BBM102 Microeconomics May 2021

Answer ALL questions

Question 1

What effect do you think an advertising campaign for coffee would have on each of the following, all other things remaining the same?

(a) Price of coffee

(b) Price of tea

(c) Quantity of sugar bought and sold

(d) Price of doughnuts

(e) Quantity of sleeping pills bought and sold

(f) Price of television advertising time

[60 marks]

Question 2

WOU Records decides to release an album by the group Cat and the Kittens. It produces the album with no fixed cost, but the total cost of downloading an album to a CD and paying Mary her royalty is RM6 per album. WOU Records can act as a single-price monopolist. Its marketing division finds that the demand schedule for the album is as shown in the accompanying table.

Price of album (RM) Quantity of album demanded

22 0

20 1000

18 2000

16 3000

14 4000

12 5000

10 6000

8 7000

(a) Calculate the total revenue and the marginal revenue per album.

[10 marks]

(b) The marginal cost of producing each album is constant at RM6. To maximize profit, determine the level of output and price it should charge for each album.

[15 marks]

(c) Cat renegotiates her contract and now demands a higher royalty per album. The marginal cost rises to be constant at RM14. To maximize profit, determine the level of output and price it should charge for each album.

[15 marks]