Contents

Section – A 1................................................................................................................................................1
Question 2...................................................................................................................................................2
Question 3...................................................................................................................................................3
Question 4...................................................................................................................................................4
Question 5...................................................................................................................................................4
Law of diminishing returns and the short-run cost curve.........................................................................4
Economies of Scale.................................................................................................................................5
Shapes of Long-Run Average Cost Curves.............................................................................................7
Question 6...................................................................................................................................................9
a. Perfect competition..............................................................................................................................9
b. Oligopoly...........................................................................................................................................10
Answer 7...............................................................................................................................................10
Question1..................................................................................................................................................12
The important of macroeconomic environment’s variables influencing in business activities...............12
Question 2.................................................................................................................................................13
Answer 2...............................................................................................................................................13
Question 3.................................................................................................................................................14
Answer 3...............................................................................................................................................14
References.................................................................................................................................................16

PART – 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

Question 2
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.

Question 3.
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.

Question 4
What is meant by price discrimination? What are the conditions to make price discrimination
effective? Discuss your answers with examples from the Airline Industry.
Price discrimination is the situation where a product seller sells the same product at
different prices to different customers. As a result, customers are billed differently, but the price
is different for different customers because they are the same product or the same product. For
example, in the aviation industry, geographic or tariff barrier conditions can help make price
discrimination effective. This is because they trade with foreigners from different countries. That
is, customers come from abroad. This makes the market imperfect because customers can't
understand the price charged to others and can't compare other industries. In the aviation
industry, owners can reach agreements with other industries and differentiate the price of
different passengers. This means they are plotting and customers cannot reveal the secrets behind
them. As a result, price discrimination has increased and the industry has succeeded.

Question 5
Write short notes on:

Law of diminishing returns and the short-run cost curve

As more variable factors (such as labor) are added to fixed factors (such as capital),
companies reach a point where labor and capital become imbalanced, reducing the marginal
product of labor and thereby limiting the marginal value. Will increase. Cost and average
variable cost. The law of decreasing marginal profit states that the use of additional factors of
production will eventually lead to a relatively small increase in production. This can only occur
if at least one fixed production factor (such as capital) is fixed, so adding a variable factor (such
as labor) will cause extra workers to interfere with each other and increase productivity.
Decreases. As a result, the short-term cost curve initially declined with increasing marginal
profits (due to specialization and division of labor), but at some point productivity was hindered,
and costs increased due to increased variables.
Economies of Scale and the long run cost curve

Economies of Scale

Earlier in this module we saw that in the short run when a firm increases its scale of
operation (or its level of output), its average cost of production can decrease or increase. This is
illustrated in Figure 1.

Figure 1. Short Run Average Costs. 

The typical shape of the short-term average cost curve is U-shaped, with lower average power at
low power levels and higher average power at high power levels.

In the long run, if a company increases production, what will the average cost be? Many
industries are experiencing economies of scale. Economies of scale are situations where unit
prices decrease as production increases. This is the idea behind "warehouses" like Costco and
Wal-Mart. In everyday language: large factories have lower average production costs than small
factories. Figure 1 illustrates the concept of economies of scale, showing that as production
increases, the average production cost of an alarm clock decreases. For a small factory like the S,
the power level is 1,000 and the average production cost per alarm clock is $ 12. For a medium-
sized factory like the M, with a power level of 2,000, the average production cost per alarm clock
drops to $ 8. In large factories such as the L with 5,000 outputs, the average production cost per
alarm clock has dropped even further to $ 4.

Figure 2. Economies of Scale

A small factory like the S generates 1,000 alarm clocks at an average of $ 12 per clock. Medium-
sized factories like the M produce 2,000 alarm clocks for $ 8 per clock. Large factories like L
produce 5,000 alarm clocks for $ 4 each. Economies of scale exist because the larger the
production, the lower the average cost.

The average cost curve in Figure 2 looks similar to the average cost curve in Figure 1, but slopes
downward instead of U-shaped. But there is one major difference. The economies of scale curve
is a long-term average cost curve because it can change every element of production. The short-
term average cost curve assumes fixed costs, and you can change only variable costs. In other
words, economies of scale are situations where long-term average costs decrease as a company's
production increases.

A striking example of economies of scale is the chemical industry. Chemical plants have many
pipes. The cost of materials used to manufacture a pipeline is related to the perimeter of the
pipeline and its length. However, the amount of chemicals that can flow through a pipeline is
determined by the cross-sectional area of the pipeline. In the calculations in Table 1, the cross-
sectional area of the pipe is four times (such as “area”).

Table 1. Comparing Pipes: Economies of Scale in the Chemical Industry

Circumference (2πr) Area (πr2)

4-inch pipe 12.5 inches 12.5 square inches

8-inch pipe 25.1 inches 50.2 square inches

16-inch pipe 50.2 inches 201.1 square inches

Pipeline production costs have doubled and chemical companies can process four times as much
material. This model is a major reason for economies of scale in chemical production using
multiple pipelines. Of course, the economies of scale of chemical plants are more complex than
this simple calculation shows. However, chemical engineers designing these plants have long
used a rule called the "$ 6/10" rule. As far as possible.

Shapes of Long-Run Average Cost Curves

Pipeline production costs have doubled and chemical companies can process four times as much
material. This model is a major reason for economies of scale in chemical production using
multiple pipelines. Of course, the economies of scale of chemical plants are more complex than
this simple calculation. However, chemical engineers designing these plants have long used a
rule called "$ 6/10." As far as possible.
Figure 3. From Short-Run Average Cost Curves to Long-Run Average Cost Curves

Five different short-term average cost (SRAC) curves represent different levels of fixed cost,
from the low fixed cost level of SRAC1 to the high fixed cost level of SRAC5. Other SRAC
curves (not shown) are between the curves shown here. The long-term average cost (LRAC)
curve is formed by the lower end of the SRAC curve series to indicate the lowest cost to generate
each output when the fixed cost can change. If the company produces quantity Q3, select the
fixed cost associated with SRAC3.

The long-term average cost curve shows the cost of each quantity in long-term production, at
which point the company can choose a fixed cost level and choose the short-term average cost
required. If you plan to produce in Q3 in the long term, you need to deploy it in SRAC3 and
make a series of investments to produce q3 at the lowest cost. Companies planning to produce
Q3 are stupid to choose SRAC2 or SRAC4 at a fixed cost level. With SRAC2, the fixed cost
level is too low to generate Q3 at the lowest cost. Also, generating q3 requires very high variable
cost levels and very high average costs. With SRAC4, the fixed cost level is too high to generate
q3 at the lowest possible cost, resulting in higher average costs.

The shape of the long-term cost curve in Figure 3 is very common in many industries. The left
part of the long-term average cost curve slopes downward from power levels Q1 to Q2 to Q3,
indicating economies of scale. In this part of the long-term average cost curve, the larger the
scale, the lower the average cost. This pattern was described earlier in Figure 2.

In the middle of the long-term average cost curve, the flat part of the curve close to Q3,
economies of scale have been exhausted. In this case, expanding all the inputs does not change
the average production cost. This constant is called the scale. Within this LRAC curve, the
average production cost does not change significantly with scale.

Finally, the right part of the long-term average cost curve for power levels Q4 to Q5 shows how
the average cost increases as the power level and scale increase. This situation is called
economies of scale. Companies and factories are too large to manage, which can lead to
unnecessary high costs. Because many managers try to communicate with workers and each
other. Due to the high manufacturing costs, there are not many large factories in the real world,
so you cannot compete for a long time with factories with low average manufacturing costs.
However, in some planned economies, such as the former Soviet Union, government economic
planners should be competitive.

Not only large factories, but economies of scale can also occur throughout the company. The
Leviathan effect can hit companies that are too large to operate effectively across the enterprise.
Downsizing companies often respond by requiring entry into underdeveloped areas, with lower
production levels lowering average costs.

New Economies of Globalization

Question 6
Briefly explain how firms compete/set price under -

     a. Perfect competition

In a completely competitive market, products cannot be influenced by market prices

because products are homogeneous and buyers do not like certain sellers (Alm, 2009). As a
result, no company individually raises or lowers below a certain market price. Setting a uniform
market price, each seller in the market will follow the specified price.
   b. Oligopoly
In oligopoly, the market is dominated by a small number of companies. Companies
cannot take independent actions when setting prices, but they need to predict competitor
responses based on price changes (McManus, 2007). As companies raise prices, competitors gain
market share as consumers move to lower-priced companies. In other words, companies need to
plan and develop options based on what their competitors think are responsive. Therefore, oligo
occupants need to make important strategic decisions, whether they raise or lower prices or stay
the same. In some cases, companies conspired to form cartels.

Answer 7
a. A drastic reduction in the cost of production (i.e. shift in the supply curve)

P
S0
S1
P0 E0
P1 E1

Q0 Q1 Q

Fig-7(a) Cost of Production Curve (Shift in the supply curve)

Yes, if a drastic reduction in the cost of production, step 1- A supply curve will shift and then
Step 2-Supply curve will shift outward (shift to the right). Step 3- This shifted caused of
production is increased; the output quality will be more producing and the supplier also willing
to sell a larger quality at each price of level.
 b. A fall in the demand for oil and oil products (i.e. shift in the demand curve)

P S

P0 E0
P1 E1
D0
D1

Q1 Q0 Q

Fig- 7(b) A fall in the demand for oil and oil products (shift in the demand curve)

This causes of Shift in demand curves is happened when oil and oil products are decreasing such
as oil production costs are high and worker are rare with high salary but oil price is fallen. For
example, oil rig vessels are stopped to producing of oil due to production cost and machineries
are high but oil price are decreasing. Consequence of this process most of high salaries workers
became jobless and most of shipyards and marine business are going down and less of job and
some are holding new finished vessels are in hand and most of revenue profits are on hold and
then workers are terminated. So most of oil connected machineries are can’t buy and although oil
prices are decreasing, only less quantity oil are buy from buyer. So a Demand curve is shift in as
show in fig-7(b).

c. Other factors?
d. As the emerging energy producers start on line, the energy market has been falling in the
short term. Oil prices have been falling freely since June 2014, Japan, India, China,
Brazil and emerging markets, demand has fallen. The decline in demand is the result of
many factors.
o Slowing global economic growth;
o Increasing global oil production (especially in North America);
 o Unexpected resumption of oil production in Libya, Nigeria, South Sudan
and Iraq;
o Saudi Arabia’s decision to reduce oil production in August 2014 by 40000
barrels in an attempt to defend its market share amid falling international
oil prices.
o Surging natural gas liquids and hydrocarbon gas liquids production
outside the OPEC quota system.
o Natural gas is a nutrient for refineries and petrochemicals, which is
damaging the oil market.
o Japan’s decision to restart nuclear power plant to reduce demand for fuel
in the electric sector.

PART -B

Question1
Yes, macroeconomic environment affects the firm’s decision making.

The important of macroeconomic environment’s variables influencing in business

activities
When we think to set up a business there is not only one business in business
environment but its surrounding has large number of business sector are operated that is called
macroeconomic environment. Macroeconomic environment had affected to each business with
opportunities but also forces with thread.

The macroeconomic environment affected to business with six forces factors from outside; such
as Demographic, Economic, Social-Cultural, Technological, Ecological and Political-judicial.
This is called DESTEP model” [ CITATION Cla15 \l 1033 ].

Demographics refer to place of zone as location, people population, geographic and

infrastructure. Each of corporation are measuring how big of population size and this is highly
affected the business development of the firm.
Economic factors will refer to the characteristic of financial information such as market trend,
power of purchasing and inflation rate. Every business is influenced by economic, as can’t
reduce the inflation but can monitoring and covering of its impact.

Social-Cultural refers to the characteristic of consumer. Such as customer behavior and culture,
life-style choices, tradition, habits. Well understanding of social-cultural factors is the one of
important key point of the business growth.

Technological factors are heavily influence in macroeconomic environment due to this effects of
changes are can create new product or high efficiency of production and also can changes the
human life-style. Technological changes can come out opportunities of market need as customer
need for an example of communication sector of business from cable phone to keypad phone and
then updated to smart phone.

Ecological factors are referring to characteristic of physical environment as natural resources,

river, forest, air, water-fall, water, etc. These neutral resources are need to highly concerned by
company and need to consider and implement environment sustainability.

Political-judicial factors are referring to characteristic of government decision such as Rule and
Regulation, Laws, product’s safety regulation, Environmental safety, etc. That factors also one of
influence factor on business” [ CITATION Cla15 \l 1033 ].

Question 2
What are the main components of Aggregate Demand? Which components are more volatile
than others? Explain.

Answer 2
Aggregate Demand is the total quantity of demanded goods and services in economy and it is
measured in some specific time of period such as a month quarter of a year.

There have five main components of Aggregate demand 1) Consumer demand 2) Investment
demand 3) Government demand 4) Net of export demand.
The formulation of Aggregate demand is saying AD= C + I + G + (X-M)

Where AD is Aggregate demand, C is personal consumption expenditure, I is Gross private

domestic Investment, G is Government consumption expenditure and X-M is Net Export of
Goods and services.

Among of these components, Investment spending is the most volatile than other because it is
varies more and more year by year and largest component of the aggregate demand. According
to studies data from United States’ Economics, the more Investment spending is subsequence
increase the aggregate demand and also that leading to economic expansion. Oppositely, if
decrease the investment spending developing of economics also will be stay slowing
down”[ CITATION JRy20 \l 1033 ].

If comparing with other components, consumer spending is relatively stable because high
consumption is not optional, and consumer has not choice on buying or spending of lees or more
foods or goods. So these are not so sensitive component. And also Government spending is not
so sensitive and risky because Government spending will not going to bankrupt due to over
usage. So government can spend even in hard period of time.

Spending on business investment is most sensitive and volatile component in aggregate demand
because it is most optional and taking the risk because it is expectation on probability of future
profit. So if probability is wrong with unexpected reason Investment can be bankrupt anytime
and if business is success more than expectation will be high rich at any time. So investment
spending component is most sensitive and volatile at aggregate demand”[ CITATION Edi20 \l 1033 ].

Question 3
What determines the foreign exchange rate? Discuss critical factors which may have caused the
recent depreciation of the Malaysian Ringgit.

Answer 3
Determines of the foreign exchange rate

There are four ways to determine the foreign exchange rate.

1) Demand for foreign exchange

2) Supply for foreign exchange

3) Determination of exchange rate

4) change in exchange rate.

There have two types of exchange rate as flexible exchange rate and fixed exchange rate.

1) Demand for foreign exchange includes to purchase the good and service from aboard, to
invest the business in foreign country and to make payment of international trade and so
on.
2) Supply of foreign exchange includes export Goods from our country to foreign, foreign
tourist came from our country, to get the service charges from our country etc.
3) Determination of exchange rate is happening at the point of supply and demand curve of
foreign exchanges are equally intersection.
4) Change in exchange rate, let’s say Myanmar kyat 1000 is equal with 1 US $, if increase
in Myanmar’s demand for US and supply and other factors remain same. In this cause
can happen the Myanmar kyat exchange rate will be rise from 1000 to 1200 is equal with
1 US$. Vise visa if Myanmar’s supply are increase but demand and other factors are
remain constant. This cause can happen exchange rate of Myanmar 1000kyats to 1 kyat is
can equal with 1US$” [ CITATION Sin20 \l 1033 ].

Critical factor that caused the recent depreciation of the Malaysian Ringgit

The main things for Ringgit depreciation is not balance of supply and demand, demand is higher
than supply to foreign, on the other hand less of country’s income.

There have several factors that become the depreciation of the Malaysian Ringgit but if we
separate the main factors group this is only come out that internal and external factor such as
effect of global economy, though of foreign investor, government policy and supporting, labor
cost.

Global economy effect, not longer time before that is happened United States increased the
dollar value to make strength and wants to control the world economy. In that same time Chinese
decrease the Yuan to covering the trade balance and increasing the export of global market. So
these two of huge economies power countries are clashes and affect to the world economy and
especially forces to developing countries and also hit to Malaysia, that is the one of external
factors to depreciation of Malaysian Ringgit. Malaysia is producing the oil and export when US$
increased and Ringgit price will decrease.

Though of Foreign Investor, most of investors are making business to get higher profit. That
foreign investor though is connecting with Government policy and supporting and also directly
connecting with labor cost. When Government is not making proper labor law and cost, Investor
will finding the cheap labor cost countries as Myanmar and Vietnam. And also safety and
security is most effecting on Investors believing that need to support by Government.

Conclusion, as per above some of pointed factors of external and internal factors are make
depreciation of Malaysia Ringgit and also same thing can happening to other developing
countries”[ CITATION ABR20 \l 1033 ].

References
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http://updates@academia-mail.com

Claessens , M. (2015, febuary 26). marketing-insider.eu/macro-environment/. Retrieved from Popular:

https://marketing-insider.eu/macro-environment/

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then-there-was-none/. Retrieved from www.brookings.edu: https://www.brookings.edu

Editorial. (2020, March 6). Economics. Retrieved from eNote.com: https://www.enotes.com/homework-

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http://www.economicsdiscussion.net/foreign-exchange