Managerial Economics & Business Strategy, Essay Example

Question 1: The X-Corporation produces a good (called X) that is a normal good. Its competitor, Y-Corporation makes a substitute good that it markets under the name Y. Good Y is an inferior good.

a) How will the demand for good X change if consumer incomes increase

If consumer income increases, demand for good x will increase: this is the definition of a normal good- when consumer incomes increase, demand for a normal good will increase as well.

b) How will the demand for good Y change if consumer incomes decrease?

If consumer income decreases, demand for good y will also decrease. That is, the definition of an inferior good is: an increase in income will not lead to an increase in consumption of inferior good. The opposite is true for a decrease in income. Thus, a decrease in income will lead to an increase in consumption.

c)How will the demand for good X change if the price of good Y decreases?

If the price of good y decreases, as a substitute good, that should lead, all things equal, to a decrease in the consumption for x. That is because a decrease in the price of substitute goods will lead to a decrease in the demand for the good whose price does not decrease.

d) Is good Y a lower-quality product than good X? Explain

In theory, one might posit that y is a lower-quality good because individuals purchase it less frequently when their income increases. But in reality, this not need be the case. For example, white bread might be an inferior good (although in Alfred Marshall’s time he posited differently) . If an individual has an increase in income, they might consume such things as rolls and croissants rather than bread. However, that does not mean that white bread is lower in quality, it just fits a different set of preferences.

Question 2: Good X is produced in a competitive market using input A. Explain what would happen to the supply of good X in each of the following situations:

a) The price of input A increases supply of good X decreases.

b) An excise tax of $1 is imposed on good X, supply of good x decreases.

c) An ad valorem tax of 5 percent is imposed on good X , supply of good x decreases.

d) Atechnological change reduces the cost of producing additional units of good X, supply of good X increases

Question 4: The demand for good X is given by

Research shows that the prices of related goods are given by Py $5,900 and Pz $90, while the average income of individuals consuming this product is M $55,000.

a. Indicate whether goods Y and Z are substitutes or complements for good X.

Good y is a substitute to good x- we know this because the coefficient for good y is positive indicating that if the price for good y increases, the quantity for x increases. This means consumers will switch from good Y to good X if the price increases.

Good z is a complement to Good x because an increase in price z leads to a decrease in the quantity of x purchased. That is, these goods are purchased together resulting in an increase in price Z leading to a reduced consumption of good X.

b. Is X an inferior or a normal good?

Good X is a normal good- we know this because the coefficient related to income is positive. That is, an increase in income will lead to an even greater consumption of good X.

c. How many units of good X will be purchased when Px $4,910?

1,200-.5(4,910)+ .25(5900)- 8(90)+.10(55,000)= 5000 units of good X

Question 12: You are the manager of a firm that produces and markets a generic type of soft drink in a competitive market. In addition to the large number of generic products in your market, you also compete against major brands such as Coca-Cola and Pepsi. Suppose that, due to the successful lobbying efforts of sugar producers in the United States, Congress is going to levy a $0.50 per pound tariff on all imported raw sugar—the primary input for your product. In addition, Coke and Pepsi plan to launch an aggressive advertising campaign designed to persuade consumers that their branded products are superior to generic soft drinks. How will these events impact the equilibrium price and quantity of generic soft drinks?

It is difficult to tell with precise accuracy what will happen, but let’s each event one at a time:

– A congress $.50 per pound tariff on all raw imported sugar- the primary input on the product will -ead to a price increase for cola (although the level of the price increase might be different across different producers) due to an increase in production costs.

– a new advertisement campaign by coke and pepsi to distinguish their products from others will further push up the price of their products without a clear distinction on their

Overall, the equilibrium price will increase and the quantity will decrease for the cola market.

Question 13: Some have argued that higher cigarette prices do not deter smoking. While there are many arguments both for and against this view, some find the following argument to be the most persuasive of all: “The laws of supply and demand indicate that higher prices are ineffective in reducing smoking. In particular, higher cigarette prices will reduce the demand for cigarettes. This reduction in demand will push the equilibrium price back down to its original level. Since the equilibrium price will remain unchanged, smokers will consume the same number of cigarettes.” Do you agree or disagree with this view? Explain.

There are numerous ways to approach this question. The first observation is: a price increase in cigarettes may be different than an increase in the price of the taxes on cigarettes- that achieves a similar effect. That is, in the first scenario the cigarette company is arguably in control or raising (and lowering) prices that leads to the (re) establishment of an equilibrium. In a tax example, however, not only does the government control the rate of taxation (which could be adjusted if cigarette companies decrease their prices), but prices would arguably remain more “sticky.” That is, what is unclear from the example is: what is the time frame from which a resstablishment of the equilibrium is: this is important because even though equilibrium is established, it still might lead to a lower in smoking over a period of time.

Question 14: You are the manager of an organization in America that distributes blood to hospitals in all 50 states and the District of Columbia. A recent report indicates that nearly 50 Americans contract HIV each year through blood transfusions. Although every pint of blood donated in the United States undergoes a battery of nine different tests, existing screening methods can detect only the antibodies produced by the body’s immune system—not foreign agents in the blood. Since it takes weeks or even months for these antibodies to build up in the blood, newly infected HIV donors can pass along the virus through blood that has passed existing screening tests. Happily, researchers have developed a series of new tests aimed at detecting and removing infections from donated blood before it is used in transfusions. The obvious benefit of these tests is the reduced incidence of infection through blood transfusions. The report indicates that the current price of decontaminated blood is $80 per pint. However, if the new screening methods are adopted, the demand and supply for decontaminated blood will change to Qd 175 P and Qs 2P 200. What price do you expect to prevail if the new screening methods are adopted? How many units of blood will be used in the United States? What is the level of consumer and producer surplus? Illustrate your findings in a graph.

175-P= 2p-200

375=3p

125=p

The price of a decontaminated pint of blood increased from $80 to $125, likely due to the extra processes involved in processing the blood.

2(125)- 200

250-200= 50

50 pints of blood will be produced in the US

Question 15: As a result of increased tensions in the Middle East, oil production is down by 1.21 million barrels per day—a 5 percent reduction in the world’s supply of crude oil. Explain the likely impact of this event on the market for gasoline and the market for small cars.

With oil production down on a daily basis, the price for gasoline will increase leading to a decrease in supply. The market for small cars will likely benefit in that they are more gas efficient (an assumption); if the shock to gas prices is prolonged, one could imagine that it would lead to an increase of demand for smaller cars.