MIDTERM

EXAM – YP 63A -TYPE B Nama: Ayustina Giusti

MM 5006 – BUSINESS ECONOMICS
30 MARCH 2021 – SUBMIT NO LATER THAN 11.00 AM NIM: 29120295
OPEN BOOKS, NO COMMUNICATION DEVICES


1. LG01/LO01/02/03. Based on your understanding market structure theory, answer the
following questions :
a. Provide an example of companies involved in either OLIGOPOLISTIC or MONOPOLY
market structure (Choose one only). Support and explain your answer.
b. Explain how companies in this market structure will maximize their profit? Provide
graphical illustration on how this company can produce its best output. What happen to
the economic profit in the short run and in the long run.
c. What is your opinion about the competitor increasing or decreasing price on the same
product in this kind of market structure? Explain your opinion according to economic
theory.
Answer:
a. Monopoly.
PLN, state-owned electricity firm has been engaged in monopoly behavior, which provides
electrical services throughout Indonesia. Currently, PLN is the only company given the
right and authority to produce, manage and distribute electrical energy services
throughout the country.
This is shown because PT. PLN is the sole seller or producer, a unique product and without
close substitutes, and its ability to charge whatever price they want. Therefore, traders
have exclusive control over the supply of goods and services in the market.
b. The profit-maximizing for PLN firm is to produce at the quantity where Marginal Revenue
is equal to marginal cost: that is, MR=MC.
If the monopoly produces a lower quantity, then MR>MC at those levels of output, and
the firm can make higher profit by expanding output. If the firm produces at a greated
quanity, then MC>MR, and the firm can make higer profits by reducing its quantity of
output.

It is seen that PLN will get the maximum profit when Marginal cost intersects the marginal
revenue.
 its long run, assumed monopolies have
a degree of economies of scale, which enables them to benefit from lower long-run
average cost.

its short run, point M is equilibrium. Monopoly has able to make supernormal profits
because the Price (AR) is greater than AC.
c. Since this is a monopoly market, there will be no effect when raising or lowering the
price. In fact, this market has no competitors and is the only one that has the power to
dominate the market.

2. LG01/LO01/02/03. You own four firms that produce different products. The following table
summarizes the conditions in each firm. After calculating the missing numbers for each firm,
make one of the following four decisions regarding operations in each firm, and explain why
a particular decision is reached.
(a) continue producing the same output level
(b) shut down
(c) increase output
(d) decrease output
Firm P MR TR Q TC MC ATC AVC
QUANTUM 3
1 300 100 250` 1.5 2.5 2
RADICAL 4 2 200 50 350 2 7 5
SOSO 8 5 80 10 70 5 7 6
TANGO 11 8 220 20 200 5 10 9
Answer:
Firm can maximize their profits, by opertating at output level: marginal revenue is
equal to marginal cost also the total revenue is higher than total cost.
a. Quantum: Decrease output. Its because the MC<MC, they need to decrese the
output production until MR=MC. TR>TC to gaining their profit.
b. Radical: Shutdown. They take a loss while running their business (TR<TC). Because
P<AVC so they need to shut down, it also because P<AVC, the losses they take
 when operating is higher than the losses from fixed when they are not operarting
in the short run.
c. SOSO: they should continue producing the same output level. Because the
MR=MC. TR>TC so they are gaining profits.
d. TANGO: increase output. The MR>MC, it makes their production must be
increased unyil MR=MC and TR>TC so they are gaining profits.
3. LG01/LO03. Suppose that in a city there are 100 identical self-service gasoline stations
selling the same type of gasoline. The total daily market demand function for gasoline
in the market is QD = 60.000 - 25.000P, where P is expressed in dollars per gallon. The
daily market supply curve is QS = 25.000P for P > $ 0.60
• Determine algebraically the equilibrium price and quantity of gasoline
• Draw a figure showing the market supply curve and the market demand curve for
gasoline, and the demand curve and the supply curve of one firm in the market
on the assumption that the market is nearly perfectly competitive
• Explain why your figure of the market and the firm in part (b) is consistent
• Suppose that now the market is monopolized (a cartel is formed that determines
the price and output as a monopolist would and allocates production equally to
each member). Draw a figure showing the monopolist’s equilibrium output and
price
• How many gasoline stations would the monopolist operate
• Can we say that the monopoly leads to a less efficient use of resources that
perfect competition? What is the amount of deadweight loss, if any?
Answer:
a.

n= 100

QD=60000−25000P QS=25000P

QD=QS
60000−25000 P=25000 P

P=Rm1.2 Q=25000(1.2)

Q=30000
Therefore, quantity produces by each firm = 30000/100 = 300

 Firm curve in perfect
competition

It’s the market demand and

supply curve for gasoline

b.
c. Part (b) is consistent because in a perfect competitive market, the equilibrium price
and quantity are determined by the curve of the market demand and market supply
that is intersects.
Each company determines market prices and conducts production based on these
prices. So, competitive firms perfectly behave as price takers and accept market
prices as their price. The result of a slight fluctuation in price can cause the loss of all
their customers which occurs by moving to another company or customers will buy
at another company at a fixed price because all companies produce the same goods.
Demand for firm output will be horizontal at market-determined level of price.
d. Q = 60 000 – 25 000P

Derive Q function,

P=2.4 – 0.04Q

TR = P * Q

= (2.4-0.04Q)Q

=2.4Q – 0.04Q2

AR = TR/Q

=2.4 – 0.04 Q2 /Q

=2.4 – 0.04Q

 MR = Dtr/dQ

= 2.4Q – 0,04Q2

= 2.4Q – 0.08Q

Find P,

Qs = 25000P

P= 0.04Q

MR=P

2.4Q -0.08Q=0.04Q

2.4 = 0.04Q + 0.08Q

2.4 = 0.12Q

Q = 20

the market is monopolised, which monopoly produces at the point which


MR=MC, therefore,

Substitute Q = 20 into AR = 2.4 – 0.04Q

MR = 2.4 -0.08 Q
And get value of P in the graph for 1.6 and 0.8 respectively.

e. The minimum of quantity divided with the maximum quantity of firm producing.

Gas station = 20 000 / 300 gallons = 67 stations

f. perfect competition is more efficient in the use of resources than monopoly. In

competition, neither quantity nor price is done in a monopoly market.

A = PS

B = CS

Deadweight Loss = CS + PS

LossCS = 1/2(10X0.8) = 4

LossPS = ½(10X0.4)=2

DWL = 6

4. LG 06/LO01. Suppose Garuda Airlines and Lion Airlines were competing for business on the
Jakarta to Medan route during the off season. To lure travellers, they were offering low fares.
The question is how much to lower fares. Both Airlines were considering a deep reduction to
a fare of $400 round trip or a moderate one to $600. Suppose costs are such that each $600
ticket produces profit of $400 and each $400 ticket produces profit of $200.
Assume that studies of demand elasticity have determine that if both airline offer tickets for
$600, they will attract 6,000 passengers per week (3000 for each airline) and each airline will
make profit of $1.2 million per week ($400 dollar profit times 3,000 passengers). However, if
both airlines offer deeply reduced fares of $400, they will attract 2,000 additional customers
per week for a total of 8,000 (4,000 for each airline). While they will have more passengers,
each ticket brings in less profit and total profit falls to $800,000 per week ($200 profit times
4,000 passengers). In this example, we can make some inferences about demand elasticity.
With a price cut from $600 to $400, revenue fall from 3,6 million (6,000 passengers times
$600) to $3,2 million (8,000 passengers times $400).
 To keep things simple, we will ignore brand loyalty and assume that whichever airline offer
the lowest fare gets all of the 8000 passengers. If Garuda Airlines offers the $400 fare, it will
sell 8,000 tickets per week and make $200 profit each for a total of $1,6 million. Since Lion
Airlines holds out for $600, it sell no tickets and makes no profit. Similarly, If Lion Airlines were
to offer tickets for $400, it would make $1,6 million per week while Garuda Airlines would
make zero.
a. Based on the story above, draw a pay off matrix by assuming these airlines are in oligopoly
market.
b. Explain whether both airlines have a dominant strategy. Is there any Nash Equilibrium?
c. Suppose this competition is repeated every week and at one week Lion Airlines offer $600
fare, how will you ( as the pricing manager of Lion Airlines ) will react? Stay at low fares of
$400 or follow suit to increase fare at $600. Explain.
Answer:

a.

Lion Air

$400 $600

Garuda $400 ($800,000, $800,000) ($1,6 million, $0)

$600 ($0, $1,6 million) ($1.2 million, $1.2 million)

Payoffs:(Garuda, Lion Air)

b. Nash Equilibrium
Lion Air
$400 $600

Garuda $400 ($800,000, $800,000) ($1,6 million, $0)

$600 ($0, $1,6 million) ($1.2 million, $1.2 million)

Payoffs:(Garuda, Lion Air)

Yes, both airlines have a dominant strategy. The dominant strategy is lower fares to $400, and
gets the biggest payoff regardless whatever strategy of the competitor has. The Nash
Equilibrium is $400, $400
c. As Garuda's price manager, what I'm going to do in competitions like this is to implement a
tit-for-tat strategy and signal to Lion Air that we agree to raise the price to $ 600 to maximize
our profit. With that said, we are going to follow the market and not stick to a low of $ 400
because it's a repeat game, because with this kind of situation Lion Air could just turn them
back to $ 400 if I didn't follow their instructions. For this scenario they (Lion Air) can change
the price below our (Garuda) operating costs which will cost us money and in the long run will
put us out of business. So the better option is to maximize Garuda's profits and change the
fare to $ 600.






FINAL EXAM- SMEMBA3 -TYPE B

MM 5006 – BUSINESS ECONOMICS
29 JUNI 2019 – 09.00-11.00
OPEN BOOKS, NO COMMUNICATION DEVICES

4 ESSAY PROBLEMS BELOW:
1. Based on your understanding on the market structure theory, answer the following questions
a. Provide example of companies involved in either monopoly or oligopoly market structure?
Please explain and support your answer.
b. Explain how companies in this market structure will maximize their profit? Use graphical
illustration as necessary. What happen to the economic profit short run and long run.
c. What is your opinion about the competitor increasing or decreasing price on the same
product in this kind of market structure? Explain your opinion according to economic
theory.
d. Explain the company you are working now. In which market structure your company is in?
What are the characteristics? Who are the competitors? How does your company
compete against the competitors?
2. You own four firms that produce different products. The following table summarizes the
conditions in each firm. After calculating the missing numbers for each firm, make one of the
 following four decisions regarding operations in each firm, and explain why a particular
decision is reached.
(a) continue producing the same output level
(b) shut down
(c) increase output
(d) decrease output
Firm P MR TR Q TC MC ATC AVC
APEL 8 5 10 70 5 6
BERRY 3
1 100 1.5 2.5 2
CITROEN 4 2 200 2 7 5
DASH 11 8 20 200 5 9

3. The invention of a self milking cow machine allows cows to milk themselves. Not only does
this reduce the need for higher cost human assistance in milking, but it also allows the cow to
milk herself three times a day instead of two, leading to both a healthier cow and increased
milk production
a. show the effect of this innovation on the equilibrium quantity and price of milk
b. show the likely effect on equilibrium price and quantity of apple juice (a substitute for
milk)

4. LG 06/LO01. Suppose Virgin Airlines and American Airlines were competing for business on
the New York to Paris route during the off season. To lure travellers, they were offering low
fares. The question ia how much to lower fares. Both Airlines were considering a deep
reduction to a fare of $400 round trip or a moderate one to $600. Suppose costs are such that
each $600 ticket produces profit of $400 and each $400 ticket produces profit of $200.
Assume that studies of demand elasticity have determine that if both airline offer tickets for
$600, they will attract 6,000 passengers per week (3000 for each airline) and each airline will
make profit of $1.2 million per week ($400 dollar profit times 3,000 passengers). However, if
both airlines offer deeply reduced fares of $400, they will attract 2,000 additional customers
per week for a total of 8,000 (4,000 for each airline). While they they will have more
passengers, each ticket brings in less profit and total profit falls to $800,000 per week ($200
profit times 4,000 passengers). In this example, we can make some inferences about demand
elasticity. With a price cut from $600 to $400, revenue fall from 3,6 million (6,000 passengers
times $600) to $3,2 million (8,000 passengers times $400).
To keep things simple, we will ignore brand loyalty and assume that whichever airline offer
the lowest fare gets all of the 8000 passengers. If Virgin Airlines offers the $400 fare, it will sell
8,000 tickets per week and make $200 profit each for a total of $1,6 million. Since American
Airlines holds out for $600, it sell no tickets and makes no profit. Similarly, If American Airlines
were to offer tickets for $400, it would make $1,6 million per week while Air France would
make zero.
a. Based on the story above, draw a pay off matrix by assuming these airlines are in oligopoly
market.
b. Explain whether both airlines have a dominant strategy. Is there any Nash Equilibrium?
c. Suppose this competition is repeated every week and at one week American Airlines offer
$600 fare, how will you ( as the pricing manager of Virgin Airlines ) will react? Stay at low
fares of $400 or follow suit to increase fare at $600. Explain.