Managerial Economics: Assessments 1 & 2 (Coursework Sample)

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Managerial Economics: Assessments 1 & 2
Assessment 1
Qs 1
Technological improvement has surpassed the increase in willingness and ability to purchase a laptop. This is due to advanced technology which has been witnessed over the last few years. The price and quantity in the market for personal laptop can change depending on the point of intersection of the demand and supply curve. This means that, the equilibrium quantity and price for the laptop will be determined by the point of intersection of the two curves. When the supply of the laptops is high (due to increased technology) then the demand for the same commodity tends to go down. Demand and supply acts hand in hand for any particular commodity. On the reverse we may expect that, when the demand is too high the supply tends to go down and the price goes high. Owing this in mind, we expect that due to advanced technology the companies that manufacture laptops will produce them in large quantities. This triggers a rise in supply hence making demand to go down. As supply increases and demand of the laptop decreases, the price on the other hand decreases. This is illustrated by figure 1 shown below.
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Fig 1
Qs 2
If the income elasticity of demand of a good X is 0.89, then the equilibrium price, if there is an increase in the income of consumers will respond positively. This means that since the income of elasticity demand is positive then the demand due to increased income will also be positive; the demand of good X will increase. The demand for this good is however inelastic since it is less than 1. By this we mean that, the demand does not respond so much to the price changes. Increase in the customer’s income means increased purchasing power. This phenomenon can be explained further by the graph shown below (fig 2.)
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 Fig 2
From the above figure, as the demand curve moves to the right, there won’t be any equilibrium at that given price and quantity. On the other hand a time comes whereby the new demand curve intersects the original supply curve (P2 and Q2); this shows an increase in both due to increased income.
Qs 3
When the ministry of labor sets up a minimum wage in the labor market, then the potential effect on employment will be positive. This means that if we go by the prevailing market price of goods and service, increment in the minimum wages will mean more purchasing power for goods and services. More people will be willing to work as the market wage increases. The minimum wage becomes a crucial factor in the rigidity of the labor market and so raising it means more employment, a factor that helps to reduce poverty in a country. The impacts to the economy are positive since any small loss of job becomes covered by the multiplier effect because more money is put to the hands of the workers consequently unleashing confined consumption, though with some effects of inflation to the economy.
Fig 3
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Qs 4
The table below shows the costs at different outputs and calculation of the marginal cost at level 5 units
Table 1
Output QTotal cost TCFixed cost FCVariable cost VCAverage variable cost AVCAverage total cost ATC1200050015001500200022500500200010001250328008002000666.6933.3433001300200050082554000200020004008006480028002000333.38007600040002000285857
When the marginal cost is 5 units,
Then marginal cost (1 to 5) = total cost of producing 5 units – total cost of producing 1 unit = 4000 – 2000 = 2000
Marginal cost (5 to 2) = 4000 – 2500 = 1500
Marginal cost (5 to 3) = 4000 – 2800 = 1200
Marginal cost (5 to 4) = 4000 – 3300 = 700
Qs 5
According to the 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 in a grocery chain is quoted saying “they are real belly fillers.” From this comment and the concept of elasticity, we know that elasticity measures the changes in both demand and supply. It measures the consumer’s sensitivity to changes in price. If in this case the price of a commodity goes down then the demand for the same goes high. On the other side whenever a substitute exists for a certain product with fewer prices, then we expect that the demand for the substitute will go high. Furthermore, if the income for consumers goes high then they tend to spend much on that particular product. More over time can be accounted as another determinant of price elasticity of products. For food products, a customer may prefer to take snacks because they are readily available and easy to eat unlike other solid foods. For our case here the business for the spam, pancake mixes, instant potatoes, rice and beans may tend to be booming during the time of recession because of the above mentioned factors. Consumers may tend to go for them because they are cheap as compared to other food stuffs. They may act as substitutes for other food products like beef and other expensive foods. Their demand triggers high sales hence the business turns to be booming. On the other side these food stuffs are fast foods and readily available. To this effect the consumers may prefer them for other foods to save time.
Qs 6
If RTA increases bus fare from Abu Dhabi to Dubai, there is a likelihood of the commuter company to increase its revenue if there are no substitutes for travelling between the two terminal points. However, if other substitutes exist like travelling by train with less fare, then the demand to commute by bus will go down due to increased fair. This will account for less customers and company’s revenue will go down. The demand curve in this case is inelastic; since the price of bus fare is high, then fewer people will be willing to get the commuting services from the bus. The curve tends to be steep because the price elasticity of demand ranges between zero and one (fig 4 below). As the price decreases the demand increases hence fetching more consumers; the reverse is also true since as the price increases the demand becomes low and so less consumers. Therefore, the revenue for ART Company is likely to be low because of the above mentioned factors.
Fig.4
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Assessment 2
Qs 1
A local firm in Abu Dhabi is operating under a perfectly competitive environment. The price in the market is 4 AED and their total cost is 500 AED (including the fixed cost of 200 AED) for output of 30 units. Owing this in mind, the company should not continue to operate because the average cost of production for this product is higher compared to the price of the same product in the market. This can be demonstrated as;
Total cost = total fixed cost + total variable cost
Total variable cost = total cost – total fixed cost
= 500 – 200 = 300; the average total cost of production per unit = 300/30 = 10 AED which is greater than the unit price which is 4 AED. Since the average cost per unit surpasses the unit price, then the firm will be running at a loss with a deficit of 6 AED per unit sold.
Perfect competition can be described as the opposite of monopolistic competition where only a single firm supplies particular goods and services. For a perfectly competitive market where the firms sell similar products, every firm becomes price takers; they have no control over the price of the products. Prices are likely to go down due competition. Failure for a company to understand the basics of competition in the market may mean the company running bankrupt and possibly close down the business. This situation can be represented in a graph as shown below.
Fig 5
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Qs 2
Recent research has documented the fact that Coke is something different compared to other soft drinks. Related literature states that coke has already attained the monopoly status. On assumption that the research is correct and coke is monopolist then;
Coke actively engages itself in price discrimination because owing to the positioning of its products in the market, Coke is able to control the market it shares with other soft drinks like PepsiCo. Coke is able to sell its products at different prices on different locations. The consumers of this product are always willing to pay for the product irrespective of the price. In this case, Coke has been able to maximize its sales and profits as compared to its rivals.
Coke has managed to become a good discriminator in the market because of the following factors; market price maker and market control, identification of different markets willing to pay different prices for its products, and maintaining of groups which have been able to resell its products to other groups. At the same time Coke has been able to use first degree, second degree and third degree discrimination. In first degree discrimination, Coke has been able to sell its products at the highest price that the consumer can afford. In second degree discrimination, Coke has been able to block the prices by selling its products at different prices for different quantities. In third degree discrimination, Coke has been able to segment the market according to the taste in age, location, gender, and ethnic group.
The figure below...