Friday, April 4, 2014

MRF0013: Basic Economics.

1. a)   What is a multinational corporation? State three examples of multinational corporation in Malaysia.
b) Why do these businesses (your examples in question 1a) go multinational ?
c) Assess the advantages and disadvantages facing Malaysia, as a host state, when receiving multinational corporations investment.
(25 marks)

a) Explanation of multinational corporation (2 marks )

A multinational corporation (MNC) or multinational enterprise (MNE) are organizations that own or control production or services facilities in one or more countries other than the home country.

For example, when a corporation that is registered in more than one country or that has operations in more than one country may be attributed as MNC. Usually, it is a large corporation which both produces and sells goods or services in various countries.It can also be referred to as an international corporation.

3 examples ( 3 marks)
1. DHL
2. Royal Dutch Shell
3. Petronas

b) Business go multinational because :  ( 5 factors x 2 marks = 10 marks)
Cut cost
Seek new market and new expansion opportunities
Ownership of superior technology
R&D capacity
Product differentiation
Entrepreneurial and managerial skills
Availability of raw materials
Relative cost of inputs
The quality of inputs
Avoiding transport and tariff costs
Government policy towards FDI
Economic climate in host nations

c) The advantages facing Malaysia, as a host state, when receiving multinational corporations investment : ( 2 factors x 2 marks = 4 marks)
Balance of payment
Technology transfer

The disadvantages :    ( 2 factors x 2 marks = 4 marks)
The environment
Transfer pricing

Organization of points and presentation = 2 marks.

2. a)   Externalities can be in the form of external benefits and external costs. Distinguish between these two types of externalities.
b) Analyze the external benefits and external costs resulting from the operations of manufacturing firms in Malaysia.
c) Discuss the possible government interventions in the market to rectify the problems of externalities ?
(25 marks)

a) Definition of external benefits (1 mark)

Definition - An external benefit occurs when producing or consuming a good causes a benefit to a third party.
The existence of external benefits (positive externalities) means that social benefit will be greater than private benefit.

Definition of external costs  (1 mark)

-  An external costs occurs when producing or consuming a good or service imposes a cost upon a third party.
-  If there are external costs in consuming a good (negative externalities), the social cost will be greater than the private cost.
-  The existence of external costs can lead to market failure. This is because the free market generally ignores the existence of external costs.

b) External benefits : ( 3 x 2  marks = 6 marks)
industrial training by a firm has positive effects on labor productivity and can reduce the cost of other firms 
The opportunity of firms to access the R & D results of other firms might reduce the costs of production and can be transferred to the consumers in terms of lower prices 
Health provision by a firm will reduce absenteeism and creates a better quality of life and higher living standards.
Job creation by small firms who deals with manufacturing firms

External costs : ( 3 x 2  marks = 6 marks)
water pollution
air pollution
traffic congestion in industrial area
higher consumer products’ prices
social problems 

c) Government intervention : ( 4 x 2 ½  marks = 10 marks)
Property rights
Laws prohibiting or regulating undesirable behaviors
Price controls
Provision of goods and services  (health care and education)

Organization of points and presentation = 1 mark.

3. a)  Country’s economy is growing and demands for most consumer products are increasing. Discuss the factors that might cause the increase in demand for these products.
b) Assume that in good economic condition government allows taxi drivers to increase taxi fares by 5 %. This situation leads to a fall in demand for taxi services in the city from 10 000 trips to 9 600 trips daily.

i)   Calculate the price elasticity of demand for taxi services.
ii) What might happen to total income of the taxi drivers when they raise their taxi fares? Justify you answer.
iii) Analyze the factors that might influence the degree of elasticity of demand for taxi services.
(25 marks)

a) Factors that might cause the increase in demand for consumer products are :
i. Higher income
ii. Advertisement
iii. Change in tastes and preferences
iv. Government policy of income redistribution 
v. Change in price of related goods   
( 4 factors x 2 marks = 8 marks)

b) i)     E =   % change in quantity demanded / % change in price
=  [ (9600 -10000) / 10 000  x 100% ] divided 5 %
=  4 %   / 5 % = 0.8  (2 m)

ii) Demand for taxi services is inelastic. (1 m)
Thus increase in price will lead to an increase in income  ( 1 m) 
Total income = P x Q  (1 m)
Assume price increase from RM 10.00 to RM 10.50 (5% increament), total income will change from :
Total income before price change  :
=  RM 10 x 10 000 trips
=  RM 100 000

Total income after 5 % increase in fares :
= RM 10.50 x 9600 trips
= RM 100,800   ( 3 m)           
( Total 6 marks) 
iii) Factors that influence the degree of elasticity of demand for taxi services :
Necessity good
Time period
No close substitute available
Taxi fare constitutes only small portion of total income
( 4 factors x 2 marks = 8 marks)

Organization of points and presentation = 1 mark.

4. Dr. Munif, a medical doctor, resigned from government hospital and started his own clinic. He employs three assistants and one locum doctor.
a) What form of business structure is Dr.Munif’s clinic classified as? What are the advantages and disadvantages of this form of business structure ?
b) If Dr.Munif wants to expand his business in the future, advise him on the suitable internal and external growth strategies. What economies of scale would his business gain from that expansion ? 
(25 marks)

a) Sole proprietorship ( 1 mark)
Because : own by single owner, small business, has few employees (2 marks)
Advantages :  easy to set up, require small initial capital investment, flexible to changing market condition, success depends very much on the commitment of owner  (2 marks)

Disadvantages :  
i)  Limited scope for expansion (financial source & size of firm that the owner can manage effectively)
ii) Unlimited liability  (2 marks)
b) Definition of internal and external growth strategies (2 marks)
Suggestion of internal growth  -   horizontal integration / vertical integration / conglomerate
      Suggestion of external growth   -  merger & acquisition / strategic alliance
(2 x 4 marks = 8 marks)

Economies of scale :
Economies of bulk buying
Managerial economies
Marketing economies
Specialization & division of labor
By product
Spreading overhead
Financial economies
  ( 3 x 2 marks = 6 marks)

Organization of points and presentation = 2 marks.                

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