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Managerial Economics Assignment 2 - Group-based Assignment

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Added on  2019-09-21

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This article discusses Managerial Economics Assignment 2 - Group-based Assignment, covering topics such as cost-benefit analysis, income elasticity of demand, rational spending rule, profit maximization, and more. It includes tables and formulas for better understanding. The article also mentions the importance of shutting down operations in case of losses and maximizing profit by producing outputs when marginal cost is on par with marginal price.
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ECO201eManagerial EconomicsAssignment 2 – Group-basedAssignmentJanuary 2017 PresentationStudent Name:StudentNumber:Pamela Lee Jia LingE1611460Nur Azlin Binte SabariZ1410637Nor’ain Binte MohammadYahya AttiaB09028061 | Page
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Question 1Question 1(a)Cost-benefit analysis (CBA) is a weighing-scale approach to making decisions.The economic concept of decision making on the margin can be used in other scenarios –in this case, to maximize the average grade of both Economics and Mathematicsexaminations.Cost: Hours of StudyBenefit: Highest gradeIn order to achieve a total highest grade of 151, it was derived that the whole three hoursmust be utilized. It is also necessary to allocate two hours of studying for Mathematics, andan hour on Economics.However, to ensure the marginal benefit is maximised for marginal cost for every additionalhour spent on studying, a chronological, step-by-step process for the revision schedule isadopted as follow:Total Time0 hours1st hour2nd hour3rd hourGreatestMarginalBenefit-+8 marks+7 marks+6 marksTotalGrade1300 hours Economics, 70 marks 0 hours Mathematics,60 marks1380 hours Economics, 70 marks1-hour Mathematics,68 marks1451-hour Economics,77 marks1-hour Mathematics, 68 marks1511 hours Economics,77 marks2 hours Mathematics, 74 marksAbove table is with reference and extracted from Appendix A.Therefore, sequencing is an important factor to consider so as to achieve the greatestmarginal benefit against marginal cost at every hour. The first hour should be spent onMathematics instead of on Economics, where it only reaped a marginal benefit of +7 marks.The next hour should be spent on Economics than on Mathematics where there is only an2 | Page
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addition of 6 marks. Finally, the last hour should be spent on Mathematics again, as choosingotherwise for Economics will only increase the grade by 5 marks.Question 1(a) continuedProgressively, the marginal cost of 1 hour is not only incurred but also kept constantthroughout every increment of hours spent in studying. The assumption made in the CBA is that economic agents are rational and seeks to maximisetheir own welfare. Therefore, an activity should be ideally pursued if the benefit outweighs itscost. In this case, although it is possible to study fewer hours than the maximum duration, it willeventually be most beneficial by attaining the highest grade possible.3 | Page
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Question 1 (b)(i)Income elasticity of demand (instant noodles), where:Qf: final quantities demanded = 0 packQi: initial quantities demanded = 7 packsIf: final incomes = $60,000Ii: initial incomes = $15,000Em = = = Income elasticity of demand (instant = − 1.6667Income elasticity of demand (movies), where: Qf: final quantities demanded = 11 moviesQi: initial quantities demanded = 1 movieIf: final incomes = $60,000Ii: initial incomes = $15,000Em = = = 4 | PageQf − QiX(Ii + If) ÷ 2(If − Ii) (Qi + Qf) ÷ 20 – 7X(15,000 + 60,000) ÷ 2(60,000 –15,000) (7+ 0) ÷ 2− 7X37,50045,0003.5Qf − QiX(Ii + If) ÷ 2(If − Ii) (Qi + Qf) ÷ 211 - 1 X (15,000 + 60,000) ÷ 2(60,000 –15,000) (1+ 11) ÷ 210X37,50045,0006
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Income elasticity of demand (instant = 1.3889Question 1 (b)(ii)Income elasticity of demandClassification of goodsInstant noodles -1.6667InferiorMovies 1.3889Normal Since instant noodles have a negative income elasticity of demand, it will be categorized asinferior goods. On the other hand, the positive income elasticity of demand for movies willindicate that movies are superior goods. A further analysis on the income elasticity of demand, 1.3889 > 1 would explain that moviesare luxury rather than necessity goods – where it tends to be very sensitive to changes inconsumers’ income.In response to a rise in Steven’s income, quantity demanded of movies has increased; whilethe quantity demanded for movies has decreased. This therefore explains the rationale behindSteven’s consumption to rise from 11 to 1 per year as he buys proportionately more ofmovies and purchased less of instant noodles from 7 to 0 packs a week.("Income Elasticity of Demand,")5 | Page
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Question 1 (b)(iii)The income elasticity of demand is a measure of responsiveness of quantity demanded tochanges in consumers’ income, with all other factors remaining unchanged.Goods or services that have negative income elasticities imply that they are inferior good,where the quantity demanded drops when income increases. This may further lead to changesin preference to more luxurious substitutes since consumers are able to increase spending andafford for it. There is thus a positive relationship between real income and the quantity demanded fornormal goods, whereas an inverse relationship for inferior goods.("Income Elasticity of Demand,")6 | Page
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