Wawasan Open University BBM102 Microeconomics TMA 1 Solution

This document presents a comprehensive solution to a Microeconomics Tutor-Marked Assignment (TMA 1) for the BBM102/05 course at Wawasan Open University. The assignment addresses key microeconomic concepts. Question 2 analyzes market equilibrium, calculating equilibrium price, quantity, and revenue before and after a shift in demand. Question 4 delves into price elasticity of demand for Indocafe and Nescafe, calculating the elasticity values and interpreting their implications on revenue. The solution also computes and interprets the cross-elasticity of demand between the two products, determining their relationship as complementary goods. The solution demonstrates an understanding of market dynamics, elasticity concepts, and their practical applications.

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Question 2
a) Equilibrium is attained when the demand and supply become equal. From the given
demand and supply schedule, it is apparent that at price of RM 9, the quantity demanded and
quantity supplied are the same which highlights existence of equilibrium.
Hence, equilibrium price = RM 9
Quantity received at equilibrium = 20 tonnes
Revenue at equilibrium = 20*9 = RM 180
b) Now there would be a change in demand and supply schedule as for each of the price, the
demand of rice would decrease by 7 tonnes. The revised demand and supply schedule is
given below.
Price
(RM)
Quantity
Demanded
Quantity
Supplied
3 21 14
6 17 17
9 13 20
12 9 23
15 5 26
18 1 29
It is apparent that now there is a change in the equilibrium condition as highlighted.
Hence, equilibrium price = RM 6
Quantity received at equilibrium = 17 tonnes
c) New revenue = RM 6 * 17 = RM 102
It is apparent that the revenue has decreased in comparison to the previous revenue of RM
180.

Question 4
Price elasticity of demand of Indocafe
Q1= 200 units, Q2 = 150 units
Percentage change in quantity = (150-200)/[(200+150)/2] = -28.57%
P1= RM 2, P2 = RM 3
Percentage change in price = (3-2)/((3+2)/2) = 40%
Hence, price elasticity of demand = -28.57/40 = -0.714
Price elasticity of demand of Nescafe
Q1= 50 units, Q2 = 100 units
Percentage change in quantity = (100-50)/[(50+100)/2] = 66.67%
P1= RM 2, P2 = RM 3
Percentage change in price = (3-2)/((3+2)/2) = 40%
Hence, price elasticity of demand = 66.67/40 = 1.67
b) It is imperative to note that since the price elasticity of Infocafe is negative, it is implies
that the demand and price are inversely related. Further, since the magnitude of price
elasticity is lower than 1, hence it would imply that demand is inelastic. As a result when the
price decrease, the quantity demanded would increase but the percentage change in quantity
demanded would be lesser in comparison to the percentage of price decrease. The net result
would be that there would a decline in the overall revenue if the price of Indocafe is
decreased.
c) The relevant formula to be used for computation of cross-elasticity is shown below.

Cross elasticity between Indocafe and Nescafe = (Percentage change in quantity demanded of
Indocafe)/Percentage change in price of Nescafe
It is known that when the price of Nescafe is increased from RM 2 to RM 3, there is a
decrease in the quantity demanded of Indocafe from 200 to 150.
Percentage change in quantity of Indocafe = [(150-200)/200]*100 = -25%
Percentage change in price of Nescafe = ((3-2)/2)*100= 50%
Hence, cross elasticity of demand = -25/50= -0.5
As the cross elasticity of demand is negative, it implies that the two products i.e. Indocafe
and Nescafe are complementary products.