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Managerial Economics - Answer 1

Introduction

COVID-19 has resulted in contractions in economic activities across the globe. According to the World Bank report, the global GDP will decline by 5.2 % in 2020 (World Bank, 2020). Moreover, the lockdown and containment measures taken to reduce the spread of the virus have resulted in a decline in consumption as well as production activities. This adversely impacted the labor market, the unemployment rate surged.

 Firms that are unable to bear the brunt of the crisis has to leave the industry, along with it, the supply chains have been hit, the production has declined sharply as a result of these activities there has been a rise in the unemployment rate (World Bank, 2020). The global economy is witnessing turmoil as a result the incentives that were used earlier in the pre-COVID -19 spread periods such as bonuses, gifts, or any other type of allowances are curtailed by the organization. The lack of aggregate demand has suppressed the production activities; as a result, firms are not able to bear the cost. Firms are taking every measure to reduce the cost; consequently, the positive benefits are curtailed while the negative incentives such as termination, firing, and perks reduction are witnesses. Moreover, as per the reports of the International Labor Organization (2020), the informal sector is hit most by the crisis which is approximately 1/3 of official GDP and provides 70% of employment in Emerging Market and Developing Economies. According to the Organization for Economic Cooperation and Development (2020), Countries are facing the worst job crises and the unemployment rate among OECD counters will surge to approximately 10 % for the year 2020.

Managerial Economics - Answer 2

Introduction

Market failure can be understood as the situation wherein the price mechanism does not take into consideration all the cost as well as gains that are obtained from an economic activity. Market failure distorts economic efficiency as it impacts the price mechanism and does not allow for the production and distribution of the socially optimal units of a commodity, thereby causing welfare losses (Jackson & Jabbie, 2019). The government has the responsibility to correct the problems that are associated with market failure and must promote methods to regulate markets and ensure the maximization of social as well as economic welfare (Jackson & Jabbie, 2019). This can be done in the following ways :

Price Profit Regulations: In this type of restriction the government sets a cap on the price that the organization can charge from its customer for a particular good or service. The cap on prices is fixed ion such as way so to ensure that firms do not charge excessive prices from the consumers at the same time remain profitable.

Restrictive Trade policy and practices: The government can put a restriction on either the quantity that can be produced by the organization or on the level of pollution Furman University, 2015). This way the firms will not be allowed to produce beyond the permissible limit.

 Direct Controls or Regulations: The government can impose direct control and can ban certain goods completely or partially that is causing negative externality. This is a direct way to reduce negative externality.

Patents and Law of Tort: Patent safeguards the work and inventions entailing to scientific or technological aspects by a person and does not allow for piracy of copy of the content. It supports the law of passing off that encourages individuals and organizations to get it in records of their trademarks. The intellectual property rights boost the bringing up of innovative ideas and attain a monopoly as a result, the individual gets an economic incentive to create or develop new ideas (Vishnubhakat, 2017).

Subsidy Policy: The government can provide a subsidy or grant to a good that provides positive externality. Through this, the true benefit that is attained from the activities will be internalized.

Tax Policy: The government can implement a tax on the good of which production is causing externality. When the tax is borne by the producer then the producer will bear the true cost of its production. As a result, the quantity produced will decline now the cost has risen and the externality will be internalized.

Foreign Exchange Policy: The government tends to intervene in the exchange market to support its economy. The government sometimes made deliberately promotes depreciation of the domestic currency by increasing the supply of domestic currency in the foreign exchange markets. As a result, the domestic goods are cheaper, thereby, the exports of the country will increase while the imports will curtail.

Managerial Economics - Answer 3

a. Given,

Price of a television set = $300

Average Variable Cost = $100

The firm must earn a profit = $10, 000 per month

Total fixed cost = $5,000

Now,

Let the number of units sold each month be ‘x’

Profit can be calculated using the formula:

Profit = Total Revenue – Total Cost

Total Revenue can be calculated using the formula:

Total Revenue = Price per unit * Quantity sold

Substituting the value in this formula

Total Revenue = $300*x

Total Revenue = $300x

Total Cost can be calculated using the formula:

Total cost = Total Fixed Cost + Total Variable Cost

Substituting the value in this formula

Total cost = $5,000 + Total Variable Cost

Total Variable Cost can be calculated using the formula:

Total Variable Cost = Average Variable Cost*Quantity

Substituting the value in this formula

Total Variable Cost = $100*x

Total Variable Cost =$100x

Now, substituting the value of Total Variable Cost in Total Cost function

Total Cost = $5,000+ $100x

Substituting the values of Total Revenue and Total cost in the profit function

$10,000 = $300x - ($5,000 + $100x)

$10,000 = $300x - $5,000 - $100x

$10,000 + $5,000 = $300x - $100x

$15,000 = $200x

$15,000/$200 = x

Thus, x = 75

Hence, the firm should sell 75 units of the television set in order to attain the profits of $10,000 per month.

b)

Now, the price per television set changes to $350.

Let the quantity sold be ‘y’ when the price changes to $350

Therefore,

Total Revenue = $350*y

Total Revenue = $350y

Total Variable Cost = $100*y

Total Variable Cost =$100y

Now, substituting the value of Total Variable Cost in Total Cost function

Total Cost = $5,000 + $100y

Profit = $350y – ($5,000 + $100y)

$10,000 = $350y -$5,000 -$100y

$10,000 +$5,000 = $350y -$100y

$15,000 = $250y

$15,000/$250 = y

Thus, y = 60

Hence, the quantity sold must be 60 units if the price of the television set increases to $350.

c)

In this case,

Price = $350

Average Variable Cost = $85

Let the number of units sold be ‘z’

Now,

Total Revenue = $350*z

Total Revenue = $350z

Total Variable Cost = $85*z

Total Variable Cost = $85z

Total Cost = $5,000 + $85z

Profit = $350z – ($5,000 + $85z)

$10,000 = $350z -$5,000 - 85z

$10,000 +$5,000 = $350z -$85z

$15,000 = $265z

$15,000/$265 = z

Thus, z = 56.6

Since the units can not be in decimals, thus the firm should sell 57 units.

Managerial Economics - Answer 4

a)

 Introduction

According to the Law of Demand, keeping other things being constant there is an inverse or a negative relation between price and quantity demanded (Mankiw, 2016). The factors other than price causes a shift in the demand curve while the fluctuations in prices result in movement along the demand curve (Mankiw, 2016). The demand curve will shift to its right or the demand curve will move upwards when there is an increase in the demand for the good. 

Factors causing a rightward shift in the demand curve (Mankiw, 2016).

Change in price of Substitute Good:

Two goods can be categorized as substitutes when these goods could be used for the same purpose by a consumer. In the case of substitute goods, a surge in the price of substitute goods would lessen its quantity demanded as a result, people will switch from this product to their alternate and hence the demand for the good or commodity will augment, causing the rightward shift in the demand curve. 

Change in price of complementary good:

Two goods can be categorized as complementary goods when these goods are demanded together. The demand for a good result in the demand for the other good.

When there is a reduction in the price of the complementary good, the quantity demanded that good will augment. Along with it, there will be a surge in the demand for the goods as these goods are consumed or used together. 

Change in the income of consumers: When the income of the consumers' surges, then the purchasing power rises. Consequently, people will demand more of the good. This will lead to an increase in demand and a rightward shift of the curve.

Change in taste and preference of the consumers: When the taste and preferences of people are towards the goods, then they will demand more of that good. As a result, the demand will increase and the curve will shift in the upward direction.

Expectations of future price: If there is a forecast that the price of the goods will increase in the future then people will tend to demand goods at present at lower prices, hence the demand will increase.

Number of potential buyers: If there is an upsurge in the number of potential buyers who are demanding the good, then the demand will rise.

According to the Law of Supply, keeping other things being constant, there is a positive relation between the price and quantity supplied (Mankiw, 2016). The factors other than price will cause a shift in the supply curve. The supply curve will shift to its right when there is an increase in the supply of the good.

Factors causing a rightward shift in the supply curve (Mankiw, 2016).

Fall in price of inputs: When there is a reduction in the price of inputs that are used to produce the goods, then more goods can be produced within the allocated budget. The cost of producing well will reduce as a result, the supply of the goods will rise and the supply curve will shift rightwards.

Advancements in technology: When technology is improved then by using efficient technology, the firms can produce more goods at less cost. Thus, there will be a rise in the production of the good.

Reduction in taxes and other regulations by the government or a rise in subsidies: When there is a reduction in taxes and regulations, then the cost of producing the good declines, as a result, the supply of the good will go up. Moreover, when the government provides subsidies, then the cost of production will reduce and supply will surge.

Natural conditions: If the natural conditions favor the production of the good then more of that good can be produced, as a result, the supply of the good will shoot up.

Expectations of future prices: If there is a forecast that the market price of good will go down in the future then suppliers will be supplying more goods at present in order to achieve higher profits. Consequently, more goods will be supplied at present, thereby increasing the supply of goods. 

b. Introduction

During the peak season, there is a rise in demand for airplane tickets. However, the number of seats is fixed. Thus, the demand curve will shift to the right, although there will be no change in the supply curve; this is shown in the diagram below.

The x-axis represents the quantity of a commodity and the y-axis represents the price of the good. Initially, the market for airplane ticket is in equilibrium as shown by the point E. The market equilibrium is attained at the intersection point of the demand curve (DD) and the supply curve (SS). The equilibrium price is demonstrated by P and the equilibrium quantity is demonstrated by Q.

However, with a boost in the demand of airplane tickets, the demand curve for airplane tickets will shift rightward to DD1 although there is no change in the supply curve. The new equilibrium point will be attained at the point E1 as shown in the diagram, which is the intersection point of the new demand curve shown by DD 1 and the supply curve shown by SS. As a result, the equilibrium price has risen from P to P1 and the Quantity has risen from Q to Q1. The new equilibrium is achieved at an elevated price as well as quantity, this is the result of, excess of demand, over the supply of airplane tickets or there is a shortage. Consequently, the competition among buyers of airplane tickets will cause the price to move upwards.

Now, in the case of Sweet corns, sweet corns are a perishable good. In the peak period when the consumption is heaviest then the demand for sweet corns will increase, in order to meet the demand of the good, more sweet corns will be supplied. Sweet corn is perishable goods and hence cannot be stored for a longer period of time.

When there is a surge in demand then consequently, there will be a surge in the supply of sweet corns. The supply of sweet corns will exceed the demand for sweet corns. As shown in the diagram below, the shift in the supply of sweet corns exceeds the shift in the demand for sweet corns. This is the situation of excess supply or surplus in the market. The competition to sell sweet corn will put downward pressure on the price. As a result, the price will be lowered to P’.

Managerial Economics - Answer 5

Total Fixed Cost will remain the same irrespective of the output level.

Total Variable can be calculated by using the formula:

Total Cost = Total Fixed Cost + Total Variable Cost

Total Variable Cost = Total Cost – Total Fixed Cost

Average Fixed Cost can be calculated using the formula:

Average Fixed Cost = Total Fixed Cost/Output

Average Variable Cost can be calculated using the formula:

Average Variable Cost = Total Variable Cost/Output

Using these formulas in the table below:

Output

Total Cost

Total Fixed Cost

Total Variable Cost

Average Fixed Cost

Average Variable Cost

0

50

50

     

1

75

50

75-50

50/1

(75-50)/1

2

100

50

100-50

50/2

(100-50)/2

3

120

50

120-50

50/3

(120-50)/3

4

135

50

135-50

50/4

(135-50)/4

5

150

50

150-50

50/5

(150-50)/5

6

190

50

190-50

50/6

(190-50)/6

7

260

50

260-50

50/7

(260-50)/7

 

Output

Total Cost

Total Fixed Cost

Total Variable Cost

Average Fixed Cost

Average Variable Cost

0

50

50

     

1

75

50

25

50

25

2

100

50

50

25

25

3

120

50

70

16.7

23.3

4

135

50

85

12.5

21.25

5

150

50

100

10

20

6

190

50

140

8.3

23.3

7

260

50

210

7.1

30

Managerial Economics - Answer 6

Introduction

Externalities can be stated as the impact of any economical or industrial activity on a third party, which is not involved in the transaction, the effect can be negative or positive resulting in either cost or gains that are not shown in the prices (Hanley, Shogren, & White, 2016). Externalities entails economic, environmental, or social consequences of activities, these are difficult to report financially.

If the third party bears any cost due to the actions performed by the producers and is not represented in the market price, then it is a case of a negative externality. Correspondingly, when the third party gains which are not consumed either by the consumer or the producer, this is the case of positive externality (Hanley, Shogren, & White, 2016).Externality results in market failure as the true cost and benefit of producing the good or service is not addressed in the price mechanism. In the case of externality, the social cost or social benefit differs from the private cost and private benefits. In case of a negative externality, the social cost exceeds the private cost, hence the producer produces more of the good as he/she does not take into consideration the true cost of producing (Kudelo, & Wejer-Kudelko, 2014). Now, in case of a positive externality, the social benefits of producing/manufacturing a good exceed the private benefits as a result, the producer produces less of the good (Kudelo, & Wejer-Kudelko, 2014). Negative externalities can be corrected through government regulations, property rights, and contractual agreements (Sigali & Kaytmaz Balsari, 2018).

b. Introduction

Advantages and disadvantages of an increase in air travel

The aviation industry provides numerous benefits that are not only restricted to national levels but also spread to international levels (ATAG, 2018). It provides economic as well as social benefits to society. However, the air travel not just has positive impact on the economy but also has negative impacts.

Air Travel not only supports trade and connectivity but also provides employment opportunities, tourism, and can be used as a rapid disaster response (ATAG, 2018). Moreover, it positively contributes to the Gross Domestic Product of the economy and hence aids in economic development. However, the air travel industry causes both positive as well as negative externalities. The air travel industry has positive spillover effects. It provides direct jobs to 10.2 million people and provides 10.8 million employment opportunities indirectly through the activities that are associated with the air travel industry, these are buying pf goods and services from other organizations that relate to the supply chain (ATAG, 2018). Infrastructure investment is high in air transport which further supports the economy. Increased air travel has to lead to an increase in tourism as now people can visit other places both domestically and internationally. All these are positive externalities created by the industry which are not depicted in the prices of the air tickets. 

In the year 2017, the air transport industry generated 859 million tonnes of CO2 (ATAG, 2018). In addition to this, the air transport industry causes noise pollution; the enormous amount of noise created from airplanes, water pollution, soil pollution as well as the waste generation from the airplane is hazardous (Jakubiak, 2015). The carbon emission as well as other pollutants generated by the air travel industry is not accounted for by the companies in and is not represented in the proce mechanism as a result, this is a negative externality.

Reference for Managerial Economics

ATAG. (2018). Aviation benefits beyond borders. Retrieved from https://aviationbenefits.org/media/166712/abbb18_global-summary_web.pdf

Furman University (2015). Solutions to market failure. Furman University Scholar Exchange. https://scholarexchange.furman.edu/cgi/viewcontent.cgi?article=1006&context=fca-add

Hanley, N. Shogren, J. & White, B. (2016). Environmental economics: in theory and practice. Macmillian Education Limited, London.

International Labor Organization (2020). ILO Monitor: COVID-19 and the world of work. Third edition updated estimates and analysis. Retrieved from https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/documents/briefingnote/wcms_743146.pdf

Jacksom, A. E. & Jabbie, M. (2019). Understanding market failure in the developing country context. MPRA paper no. 94577. https://mpra.ub.uni-muenchen.de/94577/

Jakubiak, M. (2015). Environemntal impact of air transport-case study of Krakow Airport. LOGISTYKA, 2, 276-283. https://www.researchgate.net/publication/280938169_Environmental_impact_of_air_transport_-_case_study_of_Krakow_Airport#:~:text=Risks%20associated%20with%20air%20transport,and%20change%20of%20land%20use.

Mankiw, G. N. (2016). Principles of microeconomics. Cengage Learning (9th edition).

OECD (2020). COVID-19 is causing activity to collapse and unemployment to soar. Retrieved from http://www.oecd.org/employment-outlook/2020/

Sigalı, S. & Kaytmaz Balsarı, Ç. (2018). Theoretical insights on integrated reporting and externalities. International Conference on Accounting. Retrieved from https://dergipark.org.tr/tr/download/article-file/635172

Vishnubhakat, S. (2017). An intentional Tort theory of patents, 68 Fla. L. Rev., 571. Retrieved from https://scholarship.law.ufl.edu/flr/vol68/iss2/8/

World Bank. (2020).Global Economic Prospects, June 2020. Retrieved from https://www.worldbank.org/en/publication/global-economic-prospects

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