ASSIGNMENT BUSINESS ECONOMICS (ECON 6120) Aqilah Bt Ahmad Hidzir (G1115468) Aminah Bt Abdullah (G1119912) Azniza Hartini Azrai

Azaimi Ambrose (G1114098)

Question 5 (Chapter 5)

Assuming that a firm faces an inelastic demand and wants to increase its total revenue, how much should it raise its price? Is there any limits?

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10 Figure 5

When demand is inelastic, then a price change is proportionately more than quantity. Thus the change in price has a bigger effect on total revenue than does the change in quantity. From this we can deduce that in order for a firm that faces an inelastic demand to increase its total revenue, the firm should increase its prices. As shown in Figure 5, total revenue rises from RM310 units = RM30 to RM106 units = RM60 as the price rises from RM3 to RM10.

There is limit in total revenue. This is because this firm faces an inelastic demand curve not a totally inelastic demand curve. Rational consumers would bind to leave the market when the price tends to get ridiculously high.

Question 13 (Chapter 9)

If factor X costs twice as much as factor Y (Px/Py = 2), what can be said about the relationship between the MPPs and the two factors if the optimum combination and factors is used?

Marginal physical product (MPPs) is the extra output produced by employing one more unit of the variable factor.

If Px/Py = 2, thus MPPx/MPPy = 2. rearranging the terms of the equation:

The reason is that if MPPx/Px = MPPy/Py, then, by

MPPx/MPPy = Px/Py = 2. Therefore, a change in X is twice than changes in Y.