ZCMAF6012 – BUSINESS ECONOMICS

SEMESTER II 2020/2021 ACADEMIC SESSION

GROUP ASSIGNMENT 1
Chapter 1 & 2

Submitted to:

Prof. Dr. Othman Yong

Prepared by:

MATRIC NO.
ZP05342 ZP05303
ZP05399 ZP05385
ZP05441 ZP05346
ZP05359 ZP05446
ZP05333

UNIVERSITI KEBANGSAAN MALAYSIA

 ZCMA6012 BUSINESS ECONOMICS

CHAPTER 1
Question 3

Suppose that the total benefit and total cost from a continuous activity are, respectively, given by
the following equations: B(Q) = 100 + 36Q – 4Q2 and CQ = 80 + 12Q.

MB(Q) = 36 -8Q and MC(Q) = 12]

a. Write out the equation for the net benefits.

Net benefits = Total benefits – Total cost

N(Q) = B(Q) – C(Q)

N(Q) = 100+36 –4Q2–80–12Q

N(Q) = -4Q2+24Q+20

b. What are the net benefits when Q = 1? Q = 5?

N (Q) = -4Q2+24Q+20

i. When Q=1
N(Q) = -4(1)2+24(1) +20
N(Q) =40

ii. When Q=5

N(Q) = -4(5)2+24(5) +20
N(Q) = -100+120+20
N(Q) =40

c. Write out the equation for the marginal net benefits.

Marginal net benefits, MNB(Q) = MB(Q) – MC(Q)

MNB(Q) = 36 -8Q -12

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MNB(Q) = -8Q + 24

d. What are the marginal net benefits when Q = 1? Q = 5?

Given, MNB(Q) = -8Q+24

i. When Q=1
MNB(Q) =-8(1) +24
MNB(Q) =16

ii. When Q=5

MNB(Q) = -8(5) +24
MNB(Q) = -40+24
MNB(Q) = -16

e. What level of Q maximizes net benefits?

At the maximum value of the net benefit, the difference between the marginal benefit and the
marginal cost is zero, indicating that the net benefit is maximized at the point where the marginal
net benefit is equal to zero.

MNB(Q) = -8Q+24

-8Q+24=0

8Q=24

Q= 24
8
Q=3 units

f. At the value of Q that maximizes net benefits, what is the value of marginal net benefits?

N (Q) = -4Q2+24Q+20

= -4(3)2+24(3) +20
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= -36+72+20

=56

Question 10

An owner can lease her building for $120,000 per year for three years. The explicit cost of
maintaining the building is $40,000, and the implicit cost is $55,000. All revenues are received,
and costs borne, at the end of each year. If the interest rate is 5 percent, determine the present value
of the stream of:

a. Accounting profits. b. Economic profits.

a) Accounting Profit

Accounting Profit = Total Revenue – Explicit Cost

= $ 120,000 - $ 40,000

= $ 80,000
𝐹𝑉
Present Value, PV =
(1+𝑖)𝑛

80,000 80,000 80,000

=
(1+0.05)1
+ (1+0.05)2 +
(1+0.05)3

= $ 217,859. 84

b) Economic Profit

Economic Profit = Total Revenue – (Explicit cost + Implicit Cost)

= $ 120,000 – ($ 40,000 + $ 55,000)

= $ 25,000
25,000 25,000 25,000
Present Value, PV =
(1+0.05)1
+ (1+0.05)2 +
(1+0.05)3

= $ 68,081.20
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Question 12

You are in the market for a new refrigerator for your company’s lounge, and you have narrowed
the search down to two models. The energy-efficient model sells for $1,700 and will save you $45
in electricity costs at the end of each of the next five years. The standard model has features similar
to the energy-efficient models but provides no future saving in electricity costs. It is priced at only
$1,500. Assuming your opportunity cost of funds is 6 percent, which refrigerator should you
purchase?

The net present value is:

$45 $45 $45 $45 $45

NPV= + + + + − $200
1.06 (1.06)2 (1.06)3 (1.06)4 (1.06)5

= $189.56 − $200

= − $10.44

The refrigerator that should be chosen is the standard model because it will save us $10.44 in terms
of the present value.

Question 15

Approximately 14 million Americans are addicted to drugs and alcohol. The federal government
estimates that these addicts cost the U.S. economy $300 billion in medical expenses and lost
productivity. Despite the enormous potential market, many biotech companies have shied away
from funding research and development (R&D) initiatives to find cure for drug and alcohol
addiction. Your firm – Drug Abuse Sciences (DAS) – is a notable exception. It has spent $200
million to date working on a cure, but is now at a crossroads. It can either abandon its program or
invest another $60 million today.

Unfortunately, the firm’s opportunity cost of funds is 5 percent, and it will take another five years
before final approval from the Food and Drug Administration (FDA) is achieved and the product
is actually sold. Expected (year-end) profits from selling the drug are presented in the
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accompanying table. Should DAS continue with its plan to bring the drug to market, or should it
abandon the project? Explain.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9

$0 $0 $0 $0 $12M $13.4M $17.2M $20.7M $20.7M

By the given situation, Drug Abuse Sciences (DAS) firm should not invest further because the
net present value of the income stream generated did not achieve the current cost of the project.
The explanation by using equation is as follows;

𝑓𝑣1 𝑓𝑣2 𝑓𝑣3 𝑓𝑣9

𝑁𝑃𝑣 = 1
+ 2
+ 3
+⋯ − 𝐶0
(1 + ⅈ) (1 + ⅈ) (1 + ⅈ) (1 + ⅈ)9

= 0 + 0 + 0 + 0 + 12m + 13.4m + 17.2m + 20.7m + 22.45m

1.05 1.102 1.157 1.2155 1.2762 1.340 1.407 1.477 1.551

= USD 60,108,613.11 – USD 200,000,000

= USD - 139, 891,386.89

Question 16

As a marketing manager for one of the world’s largest automakers, you are responsible for the
advertising campaign for a new energy-efficient sports utility vehicle. Your support team has
prepared the accompanying table, which summarizes the (year-end) profitability, estimated
number of vehicles sold, and average estimated selling price for alternative levels of advertising.

The accounting department projects that the best alternative use for the funds used in the
advertising campaign is an investment returning 9 percent. In light of the staggering cost of
advertising (which accounts for the lower projected profits in years 1 and 2 for the high and
moderate advertising intensities), the team leader recommends a low advertising intensity in order
to maximize the value of the firm. Do you agree? Explain.
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Profitability by Advertising Intensity

Profits (in millions) Units Sold (in thousands) Average Selling Price

Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Year 1 Year 2 Year 3

Advertising Intensity

High $20 $80 $300 10 60 120 $35,000 $36,500 $38,000

Moderate 40 80 135 5 12.5 25 35,800 36,100 36,300

Low 75 110 118 4 6 7.2 35,900 36,250 36,000

Answer:

There is a situation whereby the team leader recommends low level of advertising intensity in
order to maximize the value of the firm. However, the 3-years profit projection shows that low
advertising intensity level may result into low profit in the final year, in comparison to the
projected profit for the final year with high level of advertising intensity which may doubled the
profit from low intensity advertising budget.

Furthermore, the table also suggests that low advertising intensity will undermine the number of
units sold on the 3rd year tremendously in comparison with the sale of units that may be resulted
from high intensity level of advertising which multiplied almost 17 times more than the former
option.

Therefore, it is quite an evident that moderate and low intensive advertisement campaign may
results in higher profits in the initial years, but if the company invest on high intensity level of
advertisement, therefore the profit is projected much higher in 3rd year.

Given from the projection that the investment will be returning at 9%, therefore, to choose the best
resort to maximise the value of the company, the present value analysis (PV) can further detail as
follows:
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Yearly profit
Hard Moderate Low
PV

Profit PV Profit PV Profit PV

($ mil) ($ mil) ($ mil) ($ mil) ($ mil) ($ mil)
Intensity level of
advertisement

Year 1 20 18 40 37 75 69

Year 2 80 68 80 68 110 93

Year 3 300 232 135 104 118 91

TOTAL
318 209 252
($ mil)

Based from this analysis, the recommendation by team leader to opt for low intensity
advertisement will only put the company at the middle value between the highest ($318 mil.) and
lowest ($209 mil.), then it will not drive up the company to achieve at the desired value. Therefore,
then the best way to maximize the value of the firm is to reconsider the recommendation from the
team leader and then it is preferably for the firm to use hard intensity ads/campaign since it prevails
to mark the highest PV among other two methods of advertisement.
 ZCMA6012 BUSINESS ECONOMICS

CHAPTER 2
Question 1

The X-Corporation produces a good (called X) that is a normal good. Its competitor, Y-Corp.,
makes a substitute good that it markets under the name Y. Good Y is an inferior good.

a. How will the demand for good X change if consumer incomes decrease?

If consumer income increases, demand for good X will increase where the definition of a normal
good is when consumer incomes increase, demand for a normal good will increase as well. The
demand curve will be shift to the right.

b. How will the demand for good Y change if consumer incomes increase?

Since Y is an inferior good, a decrease in income will lead to an increase in the demand for good
Y. Thus, the demand curve will be shift to the right.

c. How will the demand for good X change if the price for good Y increases?

If the goods X and Y are substitutes, a decrease in the price of good Y will lead to a decrease in
the demand for good X. Thus, the demand curve for X will shift to the left.

d. Is good Y a lower-quality product than good X? Explain.

No. The term inferior good does not mean inferior quality but it simply means that the income and
consumption are inversely related.

Question 4

The demand for good X is given by Qxd = 6,000 – 0.5Px – Py + 9Pz + 0.2M.

Research shows that the prices of related goods are given by Py = $6,500 and Pz =$100, while the
average income of individuals consuming this product is M = $70,000.
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a. Indicate whether goods Y and Z are substitutes or complements for good X.

i. Goods Y are complements for X as the price of Goods Y are decreased.

ii. Goods Z are substitutes for X as the price of Goods Z are increased.

b. Is X an inferior or a normal good?

X is a normal good as the increase of income will cause consumer to buy less of of good X.

c. How many units of good X will be purchased when Px = $5,230?

Qxd = 6,000 – 0.5Px – Py + 9Pz + 0.2M

= 6,000 – 0.5(5,230) – 6,500 + 9(100) + 0.2(70,000)

= 6,000 – 2,615 – 6,500 + 900 + 14,000

= 11,785 units

d. Determine the demand function and inverse demand function for good X.

Qxd = 6,000 – 0.5Px – Py + 9Pz + 0.2M

= 14,400 – 0.5Px

=Px = 28,800 - 1 Qxd

0.5

Question 5

The demand curve for product X is given by Qxd = 300 – 2Px.

a. Find the inverse demand curve.

Qxd = 300 – 2Px

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2Px = 300 – Qxd

Px = 300 – Qxd
2
Px = 150 – Qxd
2

b. How much consumer surplus do consumers receive when Px = $45?

Px = 45

45 = 150 – Qxd
2
Qx = (150 – 45) x 2
d

Qxd = 210

Consumer Surplus = 0.5 x Qxd x (Pmax – Px)

Consumer Surplus = 0.5 x 210 x (150 – 45)

Consumer Surplus = 11,025

c. How much consumer surplus do consumers receive when Px = $30?

Px = $30

30 = 150 – Qxd
2
Qxd = (150 – 30) x 2

Qxd = 240

Consumer Surplus: 0.5 x 240 x (150 – 30)

Consumer Surplus: 14,400

d. In general, what happens to the level of consumer surplus as the price of a good falls?

In general, consumer surplus always increases as the price of a good falls because of the increase
in gap between the maximum price consumers are willing to pay (Pmax) and the price of the good
(Px).
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Question 6

Suppose demand and supply are given by Qd = 60 – P and Qs = P – 20.

a. What are the equilibrium quantity and price in this market?

Price: Qd = Qs
Qd = 60 - P = Qs = P- 20
60 - P = P - 20
P = 60-20
=40

That’s mean,
Qd= 60 - 40 = 40-20
P- Equilibruim = 60 - 40
= $20

b. Determine the quantity demanded, the quantity supplied, and the magnitude of the
surplus if a price floor of $50 is imposed in this market.

Quantity Demanded = Qd = 60 – 50
= 10
Quantity supplied = Qs= 50 – 20
= 30
Magnitude of surplus = Qs –Qd = 30-10
= 20

c. Determine the quantity demanded, the quantity supplied, and the magnitude of the
shortage if a price ceiling of $32 is imposed in this market. Also determine the full economic
price paid by consumers.

Quantuity demanded = Qd = 60-32

= 28
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Quantity supplied= Qs = 32 – 20
=12
Magnitude of surplus= Qd – Qs = 28 - 12
= 16

Question 9

The supply curve for product X is given by Qxs = - 520 + 20Px.

a. Find the inverse supply curve.

Given, Qxs = – 520 + 20Px

Qxs + 520 = 20Px.

Px = Qxs + 26
20

b. How much surplus do producers receive when Qx = 400? When Qx = 1,200?

i. When Qx = 400

Px = 400 + 26
20
= 46

ii. When Qx = 1,200

Px = 1,200 + 26
20
= 86