Question 1 (25 marks)

(a) Your economics lecturer is thinking about opening a bakery. She estimates that renting the shop would cost $80,000 per year and another $60,000 on other expenses. In order to be an entrepreneur, she would have to quit her job as an economics lecturer which earns her $120,000 per year. If your lecturer thinks she could sell $200,000 worth of products per year, should she open the store if she is rational? Why, or why not? Explain your answer

with reference to the economic concept of ‘opportunity cost’ .                               [8 marks]

(b) James has  spent  $100,000 renovated his house  and he plans to  sell  it  for  $800,000. However, for the house to be worth $800,000, he needs to spend another $80,000 to refurbish the kitchen. Without refurbishing the kitchen, he could sell the house at $700,000. Should he refurbish the kitchen before selling? Why, or why not? Explain your answer with

reference to the most relevant principle of economics (from topic 1).                   [8 marks]

(c) Aunty Grace makes fresh soya drinks every morning. Any soya drinks not sold by the end of the day is thrown away (all the charitable homes refuse to take any leftover from her). A cup of soya drink costs $1.00 to produce, and she charges her customers $5 per cup. Suppose near the end of one rainy day, Aunty Grace still has 15 unsold cups of soya drinks. At what price  should  she  sell the remaining  soya  drinks? Explain your  answer with reference to the most relevant principle of economics (from topic 1).                   [9 marks]

Question 2 (25 marks)

Suppose there is an introduction of Genetically modified organisms (GMOs) durian breeds that make the trees more productive and require fewer pesticides and fertilisers. Suppose durian buyers believe that GMOs are bad for their health and damage the environment.

(a) Explain, using (an) appropriate diagram(s), the effect of introducing GM durian breeds on

the equilibrium price and quantity in the market for durian.                               [17 marks]

(b) Following the introduction of GM durian breeds, what will happen to durian farmers’ total

revenue? Explain.                                                                                                 [8 marks]

Question 3 (25 marks)

Suppose the honeydew market in Malaysia is perfectly competitive. The cross-price elasticity of demand for honeydew with regard to the price of watermelon is -0.8.  Other things being equal, explain the effect each of the following situations will have on the equilibrium price and quantity of honeydew if:

(a) Researchers found that watermelon has cancer-fighting properties (use an appropriate

diagram).

(b) Wage rises for honeydew farm workers (use an appropriate diagram).

[8 marks]

[8 marks]

(c) Both events in (a) and (b) happen simultaneously (draw all possible diagrams).  [9 marks]

Question 4 (25 marks)