Economics for Business Assignment – GDP and Monetary Policy Analysis

Question 1

Grab operates a ride-sharing service in a city. To boost driver earnings and cover rising fuel costs, Grab increased the average fare per trip from P₁ = RM10 to P₂ = RM12. Following the price change, daily ride requests dropped from Q₁ = 5,000 rides to Q₂ = 4,000 rides.

(a) Calculate the Price Elasticity of Demand (PED) for Grab trips using the midpoint method. Is the demand elastic, inelastic, or unit elastic?

(b) Calculate total daily revenue before and after the price adjustment. Based on your PED result in part (a), explain why total revenue moved in the direction it did.

(c) Suppose the government steps in and sets a price ceiling of RM8 per ride to make urban transportation affordable. Explain the market outcome this creates and describe two real-world non-price impacts riders might experience.

Question 2

In Malaysia, Tenaga Nasional Berhad (TNB) operates as the sole owner and operator of the national electricity transmission grid (Grid Nasional) and primary power distributor across Peninsular Malaysia. Building duplicate transmission grids, sub-stations, and distribution cables requires massive upfront capital investments, making market entry by rival firms economically non-viable. To protect consumers from potential price exploitation while maintaining grid stability, the Malaysian government regulates electricity tariffs through the Energy Commission using an Incentive-Based Regulation (IBR) framework.

(a) Identify the specific type of monopoly market structure illustrated by TNB. Explain three key barriers to entry that protect TNB’s market position, clearly emphasizing the concept of economies of scale and high fixed infrastructure costs.

(b) Contrast the economic outcomes of an unregulated single-price monopoly with those of a perfectly competitive market. Explain why an unregulated monopoly is considered both allocatively and productively inefficient, detailing differences in price, output, consumer surplus, and deadweight loss.

(c) Evaluate two regulatory pricing strategies government regulators could impose on a natural utility provider: Marginal Cost Pricing (P = MC) and Average Cost Pricing (P = ATC). Discuss one major practical challenge regulators face when attempting to enforce these rules on a national utility provider.

Question 3

The island nation of Kunta produces only two consumer goods: Solar Panels and Fresh Mangos. The table below details production and price data for two consecutive years, with Year 1 selected as the base year:

(a) Calculate Nominal GDP for Year 1 and Nominal GDP for Year 2.

(b) Calculate Real GDP for Year 2 using Year 1 constant prices. Determine the economic growth rate (percentage change in Real GDP) between Year 1 and Year 2.

(c) Kunta’s minister of economics claims that standard of living improved dramatically because Nominal GDP grew faster than Real GDP. Evaluate this claim, and detail two limitations of using Real GDP growth as a sole indicator of citizen well-being.

Question 4

The economy of Kunte is currently operating in an inflationary gap—real GDP exceeds potential GDP (Y > Y*), unemployment is below the natural rate, and annual consumer price inflation has reached a 10-year high of 8.5%.

(a) Identify the appropriate monetary policy stance the Central Bank of Kinte should adopt to address this overheating economy. Identify and explain two specific policy tools the central bank can use to execute this strategy.

(b) Trace the step-by-step mechanism showing how the central bank’s action moves through money markets, interest rates, aggregate demand (AD), real GDP, and the overall price level.

(c) If the federal government simultaneously decides to assist using fiscal policy, describe one expenditure or taxation policy they could be implemented. Discuss one real-world risk or side effect associated with implementing this fiscal action.

Experts Answer on Above Questions on Economics

Price elasticity of demand

By utilising the midpoint method, the calculation of price elasticity of demand indicates an absolute value of -1.22, and since it is greater than 1, the demand is elastic. This implies that an increase in the fare would proportionally result in a larger percentage decrease in rides demanded.

Total daily revenue

The before price increase is RM40000 and after price increase is RM48000 and this leads to a decline in the daily revenue by RM2000. As the demand is elastic, the increase in the fare by 20% would result in a decrease in the quantity demanded by 20%. The fall in the number of rides outweighed the higher fare benefits and thereby reduces the total revenue.

Price ceiling of RM 8

Price ceiling of RM 8 is well below the original market price of RM 10 which implies that it is the binding price ceiling. It will result in excess demand as more passengers would want rides at RM8 while fewer drivers are ready to supply their services. The non price impact would be longer waiting time, and reduced service quality.

TNB’s monopoly structure

The Monopoly structure of TNB indicates a natural monopoly because one supplies electricity transmission and distribution at a lower average cost as compared to multiple networks. The three major barriers to entry are economies of scale, high infrastructure cost and control of essential network infrastructure, as TNB has established a grid that provides a structural advantage and it would be economically inefficient to duplicate a national electricity network.

Monopoly versus perfect competition

In Monopoly the price is higher whereas it is lower in perfect competition. The output in Monopoly is lower and perfect competition has higher output. The consumer surplus is lower in Monopoly and higher in perfect competition. In Monopoly the productive efficiency is inefficient whereas it is efficient in perfect competition in the long run.

Marginal cost pricing versus average cost pricing

Marginal cost pricing encourages output where the value to consumers equals the marginal cost of production, and it produces the allocatively efficient outcome. In average cost pricing, it allows the utility to cover its full operating and infrastructure cost, and avoid any kind of persistent losses.

Nominal GDP

For the solar panel, the nominal GDP is RM 50000 in year 1, RM20000 for mangoes. For year 2, it is RM66000 for solar panels and RM 27000 for fresh mangoes.

Real GDP and economic growth

On the basis of year one prices, the solar panels amount to RM500*120 times = RM60000 and fresh mangoes is RM18000.

Evaluation of the ministers claim

The claim of the Minister is not justified because the nominal GDP increased from RM 70000 to RM 93000 and the real GDP increased by only 11.43%. The two limitations of real GDP as a measure of well being are income distribution, and non market and environment factors.

Appropriate monetary policy

The central bank of kinte should consider adopting contractionary monetary policy because the economy is facing an inflationary gap, unemployment is below the natural rate and the inflation has reached 8.5%. The two specific tools are to increase the policy interest rates and open market sales when the central government sells government securities to reduce available liquidity.

Transmission mechanism

The process is contractionary monetary policy which includes Central Bank raising the interest rates which leads to decline in the bank liquidity and money supply. Market interest rate increases, borrowing becomes more expensive, and this will result in decline in consumption and investment activities. The aggregate demand falls, real GDP decreases, demand pull inflationary pressure decreases and the overall price level growth slows.

Fiscal policy

It is important for the government to increase the income or consumption taxes because higher taxes reduce the disposable income of households causing the consumption to fall. However the risk is a decline in the household spending from increasing taxes.

Want Detailed Answers with References?

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