Two incidents occurred in the Cameron Highlands

You must answer ALL the questions. (Total 100 marks) Question 1(a) Two incidents occurred in the Cameron Highlands which was a major vegetableproduction area in Malaysia. One was the severe storm that destroyed manyvegetable plantations in Cameron Highlands. The other was the crackdown ofillegal workers who worked in the vegetable plantations in Cameron Highlands….e a suitable market diagram for vegetable in Malaysia, and explain the effectson the equilibrium price and quantity of vegetables if these two incidentsoccurred concurrently.(10 marks) (b) A durian retailer estimated the price elasticity of durian to be -3.2 by using themid-point formula. Calculate the new quantity of durian demanded if theretailer originally sells 140 kg of durians at price of $51 per kg and he nowreduces the price to $45 per kg. Discuss the effect on retailer’s total revenue ifhe increases the price of durians.(9 marks) (c) Consider two goods A and B with income elasticity of demand -2.5 and 0.8respectively. During a recession where consumers’ income generally decreases,both sellers of A and B will earn higher revenue. Do you agree? Explain.(6 marks) Question 2(a) Serena sells her own patented perfume as a single priced, profit maximisingmonopoly. The perfume has a demand function of P = 60 – 2.5Q and marginalcost function of MC = 2.5Q, where P is the price and Q is the quantity. Thefixed cost is $120 and the total variable cost is the area under the marginal costcurve.Identify the optimal output, the price, the profit or loss, the consumer surplusand the producer surplus for Serena as a monopolist. Show the optimal output,the price as well as consumer and producer surplus graphically with a suitablediagram.(15 marks) (b) (i) Assume that fixed costs are sunk. Explain why a perfectly competitivefirm will operate if it can cover its total variable cost in the short run.(5 marks) (ii) Explain why all competitive firms will break even in the long run.(5 marks) ECO201e Copyright © 2016 SIM UniversityExamination – January Semester 2016 Page 2 of 4 Question 3(a) Two petrol stations, Golden Oil and Sun Petroleum are located in the highwaynext to each other. Each of them is considering lowering the price of their petrolfrom $1.20 to $1 per litre to boost revenue, but is concerned that the other partywill do the same.The daily revenue to both stations, with and without a price cut, are shown inthe payoff matrix below: GoldenOil LowerPriceMaintainPrice Sun PetroleumLower PriceMaintain Price$3,000 for Golden Oil$10,000 for Golden Oil$2,000 for Sun Petroleum$1,000 for Sun Petroleum$2,000 for Golden Oil$5,000 for Golden Oil$8,000 for Sun Petroleum$4,000 for Sun Petroleum Identify the Nash equilibrium and explain whether the game is a case ofprisoner’s dilemma.(10 marks)(b) The table below shows the payoff matrix of two commercial banks, Bank A andBank B. Each bank has two pricing strategies, to raise lending rate or to lowerlending rate.The figures in the matrix show the profits earned by each firm. Bank A RaiselendingrateLowerlendingrate Raise lending rate$200m for Bank A$185m for Bank B Bank BLower lending rate$100m for Bank A$165m for Bank B 5m for Bank A$138m for Bank B 0m for Bank A$280m for Bank B (i) Demonstrate that there is no unique solution to the game if this game isplayed simultaneously where both players move at the same time.(5 marks) (ii) What will happen if the game becomes a sequential game and Bank Agets to move first? Construct the tree diagram. Demonstrate that timingmatters and there is a unique solution now.(10 marks) ECO201e Copyright © 2016 SIM UniversityExamination – January Semester 2016 Page 3 of 4 Question 4(a) An island economy has built an integrated resort with a casino at the coastalarea to boost tourism revenue. However, the resort had damaged the coral reefsat the coastal area and the pollution created by the daily operations of the resorthad reduced the catch of the fishermen in the area.(i) Describe the type of externality that occurs. Explain with a suitablediagram that the market outcome is inefficient in the presence of thisexternality.(10 marks) (ii) Explain what the government can do to rectify this externality.(5 marks) (b) Consider two consumers A and B who are the only consumers of a product.Discuss how you would obtain the market demand curve of the product if theproduct is a public good. How would your answer be different if the product is aprivate good?(10 marks) —– END OF PAPER —– ECO201e Copyright © 2016 SIM UniversityExamination – January Semester 2016 Page 4 of 4

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