed
economy:

1. What to Produce:
 Consumer Preferences and Demand: Consumer preferences play a significant role in
determining what goods and services should be produced. In a mixed economy, market
forces, i.e., supply and demand, guide the allocation of resources to produce the goods and
services that consumers want.
 Government Priorities: The government may also influence what to produce through its
spending priorities. It may allocate resources to sectors such as education, healthcare, or
infrastructure, based on social and economic objectives.

2. How to Produce:
 Market Mechanisms: In a mixed economy, many goods and services are produced through
market mechanisms. Private businesses decide how to produce based on factors like cost-
efficiency, technology, and competition. Market forces encourage firms to adopt efficient
production methods.
 Regulations: Government regulations and standards can impact how goods are produced. For
instance, environmental regulations may require certain production methods to minimize
pollution. Occupational safety regulations can affect labor-intensive industries.

 Public Ownership: Some industries, such as utilities or healthcare, may be publicly owned or
heavily regulated. In these cases, the government may directly influence how goods and
services are produced to ensure access, affordability, and quality.

3. For Whom to Produce:

 Income Distribution: Deciding for whom to produce involves addressing income distribution. In
a mixed economy, there's often a focus on ensuring that a broad section of society benefits
from economic activities. Progressive taxation and social welfare programs are common
methods to address income disparities.
 Market Access: Market mechanisms play a role in determining who can access goods and
services. Prices and affordability can influence the distribution of products. Government
policies may also target affordability, such as subsidies for essential goods.

Page 14 of 20
 Public Goods: Some goods and services are considered public goods and are provided to all
citizens regardless of income. Examples include public education, defense, and law
enforcement.

4. Stabilization and Policy Objectives:

 Economic Stability: Governments in mixed economies often pursue policies to maintain
economic stability. This includes managing inflation, controlling unemployment, and ensuring
steady economic growth. Tools like monetary policy (interest rates) and fiscal policy
(government spending and taxation) are used.
 Social Welfare: There is typically an emphasis on social welfare and addressing social issues
in mixed economies. This includes policies related to healthcare, education, affordable
housing, and poverty alleviation.

5. Investment and Innovation:

 Encouraging Investment: Governments often play a role in encouraging investment in certain

sectors, especially those considered critical for long-term growth or national security. This can
involve tax incentives, grants, or public-private partnerships.
 Promoting Innovation: Governments may promote research and development, innovation, and
technology adoption to enhance competitiveness and address societal challenges.

In summary, the main economic decisions in a mixed economy are influenced by a combination of
market forces and government intervention. The balance between these elements can vary from
one mixed economy to another, but the ultimate goal is to achieve economic efficiency, equitable
distribution of resources, and the satisfaction of societal needs and preferences.

Page 15 of 20
QUESTION 5 ( 10 Marks ) - OPEN ENDED QUESTION
(a)
Natural monopolies present unique challenges and implications in economic theory, particularly
concerning market competition and consumer welfare:

i) Market Competition:

 Limited Competition: Natural monopolies, by definition, involve a single firm or a dominant

player in the market. This lack of competition can stifle innovation and reduce the incentive for
the monopolistic firm to lower prices or improve product quality since it faces no significant
threat from competitors.
 Barriers to Entry: High fixed costs and economies of scale create significant barriers to entry
for potential competitors. New entrants would need substantial capital investments, making it
economically unviable for them to challenge the natural monopoly. This lack of competition can
lead to reduced choices for consumers.
 Lack of Price Competition: In a natural monopoly, the monopolistic firm can potentially charge
higher prices than in a competitive market because consumers have no alternative suppliers
to turn to. This can result in price discrimination or the exploitation of consumers.
 Potential for Rent-Seeking: In the absence of competition, the monopolistic firm may focus on
maximizing its own profits rather than efficiently allocating resources. This can lead to rent-
seeking behavior, where the firm seeks to influence government policies or regulations in its
favor, potentially at the expense of consumers.

ii) Consumer Welfare:

 Higher Prices: Due to the lack of competition, natural monopolies can charge higher prices
than what might prevail in a competitive market. This can lead to higher costs for consumers
and reduced purchasing power.
 Inefficient Allocation: Natural monopolies may not allocate resources as efficiently as
competitive markets. Since they have little incentive to minimize costs or innovate, resources
may be underutilized or misallocated, which can result in lower overall economic welfare.
 Reduced Innovation: With limited competitive pressure, natural monopolies may have less
motivation to invest in research and development or adopt new technologies. This can lead to
slower technological progress and less innovative products or services.
 Regulation and Oversight: To protect consumer welfare, governments often regulate natural
monopolies. However, effective regulation can be challenging, and there's a risk of regulatory
capture, where the regulated firm influences the regulator in its favor. Ineffectively regulated
natural monopolies can still harm consumer welfare.

Page 16 of 20
In conclusion, natural monopolies have significant implications for both market competition and
consumer welfare. They limit competition, potentially leading to higher prices, reduced innovation,
and inefficiency in resource allocation. Governments often step in to regulate these monopolies to
ensure that consumer welfare is protected, but this requires careful oversight to be effective.
Overall, addressing the challenges posed by natural monopolies is essential to strike a balance
between market efficiency and consumer protection.

Page 17 of 20
 QUESTION 6 (10 MARKS) – OPEN ENDED QUESTION

(a)

Economies of Scale refer to the cost advantages that organizations can achieve as they increase
their level of production or expand their operations. These cost advantages result from spreading
fixed costs (such as infrastructure, technology, or management) over a larger quantity of goods or
services. In the case of Walmart, its ability to negotiate lower wholesale prices due to its vast
number of stores is an excellent example of economies of scale.

Here's how Walmart achieves economies of scale and negotiates lower wholesale prices:

 Large Retail Network: Walmart has an extensive network of thousands of stores across the
United States and around the world. This vast network allows the company to purchase goods
in very large quantities.

 Bargaining Power: Because of its size and the significant volume of goods it purchases,
Walmart possesses substantial bargaining power when dealing with vendors and suppliers.
Vendors are often willing to provide lower wholesale prices to Walmart because they value the
sheer scale of orders Walmart can place.

 Lower Wholesale Prices: Due to its bargaining power and ability to guarantee large purchases,
Walmart can negotiate lower wholesale prices for the products it sells. For example, if Walmart
orders 10 million units of a particular product, it can secure a lower unit price compared to a
smaller retailer ordering only a fraction of that quantity.

 Lower Average Total Cost: Lower wholesale prices translate into lower per-unit costs for the
products Walmart sells. This, in turn, lowers the average total cost of goods for Walmart.
Lower costs allow Walmart to maintain competitive retail prices and offer customers the
perception of getting value for their money.

 Competitive Pricing: Walmart's ability to offer products at lower prices than many of its
competitors is a result of these economies of scale. This competitive pricing strategy attracts a
significant customer base.

 Profitability: While Walmart may operate on relatively thin profit margins per unit sold, the
sheer volume of sales generated by its economies of scale contributes to its overall
profitability.
Page 18 of 20
The text illustrates this concept by mentioning that "Buying 10 million items cheaply from a
wholesale supplier may not be so cost-efficient if those items are sitting in a warehouse in Oregon
when a store runs out of stock in Georgia." This example highlights how Walmart's ability to
negotiate lower wholesale prices allows it to maintain efficient inventory management. By
purchasing in bulk and ensuring products are distributed efficiently, Walmart minimizes inventory
costs and avoids situations where goods are stranded in one location while needed in another.
This further emphasizes the cost advantages gained from economies of scale.

Page 19 of 20