Answers to Select End of Chapter Questions sample essay

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16. Since we have the profits from all three scenarios we just to compare the present values of each scenario. We do not need to subtract anything from the present value since the costs have already been subtracted from profits.

We can see that we have the highest present value of $290.87 when we use high advertising intensity. Therefore this is the recommended scenario.

Q2. This question deals with margin analysis, we will look at incremental revenues and costs and see whether they are worth it. On the revenue side we have an increase on 9807700, however we also have incremental costs of television airtime, ad development and a loss of $6000000 in another division

We can see that when we add up the incremental costs, they exceed the extra revenues by 317100. Therefore I do not recommend that this campaign to be undertaken.

Q21. Producer —Producer. The Brazilian and five other producers are competing against the US Southern Shrimp Alliance. Both groups are competing to provide the customers with the best shrimps at the lowest cost. However currently the Brazilian Producers have an advantage with their lower labor, cheap land etc. Government and Market; According to the current scenario, the Brazilian Group would be choice of the market since they can produce it much cheaper.

However, the Sourthern Alliance is trying to lobby the Government into imposing tariffs Brazilian Imports. Consumer Producer Rivalry; The American Seafood Distributors, which represent consumers of shrimp farming, are interested in having the lowest cost. They are supporting the Brazilians and can potentially choose not to buy from the US based shrimp farmers. Consumer – Consumer Rivalry; Is pretty low, since they have banded together to form the American Seafood Distributors. Five Forces Analysis: Shrimp Farming Industry

Power of Buyers; High

Buyers have formed the American Seafood Distributors, which means they can ask negotiate in bulk and choose whether they buy from one firm or not. They apparently have very low switching costs. Since shrimp is still shrimp wherever it came from, the price value combination becomes very important. Possible Government Intervention.

Power of Suppliers; Low

The shrimp farmers procure their supply from the sea. And really the shrimps have very little choice in the matter. There is plentiful supply, although it depends upon the weather and climate, therefore geographically specific. Also the fishermen who fish for the shrimp or the people who work in the farms demand lower wages for Brazilians but relatively high for the US based on the labour laws.

Competitive Intensity: High

Differentiation is low and competition is based primarily on price. There seems to be a high degree of concentration amongst the firms competing in the industry.

Substitutes; There are various substitutes available within the product class. Instead of shrimps, consumers could go for other seafood such as fish. Or they could also choose to go completely different route and avoid Seafood altogether. Entry; Medium

Economics of scale are necessary to harvest shrimps at a lower cost, and since there is bulk buying, network effects are also important. Q23. I would tell the owner that while owner did the right thing by incentivizing the manager, but the structure of the incentive needs to be changed. The owner has incentivized the manager to make sales, but has given no incentives to the manager to sell at a higher price. I would recommend that the owner should either set a minimum price on sales or, offer the incentive out of the profits e.g offer 2% of the profit on the sale which would ask.


Q11. In the first case, a drop in price of components represents a change in the factors of production. Therefore this will result in a change in the ‘quantity supplied’. This means that the supply curve will shift to the right. Since there is no change in the demand curve, this means that the price will fall. (exh 1) In the second scenario, we have information that incomes are supposed to grow over the coming two years. Change in income produces a change in the demand curve. This is case; we know that RAM is a normal good, with people having income over $75000 buy nearly 1.3 times more. Therefore we can expect the price to increase. However, whether this final price is greater than the initial price (before the changes in supply and demand curve) is unclear and will depend upon how much does the supply curve shifted due to cost drop.

Blue: Previous SupplyBlue: Previous Supply
Red: New Supply Red: New Supply Green: New Demand

Q13. First of all, the question misquotes the law of demand. When the prices of cigarettes are raised, the ‘quantity demanded for cigarettes will fall but the ‘demand for cigarettes will not’. The effectiveness of higher pricing will depend upon the cause of the higher pricing. If the price hike is due to a price ceiling by the governmen. then definitely the number of cigarettes demanded will decrease. However, cigarettes are very addicting, which means that the price elasticity if cigarettes is very low. So the drop in quantity demanded is very small. (exh 3). On a theoretical level, it is possible for the equilibrium price to remain the same but with lower number of cigarettes smoked.

In this diagram, the red line is demand, while the blue line is supply, we can clearly see that even with a price ceiling, the number of cigarettes smoked as decrease very little.

Exh 3

Q14. Well, in order to find out the equilibrium price and quantity I will equate the demand and supply functions. 175 – p = 2P -200. This gives us P = $125. Furthermore, at this price 50 pints of blood will be processed. In order to find the consumer surplus we will need to find the area underneath the demand curve. $175 Price

$ 125A

The area of triangle A is the consumer surplus = ½ * (50) * (175-125) = 1250 The area of triangle B is the producer surplus = ½ * (50) * (125-100) = 625

Q15. Crude oil is the critical component in the refining process. The price of gasoline will rise dramatically due to the shift in the supply curve. Since the fuel has become more expensive, people will want to buy less of it and therefore will want to buy cars which are more fuel efficient. This will cause the demand curve for fuel efficient cars to shift to the left.

Q16. Qs1 = 4P – 110 which gives me coordinates of (0, 27.5) and (-110,0) Qs2 =4.171P – 110 which give me coordinates of (0, 26.37) and (-110,0) Qd= 250 – 5P which give me coordinates of (0, 50) and ( 250,0) First let me find the equilibrium price and quantity by equating Qs1 and Qd. This gives me Pe = 40 Qe= 50 million. Also when I equate Qs2 with Qd I get the new equilibrium Pe2 = 39.25. Each customer saves 75 cents per month.

Q10 of the assignment
The price of an entry level DVD player is $25.70 on Ebay

According to my estimate, the demand curve and supply curve have both shifted to the left. Demand Curve; As opposed to 2003, in 2012 people have many more option in which to watch their movies. They can carry them on USBs, stream them over the internet, or rent them online from websites such as Netflics. All of these directly contribute to reduce the popularity of DVDs which are complements of Dvd Players. Since there are so many alternate channels to watch movies which offer better price and excellent quality, people will not demand as much of the product. Furthermore, the large amounts of substitutes will directly contribute make the demand much more elastic, so that at the slightest decrease in the price people will switch out Supply Curve;

Due to mass production and advancements in technology one could expect that the supply curve should shift outwards. However, due to the number of firms which will pull out of this industry the supply curve will shift towards the left. There is simply not enough demand to sustain all these firms.

ii)Besides the change in the number of suppliers, change in technology or a decrease in labour costs could affect the supply similarly