Vertical & Horizontal Shifts in Demand Curve - Assignment Example

Managerial Economics: Assessment 1 Note: This is individual assessment. Group work is not allowed. In mentioned cases provide a neat diagram to explain your answer. Make sure to label axes properly. Else points will be deducted. The maximum possible points is 50. 1) 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 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. Draw a diagram and explain your answer. (10 points) An improvement in technology has helped to produce better laptops at a higher price. The demand has increased but hasn’t been phenomenon considering the growth the supply side has witnessed due to improvement in technology. This will thereby have an impact on both the equilibrium price and quantity where the equilibrium price has increased more compared to equilibrium quantity as shown in the diagram below The above diagram shows that a change in technology has provided an opportunity to sell better products which has surpassed the expected change in demand and has thereby resulted in a higher change in equilibrium price to Ep2 from Eq1 compared to the equilibrium change in quantity from Eq1 to Eq2. This has thereby made the prices move higher compared to demand because of the high expenditure which is made to develop the product (Docters, Schefers, Korman & Durman, 2008). 2) 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. Draw a diagram to support your answer. (5 points) An increase in the income elasticity of demand due to an increase in the income of consumer will lead towards an increase in quantity demanded and hence an increase in price as it will not be possible to increase supply in the short run. This is shown below An increase in income would mean that more and more goods are demanded as the income elasticity is for necessity goods. This will thereby increase the demand for necessity goods and make people consume more. Since, supply cannot be increased in the same manner in the short run it would lead towards an increase in the price thereby making the equilibrium price to move up (Shepherd, 2006). 3) If Ministry of labor sets up a minimum wage in the labor market, what can be the potential effect on the employment? Explain your answer with help of relevant diagram. (10 points) Imposing a minimum wages for labor in the labor market from the ministry of labor would lead towards unemployment. This is shown in the diagram below Considering a situation where there is no government interference so the market forces of demand and supply determine the equilibrium level which is to be achieved as shown by the equilibrium point in the graph. Imposing a minimum wage which is always more than the market wages creates a gap between demand and supply. At higher wages people and business starts to reduce the demand for labor at that given price. Some section of the society won’t work for a lower wage and demands a higher wage which has been provided by the government agency. This creates a gap between the demand and supply of labor thereby leading towards unemployment as shown in the above graph through the highlighted area in yellow. Thus, imposing a minimum wage leads towards increased unemployment which thereby tends to have an impact on the demand and supply curves of labor (Colell, Winston, Michael & Jerry, 1995). 4) 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 785.714 857.14 He was also asked to find the marginal cost at output level of 5 units. (7+3=10 points) Marginal Cost = Change in Total Cost / Change in Total Output = 4000 – 3300 / 5 – 4 = 700 5) 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 elasticity’s discussed in class. (5 points) Considering this situation from the perspective of income elasticity shows that it is inferior products as the demand for the products has increased when the income has decreased as recessionary period’s results in lower income. This shows that the decrease in income has increased the consumption as they are cheap and inferior products the demand of which rises when the income level falls and the demand decreases when the income increases (Mayerhoefer & Zuvekas, 2008). This brings to the fact that the elasticity for the product is negative and is an inferior product which is consumed to fill the belly. 6) If RTA increases the bus-fare from Abu Dhabi to Dubai, then what will happen to their revenue? [Hint: the demand curve is inelastic] Explain your answer with help of a diagram. (10 points) A change in the revenue of bus fare from Abu Dhabi to Dubai will have no impact on the demand as the demand is inelastic. This would thereby lead towards an increase in revenue for RTA. This has been highlighted through the diagram below The above diagram shows that the demand in inelastic suggesting that whatever be the price the demand will remain the same. Previously, when RTA had not raised the price the price per ticket was P1 and the quantity demanded was Q1 making the revenue to be P1Q1. When the RTA raised the price to P2 then the demand was still the same i.e. Q1 making the total revenue to be P2Q1. The difference between P2Q1 and P1Q1 is the additional revenue which RTA was able to earn through the increase in price and is shown through the colored area in the diagram. RTA was thereby able to increase its revenue through a price increase in the tickets as the demand is inelastic (Garg, 2010). References Colell, M., Winston, A., Michael, D. & Jerry, R. 1995. Microeconomic Theory. 3r Edition, New York, Oxford University Press, Pearson Education Docters, R., Schefers, B., Korman, T. & Durman, C. 2008. The neglected demand curve: how to build one and benefit. Journal of Business Strategy, 25 (5), 19-25 Garg, S. 2010. Microeconomics: Introductory. 7th edition, pp 3.11-9.17, Dhanpat Rai Publication Mayerhoefer, C. & Zuvekas, S. 2008. The shape of demand: what does it tell us about direct to consumer marketing. The B.E. Journal of Economic Analysis & Policy, 18 (2), 4-8 Shepherd, G. 2006. Vertical & Horizontal Shifts in demand curve. The Econometric Society, 4 (4), 361-367 Read More