Major Issues in Management and Economics - Assignment Example

Managerial Economic Assessments Assessment One Question One In the world of electronics overtime, people realized the immense use of having a personal laptop, and at the same time, the technology has improved significantly in the last decade. In fact, the technological improvement has surpassed the increase in willingness and ability to purchase a laptop. Given this piece of information, what in your opinion happened to the equilibrium price and quantity in market for personal laptop? In the world of electronics overtime, people have realized the immense use of having a personal laptop. Their preferences have changed to adopting personal laptops. This preference is as a result of their choices based on the increase of their willingness and ability to purchasing personal laptop. In the short run, change of preference will cause an outward shift of the demand curve from D to D’ in the market (Rubin & Dnes 2010, P. 450). Holding the supply of personal computers constant in the market, the equilibrium position shifts from E to E’. The demand will increase from Q to Q’, which will lead to a decline of available quantities of personal computers in the market. Shortages will influence the prices to increase from P to P’. The new equilibrium position in the market for personal laptops will be at E’, with Q’ and P’ as the new quantity and price respectively in the market. In the long run, however, the manufacturers of laptops will increase their supply in order to maximize their profit since the prices in the market are high (O'Brien 2011, P. 186). The supply curve will shift from S to S’. At the point of intersection of the new supply curve and demand curve, the new equilibrium position in the market of personal laptops is established. Prices will decline from P to P’, but demand will increase from Q to Q’. Consumers will be demanding Q’ quantities at a price p’ at the new equilibrium point in the market. Question Two If income elasticity of demand of good X is 0.89, what will happen to equilibrium price if there is an increase in income of consumers? Income elasticity of demand is a measure of the response rate of quantity demanded due to changes in consumers’ income (Webster 2003, p. 32). Where income elasticity is below one but greater than zero, the good is normal and is income inelastic. In this case, the income elasticity is 0.8, thus its demand is not very sensitive to changes in income. For a normal good, increase in quantity demanded leads to a decline in prices of the product at ceteris paribus. For every $1 increase in income of the consumer, he will be increasing his demand with 0.8 units. With the increase in demand of good X by the consumer, the price of good X shall decrease. Changes in income of the consumer lead to a shift of the demand curve from D to D’. As a result, the price of good X increases from P to P’. A new equilibrium position is established in the market at point E’. The prevailing equilibrium price of good X becomes P’. Question Three If Ministry of labor sets up a minimum wage in the labor market, what can be the potential effect on the employment? Minimum wage laws are regulations by the Ministry of labor on the legal minimum wages that workers should be paid by their employers (Osterman 2011, p. 645). Such laws are enacted to protect workers from employers’ exploitation, and reduce the levels of poverty. The ministry sets up the laws with a purpose of guaranteeing a minimum level of living standards, particularly on unskilled laborers. Minimum wage laws determine the wages but do not guarantee jobs, in fact, wage floors reduce employment. They normally price workers with low skills out of the markets. Employers usually are not ready to pay any worker at a value above that of an additional product which he produces. Workers whose productivity is less than the set wage are seen as expensive and employers do not find them fit to their organizations (Addison & Demet 2012, p. 790). Employers may prefer to pay skilled labor for extra hours or substitute machines for workers so as to avoid such laws. The curve D and S represent the demand and supply curve of labor in the market respectively. Before the Ministry set the law, the labor market is at the equilibrium point E where Q is the number of people employed at the market price P. The minimum wage is set at P’, higher than the market wage. However, the employers will demand workers at Qd levels, but the level of supply of workers will be Qs. The gap between Q and Qd reflects the unemployment that has been caused by the wage floor, but the total unemployment in the labor market is the difference between Qs and Qd. Question Four A manager in a firm has been assigned a job to find costs at different levels of output He is provided with the following table and asked to fill up the missing values since there was no information available. Output Total cost Fixed cost Variable cost Average variable cost Average total cost 1 2000 500 1500 1500 2000 2 2500 500 2000 1000 1250 3 2800 500 2300 766.67 933.33 4 3300 500 2800 700 825 5 4000 500 3500 700 800 6 4800 500 4300 716.67 800 7 6000 500 5500 785.71 857.14 He was also asked to find the marginal cost at output level of 5 units. M.C5 = 4000-3300 = 700 5-4 Question Five According to posting from last fall, sales for products such as Spam, pancake mixes, instant potatoes, rice and beans have been booming during the recession; a spokesperson from a grocery chain is quoted as saying “They’re real belly fillers.” Comment on this, using concept related to any one of the elasticities discussed in class. Recession is a period when the Gross Domestic Product of a country is declining (Webster 2003). The real incomes of citizens are decreasing as well due to increase in products’ prices. They are unable to purchase the usual commodities like meat, but rather prefer to buy commodities like spam, rice, beans and instant potatoes, since their prices are low but still provide similar nutrients. The cross price elasticity of demand shows responsiveness change in quantity demanded for good X with respect to price of good Y. In this case, spam and meat are substitutes, where people increase their demand for Spam with respect to the increased prices for meat. Question Six If RTA increases the bus-fare from Abu Dhabi to Dubai, then what will happen to their revenue? [Hint: the demand curve is inelastic] RTA is the seller while people are the buyers of transport, which is the commodity. Following the law of demand, increase in price of the commodity results to decline in the quantities demanded (Webster 2003). By RTA increasing the bus fare from Abu Dhabi to Dubai, the people who use the route will reduce their tendency of using the route. However, since the elasticity of demand by consumers is inelastic, a unit increase in bus fare will result to a less than unit reduction of demand by consumers. Therefore, their revenues from the charges of bus fare will reduce since the demand has decreased but not to a greater extent. Before the increase of bus fare, the price is at P1 and quantity demanded is Q1. With the increase, the increase in price is bigger than the decline in quantity demanded. Assessment Two Question One A local firm in Abu Dhabi is operating under a perfectly competitive environment. If price in market is 4 AED and their total cost is 500 AED (including the fixed cost of 200 AED) for output of 30 units, then should they continue to produce or shut down in short run? In the short run for perfect competitive environment, P= MR=AR (Webster 2003). For maximizing profit, the firm’s MR=MC. In this firm, TC= 500 while TR= 200, it is producing at a loss of 300 units. A firm will continue producing in the short run if its Price is equal to average variable cost (AVC) because it can meet its variable costs, but will shut down when the AVC exceeds its prices (Thaver 2013, p. 85). The average variable cost in this firm is 10, but the price is 4 AED. Its average variable costs exceed its price, and it is advisable to shut down. The area AVCPBA shows the loss that the company is generating Question Two Recent research has documented the fact that Coke is something different compared to other soft drinks. In fact related literature states that Coke has already attained the monopoly status. If we assume the research is correct and coke is a monopolist, then a) Do you think that coke actively engages itself in price discrimination? B) If so, what type of price discrimination they are engaged in?) Coke is a monopolist since no other industry has managed to produce high quality products as Coke does. It actively employs price discrimination policy to its sales policies, especially because it has price setting power in the market. It sells its products at a different price in clubs and restaurants as compared to shops and hawkers. The prices of Coke’s products in restaurants and clubs are normally higher. The demand’s price elasticity for Coke’s products in the restaurant is inelastic, increase of the products’ prices does not affect greatly on consumers’ demand. The company is able to extort consumer surplus through varying their prices to add their profit and revenues (Escrihuela 2009, p. 145) . Price discrimination allows Coke to appropriate part of the Dead Weight Loss and consumer surplus. Question Three Etisalat and Du are duopolists. If they form a cartel between themselves, then what will happen to price and output in the market? Du and Etisalat are two only businesses in the market who agrees and cooperate with each other to restrict output to a quantity level of a monopoly. If they agree to form a cartel, they will act like a monopoly in the market (MING et al. 2013, p. 12). In order to maximize their profits, they will restrict the quantities of output with the aim of raising prices, and thereby profits. This cartel will operate at point B and behave as a monopoly supplying Qm at a price Pm. The dead weight loss to the society is illustrated in area BDC. Question Four In a recent conversation a policy maker argued that since DEWA is monopolist, they are charging higher price and lower output is produced. He further mentioned that government should split the entire unit into small pieces so that competition can drive down prices. Do you agree with this statement? Competition of business enhances satisfaction of wants and needs of a wider number of consumers by producers (Baranchuk et al. 2011, p. 3340). Market prices and demand are not determined by an individual company, but by the market forces of demand and supply. It is a good suggestion of the government to split DEWA into many smaller entities so that they can compete against each other. By so doing, accessibility and fairness in water and electricity prices are expected. MC Question Five Consider the following pay-off matrix (Numbers in the matrix reflect their respective profit levels) for two gas stations. Gas station A Gas Station B High price Low price High price 200,000 AED; 200, 000 AED 50,000 AED; 400,000 AED; Low price 400,000 AED; 50,000 AED 80,000 AED; 80,000 AED; If each firm follows their dominant strategy, then what will be their respective profit levels? And if they collude then what is their new profit level? If gas station B uses its dominant strategy, charging low price when Gas Station A charges high price, it gains a profit level of 400,000 AED. If Gas Station A uses its dominant strategy, charging low price when Gas Station B is charging high prices, it has a profit of 400,000. When they adopt their dominant strategies, each will have a similar profit of 400,000 AED. If they decide to collude, they will adopt the strategy that promises high profits, which is 200,000 AED. They will charge high prices in the market (OWEN 2013, p. 3). Question Six A cosmetic firm operating in a monopolistically competitive market environment spends a lot of money in advertisement and ends up with super-normal profit even in long run. Is it possible? In a monopolistic market, there are a number of large businesses in the market. They compete against each other and, therefore, have to adopt strategies to lure their customers. Advertising accomplishes market control and product differentiation (Webster 2003). Advertisement informs buyers about differences in their products and convinces them that their goods are better and different to other products. As a result, the firms are able to increase their sales, increase their prices and revenues increase, as well. List of preferences Addison, J & Demet Ozturk, O 2012, “Minimum Wages, Labor Market Institutions, and Female Employment: A Cross-Country Analysis”, Industrial & Labor Relations Review, vol. 65, no. 4, pp. 779-809. Baranchuk, N, MacDonald, G & Yang, J 2011, “The Economics of Super Managers”, Review of Financial Studies, vol. 24, no. 10, pp. 3321-3368. Escrihuela-Villar, M 2009, “A note on cartel stability and endogenous sequencing with tacit collusion”, Journal of Economics, Vol. 96, no. 2, pp. 137-147. Ming Chung, C, Yun-Chieh, L & Chiu Fen, L 2013, “Comparing Cournot Duopoly and Monopoly With Asymmetric Complementary Goods”, Singapore Economic Review, vol. 58, no. 2, pp. 1350011-1-1350011-16. O'Brien, TJ 2011, “Managerial economics and operating beta”, Managerial & Decision Economics, vol. 32, no. 3, pp. 175-191. Osterman, P 2011, “Institutional Labor Economics, The New Personnel Economics, And Internal Labor Markets: A Reconsideration”, Industrial & Labor Relations Review, vol. 64, no. 4, pp. 637-653. Owen, G 2013, “Applications Of Game Theory To Economics”, International Game Theory Review, vol. 15, no. 3. Rubin, P & Dnes, A 2010, “Managerial economics: a forward looking assessment”, Managerial & Decision Economics, vol. 31, no. 8, pp. 497-501. Thaver, RL 2013, “Integrating the Output and Substitution Effects Of Production into the Intermediate Microeconomics Textbook', Business Education & Accreditation, vol. 5, no. 1, pp. 81-90. Webster, TJ 2003, Managerial Economics: Theory And Practice, Academic Press, Amsterdam. Read More