Individual Assignment

Assignment 1 (Individual)

MBA/19/5223 B. S. D. Perera

Sub Group No.: D–4

Course : MBA 502: Economic Analysis for Business

Instructor : Prof. A. T. Fonseka

Term : January – March 2019

Postgraduate Institute of Management

University of Sri Jayewardenepura
Declaration

I am fully aware of the content under plagiarism stated in the PIM Student Handbook, and I
hereby declare and affirm that I have strictly observed the law relating to intellectual property,
copyright and plagiarism in this exercise (Student Handbook, 2018).

…………………………..

B. S. D. Perera

Date: 02nd February 2019

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Part 1: MCQ Questions.

Table 1.1: Answers for the MCQ Questions.

MCQ Number Answer

1 B

2 B

3 D

4 C

5 A

6 C

7 E

8 B

9 D

10 B

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Part 2: Problems, Essay Questions & Short Answer Questions.

Question 1: Ch.1 p.26 Q 2 (Nihal’s Opportunity Cost).

Table 2.1: Nihal’s income and expenditure.

Income/Expenditure Amount (Rs.) Type Comments

The annual income 600000 SacrificeUse to calculate
opportunity cost.
Training costs (coach’s fee) 180000 Expenses Use to calculate
amount opportunity cost.
Meal expenses amount 200000 Regular Don't use to calculate
expenses opportunity cost as this
is a regular expense
that will occur in any
event.
Sports scholarship form the 100000 Gain Use to calculate
Ministry of Sports opportunity cost.
a) Nihal's Opportunity Cost for taking a year off from his job to train for the Asian Games
Championships 400 meters event next year.

Table 2.2: Nihal’s opportunity cost.

Income/Expenditure Amount (Rs.)

The annual income 600000

Training costs (coach’s fee) amount 180000

Sports scholarship form the Ministry of Sports (100000)

Nihal’s Opportunity Cost 680000

b) Annual Opportunity Cost for to the country of training Nihal assuming that the coach was
specially assigned to train Nihal.

Cost item Amount (Rs.)

The annual GDP lost 600000

Training costs (coach’s fee) amount 180000

Country’s Opportunity Cost 780000

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Question 2: Ch.2 p.56 Q 3 (Demand & Supply).

Table 2.3: Demand and Supply Schedules for CDs.

Price (Rs. per CD) Quantity Demanded (CDs) Quantity Supplied (CDs)
500 300 100
600 250 150
700 200 200
800 150 250
900 100 300
A) Equilibrium Price and Quantity.

Graph 2.1: Equilibrium Price and Quantity.

In a free market the consumers and producers behave uniquely to the price change. When the
price is high the demand goes reduces due to the consumer reluctant to buy and when the price
is low the demand increases where the supply will reduce from produces. As per the Economic
theory there will be an equilibrium price which will balance the demand and supply.

According to above schedule the equilibrium price is Rs. 700 when the equilibrium quantity is
200 CDs.

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B) If the price of a CD is Rs. 600.

Graph 2.2: If the price of a CD is Rs. 600.

When the price of a CD is Rs. 600 the quantity supply is visible by A and quantity demanded
is visible by B. Here the demand has an excess of 100 CDs.

With this excess demand consumer is willing to pay extra which influence the supplier to
increase the price and this will result in stabilizing the price at Rs. 700 and the quantity at
200 CDs, back in the equilibrium.

C) If the price of CD is 800.

Graph 2.3: If the price of CD is 800.

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When the price of a CD is Rs. 600 the quantity supply is visible by F and quantity demanded
is visible by E. Here the supply has an excess of 100 CDs.

With this excess supply producer wants their excess stock to be sold which creates a
competition and that will result to lower the price due to the competition. As a result the
price will decrease and this will result in stabilizing the price at Rs. 700 and the quantity at
200 CDs, back in the equilibrium.

D) CDs increase by 100.

E) CDs at 75.

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Question 3: Ch.3 p.79 Q 5 (Elasticity).

a) Sunil’s income elasticity of demand for Pasta.

Income Elasticity Demand (YED) – for Pasta

YED = (% changes in quantity demanded) / (% changes in the consumer income)

YED = (-20% / 10%)

YED = (-20/10)

YED = -2

b) Pasta is an inferior good

As there is a negative income elasticity of demand. Which has negative income elasticity
and as a result the consumers move to superior products when their income capacity
increases are called inferior goods. The income elasticity became negative as Sunil's
income increases and decreased quantity demand of Pasta, hence income elasticity became
negative.

c) Income elasticity of demand for Chicken.

Income Elasticity Demand (YED) – for Chicken.

YED = (% changes in quantity demanded) / (% changes in the consumer income)

YED = (5% / 10%)

YED = (5/10)

YED = 0.5

d) Chicken is a normal good.

Because, Chicken has a positive value of income elasticity of demand.

e) The income elasticity for Chicken < 1, hence the demand for Chicken is income inelastic.

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Question 4: Ch.7 p.182 Q 1 (Calculating profit).

a) Jack’s explicit costs.

Table 2.4: Jack’s explicit costs.

Item Amount ($)

Materials, Phone and utilities 50000
Wages paid 75000
Leased machinery 100000
Interest for $4000 borrowed from the bank 4000
Jack’s explicit costs 229000

b) Jack’s implicit costs.

Table 2.5: Jack’s implicit costs.

Item Amount ($)

Earnings 135000
Rent 33000
Savings interest 5% from $100000 5000
Normal Profit 75000
Jack’s implicit costs 248000

c) Jack’s profit calculated by the accountant.

Table 2.6: Jack’s profit calculated by the accountant.

Item Amount ($)

Jack's Sales 560000
Jack’s explicit costs 229000
Jack’s profit calculated by the accountant 331000

d) Jack’s economic profit.

Table 2.7: Jack’s economic profit.

Item Amount ($)

Jack's Sales 560000
Jack’s explicit costs 229000

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Jack’s implicit costs 248000
Jack’s economic profit 83000

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 References

Fonseka, A. T. (2018). Economic theory and management practice (2nd ed.), Colombo: Postgraduate
Institute of Management Publication.

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