Sunway University ECN5023: Economics of Sustainability Assignment

This document presents a comprehensive solution to an economics assignment focused on the economics of sustainability management. The assignment analyzes the financial sustainability of two banks, calculating their Capital Adequacy Ratio (CAR) and assessing the impact of non-performing loans (NPLs) under various scenarios. It also delves into the economic implications of an infant protection policy, evaluating the effects of tariffs and subsidies on drone imports and domestic production. The solution includes balance sheets, profit calculations, and welfare analysis, with recommendations for policy implementation. The assignment covers concepts such as CAR, NPLs, supply and demand curves, and the impact of government interventions on market equilibrium and consumer/producer surplus. Furthermore, the solution provides a detailed analysis of the economic consequences of different policy choices, comparing the effects of tariffs and subsidies on domestic production, import levels, and overall economic welfare. The document concludes with a recommendation for the government to adopt a subsidization alternative to reduce drone imports and support local producers.

ECONOMICS 1
Economics of Sustainability Management
Name of the student
Institutional affiliation
Course
Instructor’s name
City and state

ECONOMICS 2
SCEENARIO A:
Balance sheet at the beginning period
Bank A:
Bank A balance
sheet $ $
Assets
loans (cash) 99 99
equity and liabilities
capital 10
deposits 20
bonds 70 100
Bank B:
BANK B balance
sheet $ $
Assets
loan (cash) 80
equity and liabilities
capital 10
deposits 20
bonds 50 80
SCENARIO B: computing the actual CAR
Capital Adequacy Ratio (CAR) is a technique used by banks and other financial
institutions in measuring the level of capital expressed in terms of risk-weighted credit
exposure (Reserve Bank of New Zealand, 2007). The CAR is also used a measure of
protection to creditors, and promotion of sustainability of financial institutions. The formula
for calculating CAR is stated as: CAR = Tier 1 capital+Tier 2capital
Risk Weig h ted Assets . Alternatively however,
CAR can also be calculated as: (total capital)/weighted loan amounts.

ECONOMICS 3
CAR for bank A:
Therefore CAR =
Tier 1 capital+Tier 2capital
Risk Weig h ted Assets
= $(10/27)*100
CAR =0.37*100
= 37%
CAR for bank B:
BANK B
risk-weighted
exposures on the
balance sheet
amoun
t
risk
weighting
risk
weighted
exposure
s
exposure type
cash 80 0% 0
commercial loans 20 100% 20
5 year bond 50 10% 5
total 150 25
CAR = (10/25)*100
= 0.4*100
CAR = 40%
Profit for Both Banks
profit bank A Bank B amount
amount ($) $ $
Interest on loans
(4%) $80.0 $3.2 $99.0 $4.0
5-year bond (3.8%) $50.0 $1.9 $70.0 $2.7
Less: deposit rate
(3.5%) ($20.0)
($0.7
) $20.0 ($0.7)
profit $4.4 $5.9
risk-weighted
exposures on the
balance sheet BANK A:
exposure type
amoun
t
risk
weighting
risk
weighted
exposure
s
cash 99 0% 0
commercial loans 20 100% 20
5 year bond 70 10% 7
total 189 27

ECONOMICS 4
Scenario B:
The bank owner should report the ratio of the nonperforming loan to the total loans of
the bank. It is done because it allows the owner to ascertain the quality of loans outstanding.
Scenario c:
The owner in such a case should set aside a specified amount of money to write off
the possible non performing loan. It is done because there are clear signs that the debtor is
likely not to repay the required instalments as agreed.
Scenario D:
In such a scenario, the bank owner should write off the nonperforming loan as an
expense in form of a bad debt. At such a time the loan has exceeded the acceptable 90 days
period of repayment (Beers, 2019).
Where the owner issues new shares, they will then be added to share ordinary share
capital in form of equity. They can also be subdivided into preference and ordinary shares.
Scenario E:
Reducing the CAR to 5% implies that financial institutions are less likely to meet
their obligations and therefore, access to capital is limited.
Question 2: Assessing the Economic Sustainability of an Infant Protection Policy
For domestic market;
Demand Curve = 20-2Q, Supply curve = 10 + Q
For equilibrium market,

ECONOMICS 5
20-2Q = 10 + Q
Qe (Drones) = 3.3 approximated to 3drones with the price of $13.4 per drone.
However, when the marginal (supply curve) shifts in 10 years,
20 -2Q = 5 + ½(Q)
Q = 6 drones in ten years and price $8 per drone.
Alternative 1
When 50% tariff is put on the imported drones for 10 years,
50/100 *6 drones = 3 drones
When 50% tariff is imposed on imported drones for 10 years, the quantity of drones imported
will reduce to 3 as the price per drone increases by $1.5. This will therefore encourage the
government to subsidize the local or domestic industries producing drones at a cheaper price.
Figure 1: Welfare Analysis

ECONOMICS 6
Alternative 2
When there is a subsidy of $4 per domestic unit produce in the country, the domestic quantity
will increase. That is to say,
P = 20 – 2Q, when the domestic producers are subsidized with price $4. By substitution;
20 -2Q = 4
Q = 8 units
Where e = equilibrium market,
A = quantity of drones for 10 years when the annual production is at least 2 thousands.

ECONOMICS 7
B = the quantity point when a 50% tariff is imposed for the10 years imported drones. This
implies that when the tariff is imposed, imported units are reduced to 3 units as point B
indicates.
C = the drones produced domestically when the government subsidizes each domestic unit by
$4. This shows that the price for local prices will increase up to $17.4 with the produced
quantity of 8 drones. This means that the imported drones will reduce since the domestic
producers are subsidized.
‘D’ is the point which meets the price and quantity of drones being demanded and produced
by the local producers after subsidization alternative.
Recommendation
Malarkey government should adopt subsidization alternative. This will help the government
to reduce on the increased importation of drones. The reduction of importation helps the local
producers to produce more with lower costs compared to imported drones.

ECONOMICS 8
References
Beers,B 2019. What Does A High Capital Adequacy Ratio Indicate? Retrieved
https://www.investopedia.com/ask/answers/040115/what-does-it-mean-when-company-has-
high-capital-adequacy-ratio.asp
Reserve Bank of New Zealand 2007. Capital Adequacy Ratios for Banks-Simplified
Explanation and Example of Calculation. Retrieved from
http://people.stern.nyu.edu/igiddy/articles/capital_adequacy_calculation.pdf