YUVIENCO, RIBOMAPIL C. ECN520M PROF.

INOCENCIO

1. A.) In this given scenario--train rides are a substitute good from bus rides. The market, i.e. the
average commuter, will definitely prefer a more efficient and economical means of travel during
rush hours. A train ride will be a wiser choice since the train tracks will virtually fly over the traffic
jams of Metro Manila.
This will cause an excess in demand, causing a shortage in
the equilibrium. Many commuters will prefer taking the
train. This will prompt the train operators to increase their
prices. This will then result into a clear shift to the right in
the demand curve, wherein price and quantity will
increase.

B.) Train rides serve as a complement good in this scenario. Flourishing food stalls can cause
commuters to ride more. These stalls are profitable when located inside places of mass transit. The
market, which is the average commuter, will definitely enjoy the convenience of catching a ready
meal from food stalls inside or beside the train station before riding the train to work.

The effect on the market equilibrium here would be a

surplus. This would be the case since in order to compete
in the market—in light of the train stations awash with
food stalls, proprietors must make sure that they lower
their prices or at the least make their products affordable.
Because there will be more commuters, increasing the
demand for train rides and likewise increasing the demand
for food located in train stations, the demand curve in this
market will shift to the right.

C.) Many malls in Metro Manila are conveniently located beside train stations. This is very strategic
since an abundance of commuters (the market) who take the trains would mean an abundance of
shoppers and mall patrons. Thus in this premise, malls serve as a complement good wherein mall
establishments increase the demand for train rides and vice versa.

In this scenario, the equilibrium then will progress into a

surplus, wherein an overabundance of goods supplied by
malls will occur. In order to fully compete with each
other, these malls must learn to strategically lower their
prices in order to gain profits. The increase of demand
for more commuters to do more shopping in malls will
result to a shift in the demand curve to the right.

MIDTERM EXAMINATIONS
1
YUVIENCO, RIBOMAPIL C. ECN520M PROF. INOCENCIO

2. A.) I agree with the broker. Purchasing a townhouse in this point of my life when my needs are
minimal and my income is expendable will be ideal since a townhouse, especially when it is located at a
prime location, has investment value. I and my spouse can easily sell it in the near future and buy a
bigger house when we start our family.
Despite the fact that there are opportunity costs here, i.e. I could have started up a small scale
business instead of buying a townhouse, or I could have enjoyed the money with my spouse and go on
an extended vacation, or I could have used the money to invest in either equities or bonds, these
opportunity costs pale in comparison with my initial need for a family home. In the same vein, the sunk
costs, which I have already incurred in this situation, such as: broker commissions, advanced payments
for the town house and insurance costs paid, are not significant enough to deter me from making this
necessary purchase.

B.) In this situation, I can think of three factors that can affect my demand in buying a townhouse: (i) the
number of buyers in the market, (ii) the increases in income, and (iii) future expectations in the
country’s economy.

C.) i. The number of buyers in the market will definitely rise in the future. As more
households gain spending power, the more that they will think of buying a house. This
rise of buyers will definitely cause a shift of the demand curve to the right, prompting the
prices to rise as demand for townhouses increases. Thus, as a knowledgeable consumer, I
have to take advantage of the current affordable prices.

ii. In matters of income, it can be expected that as the economy improves, the incomes of
households will also improve. More money being available to households can only mean
that many can now afford to buy townhouses. Likewise, a shift to the right in the demand
curve can be expected here as more people purchase townhouses. Prices will inevitably
rise--so will the quantity of the demand in the market. An early purchase of a townhouse
before this rise in income will be advisable.

iii. Some expectations in the future would be as the economy soars, more people will want
to buy townhouses, especially in urban areas, where it is accessible to their work. Likewise,
this future economic boom can only have a positive influence in the demand curve,
wherein prices and quantities can only rise, causing a shift to the right.

MIDTERM EXAMINATIONS
2
YUVIENCO, RIBOMAPIL C. ECN520M PROF. INOCENCIO

3. A.) In the given situation, curbing the corruption in NAIA, the country’s foremost airport, can only be
good. With no corruption, more tourists can fly in the country and more Filipinos will fly abroad.
However, the potential trade off that can be foreseen here is that the resources spent in cleaning up
NAIA could have been also used in rectifying other government agencies that have bad reputations such
as the Bureau of Customs and the Department of Agriculture.

As seen in this graph, there will be a shift to the right in both the supply and
demand curves. The affected markets in this situation is the various airlines and the
tourism industry, wherein a streamlined NAIA will cause an increase in supply for
airline tickets as more people fly in and out of the country and will also cause an
increase in demand for tourist destinations in the Philippines.

B.) Here, an ad ban prior to the campaign period will be a good move by the government in order to
prevent unscrupulous candidates from advertising their political platforms incessantly. The
government’s intervention here can improve the situation. As for trade-offs there are none since the
government and its agency, particularly the Commission on Elections is mandated by law to enforce an
ad ban before the actual campaign period.

The graph to the left shows that the demand and supply for election materials and
paraphernalia manufactured by various firms (the affected market in the situation)
will effectively waver. There will be a decrease in supply and demand for these
materials, thus causing both curves to shift to the left.

C.) Truck lanes are necessary in order to facilitate trade within the country. These lanes, when managed
effectively, can ensure that there will be a steady flow of goods available to every household. It can also
improve the country’s import and exports since these lanes can facilitate goods going to ports to be
exported outside the country and can streamline foreign goods coming in Philippine shore. Therefore,
government intervention will definitely be helpful in this situation. However, trade-offs can be seen
here. For instance, instead of opening and maintaining additional truck lanes Metro-wide, the
government can just improve, maintain and rebuild the current road, lanes and infrastructure that it
has. Further, these truck lanes can also cause massive traffic jams across the Metro.

As shown in this graph, the market, i.e. truck operators, can definitely enjoy an
upward trend in both their supply and demand due to this positive government
intervention. More firms would rely and benefit from the services that they bring.
Hence, they can justify raising their prices as the quantity for their service also
rises.

MIDTERM EXAMINATIONS
3
YUVIENCO, RIBOMAPIL C. ECN520M PROF. INOCENCIO

4. A.) In this situation, where firms are competitive, the total revenue
(TR) can be easily calculated by multiplying the price under competition
(Pc) and the quantity (Q). Since the demand here is linear, one can go
up to the maximum number of quantities that can be produced by the
firms, which is 18,000, as long as one does not go above the Pc which is
Php 50. Multiplying these two numbers, we will have the TR at Php
900,000 (50x18,000). To solve for total cost (TC), we need to multiply
the average total cost (ATC) by the quantity (Q) in the competitive
market. Since ATC is equal to the marginal cost (MC), ATC then is Php 50. We multiply this by the Q of
18,000, (TC=ATCxQ) yielding a TC at Php 900,000 (50x18,000). As for the consumer surplus, one needs
to form a triangle with the maximum quantity desired as the triangle’s base, the maximum price limit is
to serve as the triangle height and the demand equation as the triangle hypotenuse. One must then
solve for the area of the triangle using the formula 1/2 x height x base. Since the demand in this market
is linear, there is no height in the triangle and in the equation. The formula will be ½(0x18,000). The
consumer surplus is zero (0).

B.) As seen in the table to the right where there is an existing monopoly and ATC/MC
is a fixed Php 50; the profit maximizing price is Php 75, yielding to a TR of 337500, a
TC of 225000 and a Profit of 112500. As for the consumer surplus, since in this
monopoly situation, the demand curve shifted to the left, we apply the same
formula in (A) since there is a triangle formed here. Hence, ½ (50x4,500)—this will
yield a consumer surplus of 112,500.

C.) By comparing the two situations, it is more economical and equitable to operate in a competitive
market. Despite the fact that in an economy, one has virtual sole control of the market—it still faces the
natural limitations of a monopoly wherein a high enough price will not yield any revenue and will in fact
be ignored by buyers. A competitive market may have the same price, but since the demand is linear,
the quantity of product sold may be augmented as long as circumstances permit.

In this scenario, since the demand curve shifted to the right, there is a clear
dead weight loss as marked by the color green. The dead weight loss can be solved by
getting the area of said triangle which is 1/2 x height x base. By applying this equation
(1/2x50x4,500), we will get a dead weight loss of 1,500.

Here, the monopoly that resulted instigated the deadweight loss. The two
remedies here are (1) increasing competition and reducing the market power of
seller, and/or (2) allowing the seller to practice price discrimination. The former
remedy will hurt the seller but will benefit the buyer more, while the latter remedy
increases the total social surplus created but the bulk of the surplus is gathered by me, the seller.

MIDTERM EXAMINATIONS
4