ECO201e. Managerial Economics. Assignment 2 – Group-bas

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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
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:TotalTime0 hours1sthour2ndhour3rdhourGreatestMarginalBenefit-+8 marks+7 marks+6 marksTotalGrade1300 hoursEconomics,70 marks0 hoursMathematics,60 marks1380 hoursEconomics,70 marks1-hourMathematics,68 marks1451-hourEconomics,77 marks1-hourMathematics,68 marks1511 hoursEconomics,77 marks2 hoursMathematics,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
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
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 - 1X(15,000 + 60,000) ÷ 2(60,000 –15,000)(1+ 11) ÷ 210X37,50045,0006
Income elasticity of demand (instant= 1.3889Question 1 (b)(ii)Income elasticity of demandClassification of goodsInstant noodles-1.6667InferiorMovies1.3889NormalSince 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
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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