Econ 6000 Economic Principles And Assessment Answers
Answer:
Module 1
Problem A:
The elasticity of supply determines how rapidly supply responds to changes in the price levels. When the firm starts the production of energy bars, it should know how changes in the market price will change the output levels such that it is prepared for any change in the market and can adjust its output levels accordingly (Varian, 2009).
The more important consideration is however the elasticity of demand for energy bars in the market. The elasticity of demand determines how the demand for energy bars respond to changes in the price level. It is absolutely mandatory for a firm to estimate the elasticity of the concerned product before it starts to produce the same. This will determine its revenue and hence profit levels in case of any price alteration (Pindyck and Rubinfeld, 2009). If the elasticity of demand for energy bars is low, it will imply that when the price of energy bars increases by a unit percent, the demand for energy bars will decrease less than proportionately. This means that the overall revenue of the firm will increase. Again if the elasticity is very high then demand will be very sensitive to price and hence a very small change in the price level will bring down the demand to a great extent (Varian, 2009). This will result in a fall in the revenue of the firm and consequently its profit levels.
Thus to start production and set the price of the energy bars relative to similar bars that are substitutable in the market, it is essential for the firm to know the elasticities of demand and supply.
Problem B:
|
Price |
Quantity demanded (thousands per day) |
Total Revenue (in ‘000 $) |
|
1.00 |
30 |
30 |
|
1.50 |
25 |
37.5 |
|
2.00 |
20 |
40 |
|
2.50 |
15 |
37.5 |
|
3.00 |
10 |
30 |
The price elasticity of demand at $2.00 is:
[{(20 – 25) / 25}/ {(2.00 – 1.50) / 1.50}] = –3 / 5 = –0.6
(Varian, 2009)
[{(20 – 30) / 30}/ {(2.00 – 1.00) / 1.00}] = –1 / 3 = –0.333
[{(25 – 30) / 30}/ {(1.50 – 1.00) / 1.00}] = –1 / 3 = –0.333
[{(9 – 11) / 11}/ {(2.00 – 3.00) / 3.00}] = 6 / 11 = 0.55
(Pindyck and Rubinfeld, 2009)
Reference:
Pindyck, R. and Rubinfeld, D. (2009). Micreconomics. 7th ed. New Jersey: Prentice Hall.
Varian, H. (2009). Intermediate Microeconomics: A Modern Approach. 8th ed. New York: W. W. Norton & Company.
Module 2
Problem A:
There can be multiple firms producing energy bars in the market. Moreover, there may be many more firms preparing to enter into the market. Since there are many firms, Schmeckt can set its prices independently without considering the prices set by other firms in the market. Since there can be many firms, the price decision of a single firm has no significant impact on the market (Pindyck and Rubinfeld, 2009).
If a certain firm wants to enter into the energy bar market, it does not necessarily have to incur any additional costs. On the other hand, if a certain firm wants to exit the market, it can shut down its production without paying any extra cost for that. Hence, there is no cost for entry into or exit from the market (Varian, 2009).
All the decisions taken by Schmeckt or any other firm in the market can be autonomously made as it is not going to have any impact on the market.
Each firm producing energy bars, including Schmeckt, will enjoy a certain degree of market power because it sells a differentiated energy bar. This implies that a firm can raise the price of its energy bar without losing all its customers. It can also reduce its price without triggering any price war with its potential competitors (Varian, 2009).
The market for energy bars is somewhat characterized by imperfect information.
According to all the above mentioned characteristics, the market for energy bars that Schmeckt is trying to enter into is characterized by Monopolistic Competition (Pindyck and Rubinfeld, 2009).
In order to ensure a smooth introduction of the Schmeckt Besser energy bar, the first criterion that Schemeckt should consider is product differentiation (Pindyck and Rubinfeld, 2009). If the company already has a good reputation in the market, it will be an additional benefit. However, in order to differentiate its energy bar the research department should first analyse the other type of energy bars in the market and determine their kind. Accordingly, the Schmeckt energy bar can be differentiated as much as possible in terms of the quality, the flavours, the packaging, the size, etc. Moreover, it has to take into account the prevailing price structure in the market. Schmeckt must ensure that the price it sets is not very high or very low compared to the price of similar energy bars in the market. At the beginning, when it is just about to introduce the Schmeckt Besser energy bar into a market which already has similar energy bars, it should set the price somewhere around the market price. However, to ensure profit-maximisation, it should equate its marginal revenue to the marginal cost incurred in the production process (Pindyck and Rubinfeld, 2009).
- Type of Product: To check if the different energy bars available in the market are identical or differentiated. If they are differentiated, to determine the degree and kind of differentiation.
- Price Setting: To analyse whether the different firms operating in the energy bar market are price-takers or price-makers, that is, whether they can control the price of the energy bar they produce.
- Market Share: To determine the market share of each firm producing energy bars in the market.
- Entry and Exit: To check whether firms can enter into or exit from the market without incurring any additional cost.
- Market Power: To analyse the degree and kind of market power enjoyed by each firm in the market.
- Information: To check whether complete information prevails between the buyers and sellers in the market.
(Varian, 2009)
This analysis will determine the kind of market structure for energy bars and hence for Schmeckt Besser energy bar when it is introduced into the market (Pindyck and Rubinfeld, 2009). Once the company knows the market structure prevalent, it will be able to adjust its production and sales decisions accordingly.
Reference:
Pindyck, R. and Rubinfeld, D. (2009). Micreconomics. 7th ed. New Jersey: Prentice Hall.
Varian, H. (2009). Intermediate Microeconomics: A Modern Approach. 8th ed. New York: W. W. Norton & Company.
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