BHMH 2002 - A2 - Q - 2122 S2 (V1)

HONG KONG COMMUNITY COLLEGE
BHMH2002 Introduction to Economics (S2, 2122)

Assignment II – Question Paper
Submission Deadline : 1pm on 11 April (Monday)

Program Learning Outcomes : This assessment is designed to measure S-ILO-3 Critical Thinking
Analyse and evaluate information, ideas, arguments and
issues critically, and make decisions that are informed by
evidence in their chosen areas of specialism.
Subject Expected Learning : (a) explain the issues involved in the allocation of scarce
Outcomes: resources for individual economic agents and the
economy as a whole
(b) apply relevant economic knowledge to conduct economic
analysis of the behaviour of firms and markets, and the
effectiveness of government economic policy
(c) apply relevant economic knowledge to enhance their
understanding of other business subjects
Format and requirements : Students should refer to the “Instructions of Assignment I” for
the format and requirements. Answer ALL questions on the
standard answer sheet provided.
Declaration of Original Work Plagiarism is a serious misconduct. No part of students’

assignment should be taken from other people’s work without
giving them credit. All references must be clearly cited. Any
plagiarism found in students’ completed assignments can lead
to disciplinary actions such as mark deduction, disqualification
or even expulsion by the College.
This assignment has a total of THREE (3) pages (including this covering page).
Page 1 of 3
Question 1
Natural Salt is one of the 350 price-taker firms in Country X producing and selling salt. The market
price of salt is $16 per bag and Natural Salt has a fixed production cost of $13,000. The firm’s
variable cost schedule is shown in following table.
Quantity Total Variable Cost ($)

(bag)
0 0
1,500 10,500
2,000 12,000
2,500 20,000
3,000 30,000
3,500 42,000
(a) Construct ONE new table based on the above data, which includes the following columns to
calculate Natural Salt’s total revenue, average variable cost, average total cost and marginal
cost. Round your answers to one decimal place if applicable. (4 marks)
Quantity Total Average Average Marginal

(bag) Revenue ($) Variable Cost Total Cost ($) Cost ($)
($)
(b) What is the competitive equilibrium condition of a price-taker firm? Determine the profit-
maximizing output, price and economic profit (loss) of Natural Salt. (4 marks)
(c) Draw a set of market-firm diagram to illustrate the situation of Natural Salt. Label the critical
points with relevant figures, including the equilibrium price, equilibrium quantity, marginal
revenue, profit maximizing quantity, average total cost and average variable cost at the profit
maximizing quantity. Label the area of profit (loss) too. No workings and explanation are needed.
(6 marks)
(d) Suppose many new salt producers enter the market and so the Natural Salt is in bad times now.
In spite of this, the firm will continue the operation in the short run. Explain and illustrate these
changes in the same diagram of part (c). (6 marks)
Page 2 of 3
Question 2
193 is a famous singer and is planning for opening a coffee shop in Hung Hom. To finance his business,
he needs a starting capital of $1,400,000. He withdraws $700,000 from his savings account, which he
could earn a saving interest rate of 3% a year. Besides, he borrows another half of the capital amount
from the bank at annual loan interest rate of 5%. Outbreak of Covid-19 has pushed down the rent in
Hong Kong. The monthly rent of this new shop is only $50,000 and the decoration cost is $200,000.
The cost of equipment is $35,000, which is estimated to have resale value of $14,000 after a year of
operation. Every month, the purchase costs of coffee beans and other raw materials are estimated
at $60,000. The electricity and utility expenses are $4,000 per month. To operate his coffee shop,
there are one shop manager and one shop assistant with total annual salary expense of $400,000.
The annual promotional expense is $20,000. As he has more than 405,000 fans, the estimated annual
revenue of his coffee shop is $2,000,000.
(a) Define explicit cost and annual implicit cost. Calculate 193’s annual explicit costs and annual
implicit costs of operating his coffee shop. List the relevant items in your calculation and show
your workings. (12 marks)
(b) With the concept of economic profit, based on the above information, would you recommend
193 to operate his coffee shop? Explain your answer with relevant data and workings. (4 marks)
(c) The rational decision will be changed if there is any change of explicit or implicit cost. Supposing
that the monthly rent changes, explain how the monthly rent changes so that 193 will change his
decision obtained from (b). Support your answer with data. (4 marks)
- END OF PAPER -
Page 3 of 3

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HONG KONG COMMUNITY COLLEGE

BHMH2002 Introduction to Economics (S2, 2122)

Submission Deadline : 1pm on 11 April (Monday)

Declaration of Original Work Plagiarism is a serious misconduct. No part of students’

Quantity Total Variable Cost ($)

Quantity Total Average Average Marginal

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