Managerial Economics Assessment - Assignment Example

MANAGERIAL ECONOMICS: ASSESSMENT by (Name) The Name of the Class (Course) Professor (Tutor) The Name of the School (University) The City and State where it is located The Date 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) Demand is the willingness and ability to purchase a commodity. Increase in demand for laptops caused the price to shift from P1- P2. The equilibrium position also moved from Q1 to Q2. This is because the demand increment implies that consumers are willing and able to purchase more products (McGuire & Staelin 2003). Since supply is constant, prices have to increase locking out some consumers and availing laptops to those who can afford price P2. 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) Increase in consumer’s income increases the purchasing power. 0.89 price elasticity indicates a relatively elastic commodity. Good X is adversely affected by a slight price change affirming that it is not a basic commodity. Change in consumer income will affect the commodity as demand will increase (Zhu, Singh & Manuszak 2009). When the demand of a price elastic commodity increases, the price also increases locking out consumers who can no longer attain the new prices. The equilibrium position will shift as price and quantity demanded change. 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) The ministry of labor can at times set a threshold dictating the lowest amount employers remunerate their staff in a country. Minimum wage seeks to prevent employees who do not have feasible unions in place that protect their interest. Minimum wage is similar to a price floor entrenched to ensure that suppliers get a minimum return (Burdett & Mortensen 2010). Though intended to safeguard employees, minimum wage enactments amount to salient consequences in the employment front that necessitate conclusive decision-making. For instance, if the minimum wage is above the market rate, downsizing initiatives are compulsory. Unemployment increases when employees have a wage limit to work with as it negates negotiations. 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 767 933 4 3300 500 2800 700 825 5 4000 500 3500 700 800 6 4800 500 4300 717 800 7 6000 500 5500 786 857 He was also asked to find the marginal cost at output level of 5 units. (7+3=10 points) Marginal cost relates to the cost incurred for an additional unit of output. Marginal cost = 20 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 discussed in class. (5 points) The price elasticity of demand is the percentage change in the quantity demanded of a good or a service given a percentage change in its price. Elasticity in times of booms is less, it rises when there is lesser utility for lower priced substitutes. During recession, there is a high elasticity due to a decrease in the imperfect competition. Consumers hold critical utility levels for products. These levels occur due to the following factors such as search cost, the confidence of consumers with a market, and interest rates. An increase in interest rates in times of recession causes critical utility level to rise and this reduces number of customers in the market and reduces the elasticity of demand Vind, K. (2005). The buying patterns of new and existing customers also affect price elasticity. The existing customers exhibit a low elasticity of demand due to pledges by sellers to maintain prices. New customers hold a relatively higher value of price elasticity of demand. When new customers dominate the market, there is a high elasticity of demand. Switching cost occur where customers expect favorable prices in future. Firms can maximize current profits once they exploit the customers to increase their market share due to future expectations. The business cycle can influence price elasticity through shifting the demand curve. 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) Price inelastic commodities encompass basic needs availed to a society. Bus fare is a basic need to many individuals relying on public transportation on daily basis. With the notable population increase, public transport availed by a sane governmental regime remains the safest, fastest and cheapest travel mode. With an inelastic commodity, an extensive change in price results to an insignificant change in commodities demanded. With the current situation in Abu Dhabi, the change in transportation expenses will not necessarily imply a similar change in demand for the services. Since transportation costs are price inelastic, a huge change in prices will resonate to a low change in quantity demanded (Krishnamurthi & Raj 2011). This is because consumers are willing and able to pay for bus fare regardless of a huge change in related costs. In essence, the change will result to an increase in revenue as consumers will pay the new set prices. Managerial Economics: Assessment 2 1) 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? Provide your answer with a relevant diagram and explain your answer in few words. (10 points) Organizations in perfectly competitive industries operate under the mercies of market forces (Vind 2005). The manufacturing cost of one output averages at 17AED implying that the venture is not profitable. The company should rather shut down as its average cost curve is way above the demand and average revenue curve. 2) 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? Price discrimination thrives in monopolistic industries where the supplier produces a similar product but sells it at different prices to different consumers. Coke being a monopoly has the ability to sell its products all over the world. With a wide market share, consumers have different abilities as some are heavily endowed more than others. Some markets are inelastic more than others. This implies that some markets have higher purchasing powers compared to other markets. With this strategy, coke garners different profit margins from different consumers. Coke engages in the third degree price discrimination. This is because different market segments have different qualities. Being a worldwide monopoly, coke serves diverse market segments that have different economical and social characteristics (Debreu 2006). The company has to be open in terms of pricing and hence enacts the third degree discrimination. With this policy, the company bases the pricing strategy on location, market segment and the client’s willingness to pay. 3) Etisalat and Du are duopolists. If they form a cartel between themselves, then what will happen to price and output in the market? Discuss your answer with a relevant diagram (10 points) Duopoly is a market structure where an industry only has two firms. If the two firms (Etisalat and Du) combine to form a market cartel, the industry’s demand curve will bend. This is because the cartel is the market marker while consumers have no option. Prices will increase but demand will not change as consumers have no option (Moorthy 2008). Eventually, the quantity demanded will reduce while prices increase. The equilibrium point will be a region between the bend from the earlier demand curve and where the price intersect the new demand or marginal revenue curve. 4) 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? Explain your answer in few words. Provide a relevant diagram (10 points). A monopoly is a market structure with one firm in the entire industry. Since the firm is the market marker, there is tendency of pricing commodities at high prices. By cutting the commodity into pieces, competitors might share into the abnormal profit margin but this does not guarantee a price reduction (Unknown Author 2007). With many companies in an industry, production inefficiencies tend to affect commodity prices. 5) 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? Independent profit will be 140,000 AED. If both firms combine, they will attain a 350,000 AED profit level. 6) 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? Explain your answer in few words (5 points). A monopoly market is a market structure where there is only one producer of a good or service. There are no close substitutes and the firm can offer product differentiation. The buyers cannot influence prices because they have no bargaining power. A monopolistic competitive industry has large number of firms, each producing a relatively small percentage of total industry output. Monopolistic competition assumes a large number of buyers for output of resources that alternate many uses. This structure necessitates product differentiation from competitors. Products in each firm are close but not substitutes. This structure permits market segments where they charge exorbitant price to customers. Each segment of the market is a monopolistic that exercises market power. Monopolistically competitive industries sell branded unique products. Brand advertising contributes to fixed costs of the cosmetic firm. This cosmetic firm commits many funds in its advertising strategy to reinforce real and perceived product differences. The intention of doing this is to attract new buyers, create brand-name recognition and to solidify customer loyalty. In this market, economic profit is short lived due to the advent of new entrants in the market and profits dissipate. The price in this market is above the marginal cost (Prescott 2004).In the short run, the monopolistic firm has the ability of affecting the selling price without completely losing the customer base. In the end, the firm faces downward-sloping demand curve for its product. There is a limit to the ability of firms in a monopolistic competitive industry to exercise market power by exploiting customer loyalty. This is because all the firms produce one commodity; this creates price elasticity due to close substitutes. The short run analysis offers maximum profit in a monopolistically competitive firm. The relatively easy entry and exit in the industry ensures a zero economic profit in the end. Bibliography Burdett, K., & Mortensen, D. T. (2010). Search, Layoffs, and Labor Market Equilibrium. Journal of Political Economy, 88(4), 652. Debreu, G. (2006). Market Equilibrium. Proceedings of the National Academy of Sciences, 42(11), 876-878. Krishnamurthi, L., & Raj, S. P. (2011). An Empirical Analysis of the Relationship Between Brand Loyalty And Consumer Price Elasticity. Marketing Science, 10(2), 172-183. McGuire, T. W., & Staelin, R. (2003). An Industry Equilibrium Analysis of Downstream Vertical Integration. Marketing Science, 2(2), 161-191. Moorthy, K. S. (2008). Product and Price Competition In A Duopoly. Marketing Science, 7(2), 141-168. Prescott, E. (2004). Market Structure and Monopoly Profits: A Dynamic Theory. Journal of Economic Theory, 6(6), 546-557. Unknown Author. (2006). An Intertemporal Comparison of Price and Income Elasticities for Food. Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, 24(3), 55-56. Vind, K. (2005). Perfect Competition or the Core. European Economic Review, 39(9), 1733-1745. Zhu, T., Singh, V., & Manuszak, M. D. (2009). Market Structure and Competition In The Retail Discount Industry. Journal of Marketing Research, 46(4), 453-466. Read More