Managerial, Macro & Micro Economics Assignment Questions

Managerial Economics Final paper questions

Question 1

While sipping a cup of coffee, CEO William Corked began to reminisce. It seemed like yesterday, but it was actually more than 10 years ago when he had convinced the board of directors of National Foods, Inc., to go into the soft drink business. Here he was a decade later, sampling a product that his VP of Marketing, Samantha Gordon, was telling him would be an even stronger “growth engine” for the company than bottled water. She had pointed out to him that in 2003 Caribbean consumers spent $1 billion on coffee.

Although this amount was far less than the $3 billion spent annually for tea, it was five times as much as people spent on coffee a decade ago. “It’s obvious,” she told him, “National Foods must get into the coffee business.” As he poured his second cup of coffee, Bob had to admit that even he had begun to prefer coffee over tea. He decided to call Samantha into his office to discuss the matter further. “Okay, Samantha,” Bob began, “You’ve always had a good instinct for what’s new in the market. But before we leap into this, I want a report on exactly why you believe coffee will be the real spark to our company’s growth in the coming 5 years. After all, in our business it’s all about ‘share of stomach.’ If people are drinking more coffee, then they might be drinking fewer soft drinks and bottled water, so we’d be cannibalizing our own products. I’d feel much better if you could help me understand why this wouldn’t be the case. Furthermore, what are the key determinants of the demand for coffee? Could this be just a fad? Already people are starting to tire of their low-carb diets.

Required (30 marks)

a. Based on the scenario, prepare a response to the CEO describing how five key demand determinants that could affect the demand for coffee. (10 marks)

b. Based on your response to question 1 above, write the expression for the following for coffee:

a. Demand function (5 marks)

b. Demand curve (3 marks)

c. How might people respond to changes in the price of competing products such as bottled water and carbonated soft drinks? (7 marks)

d. Explain the factors that would determine if coffee is a ‘luxury’ good, or a necessity. (5 marks)

Question 2 (20 marks)

a. With the aid of a diagram, explain why according to economic theory, in the short run rational firms should only be operating at Stage two of production. (10 marks)

b. Why is it not rational for firms to operate at Stage one or Stage three of production? (5 marks)

c. The impact of COVID-19 has the CEO of a small manufacturing firm worried because of the reduced demand for its product has resulted in reduced production. She has asked you to explain how this will affect the firms fixed, variable, average and marginal costs. (5 marks)

Question 3

Peter Dennis is the owner-operator of a local gas station and convenience store. Peter chose to locate his store in an area at least 10 minutes away by car from the nearest supermarket or grocery store. For the most part, Peter’s business has been quite successful. Then one day he noticed that a new grocery store was opening just one block away. A month later he noticed that a new convenience store had opened for business less than a 3-minute drive away. Peter realized that to maintain the status quo in the face of this new competition, he would have to make some tough decisions about his pricing and promotion policies and the mix of items carried in his store.

The items that he carried were typical of those found in retail establishments of this type, with beer, cigarettes, hot coffee, and soft drinks accounting for about 75 percent of total sales. Soft drinks were by far the best-selling item in his store. Essentially, the retail price of soft drinks was based on the wholesale price plus a markup of about 40 percent. Peter recognized that this markup was considerably higher than the one used by a supermarket, but he believed that people were willing to pay more for the convenience. On certain occasions, Peter would offer a particular brand of soft drink at a substantial discount. Regardless of whether he lost or made money on soft drinks by this action, he found that it helped to attract additional customers into his store, and gasoline sales actually increased

Several people from an adjacent town told him that they waited until they were in the vicinity of his station to fill their tanks because of his discount on soda. Given the public’s responsiveness to special discounts on soft drinks and the ability of this product to promote other products, Peter decided to use the pricing of soft drinks as his main weapon against his new competition. Instead of offering a temporary discount, he decided to reduce the price of soft drinks permanently. However, after a month, despite the lower soft drink prices, there was a noticeable decline in his revenue from soft drinks. Peter realized that he would have to reassess his competitive tactic.

Required

a. Explain the relationship between elasticity and total revenue for all three categories of elasticity. (15 marks)

b. One assumption in economics is that certain factors are held constant in the examination of the impact of one variable. What non price factors should Peter consider in making his decision? (10 marks)

Economics in Environmental Policy

The Minister of Fisheries is considering how to manage an open access commercial fishery. Fishery parameters: Variable name Description Value B0 Initial biomass 250,000 tonnes K Carrying capacity 1,000,000 tonnes r Intrinsic growth rate 0.30 q Catchability 0.20 z Asymmetry 0.05 p Price of fish $100 per tonne w Cost of effort $4,000 per unit of effort (eff) d Discount rate 6% Mathematical expressions describing the fishery Bt Biomass at time t (tonnes) Bt = Bt-1 + Gt-1 - Ht-1 Gt Biological growth at time t (tonnes) The Pella & Tomlinson model Gt = rBt(1-((Bt/K)z )/z Ht Harvest at time t (aka catch or yield) Ht = qBtEt Yt Profit at time t ($) Yt = pHt-wEt Pella, J.J. & Tomlinson, P.K. (1969). A generalized stock production model. Bulletin of the Inter-American Tropical Tuna Commission 13(3): 419-496. Part A: Static management scenarios The Minister understands that open access is inefficient and risks “crashing” the fishery and she intends to provide some protection from over-depletion by imposing a minimum biomass level.

· A biological adviser has suggested that setting harvest at maximum sustainable yield [MSY] would be best because it would maximize perpetual volume of fish harvested.

· Another adviser has suggested that it would be better to target maximum static economic yield [MSEY] because it would maximize perpetual net income (profit) from the fishery. The Minister has asked you to estimate the impacts of these two policies relative to continuing with open access.

1. Complete the following table: (5 marks)

Part B: Dynamic management an environmental economist has explained to the Minister that MSY and MSEY are static scenarios that ignore the temporal nature of fisheries management. The Minister should recognize the dynamics of fisheries management, particularly the need to allow a depleted fishery to rebuild to support target harvest. The economist has explained that the rebuild process can affect the present value of fishery profits. The Minister has decided to adopt a strategy that targets MSEY. She has asked you to advise on the economic impacts of alternative annual harvest strategies to attain BMSEY by year 15 (or sooner). You have been asked to model four scenarios over the first 14 years:

Scenario 1 (Simple): Catch MSEY every year, starting now.

Scenario 2 (Full closure): Choose X to Maximize NPV. No fishing for X years until biomass grows to at least BMSEY. After X years catch MSEY each year.

Scenario 3 (Closure with a one-year transition): Choose Y to Maximize NPV. No fishing for X-1 years [X comes from Scenario 2]. Harvest Y tonnes of fish in year X, harvest MSEY each year after that.

Scenario 4 (Fixed interim harvest): Choose Z to Maximize NPV. Catch Z tonnes of fish each year for the first 14 years to enable biomass to reach BMSEY in year 15.

• (i) Calculate X, Y and Z

(ii) Calculate NPV for each scenario

(iii) Graph over 15 years:

· Harvest (put all four scenarios on the same graph)

· Effort (put all four scenarios on the same graph)

· Annual profit (put all four scenarios on the same graph)

· Biomass (put all four scenarios on the same graph) (10 marks)

Part C: Interpretation 3. Write a brief, qualitative (no numbers!) report contrasting the three dynamic scenarios, describe the key principles about bio-economic resource management that you have learned from manipulation of this model, and explain their importance. (10 marks)

Hints for getting your models to work Whenever mathematical equations are used to model phenomena it is important to think about what can occur because of mechanistic application of the formulae, and how that could contravene real world constraints or common sense. For example, in optimizing a fishery management plan the mathematics could imply that it is a good idea to invest in the future state of the fishery by having a period of negative catches. That is infeasible. It is necessary for you to tell the model that by including a constraint that harvest must be positive. The rules below indicate the types of feasibility constraints that you should build into your model of the fishery.

· Biomass cannot be negative

· Effort cannot be negative

· Harvest cannot be negative

· Harvest must be less than Biomass

Short-Answer and Algebraic Questions: (The numbers in square brackets give the breakdown of the points for various parts of each question. To receive full credit, please explain your answers.)

1. The COVID-19 pandemic has led to shutdown of many businesses and high unemployment in the US. Meanwhile, surgical masks are in high demand. Suppose in this context, SM Inc., a producer of surgical masks, had managed to overcome the health hazard and continue its operations, producing $15 million worth of masks during first quarter of 2020 (2020Q1). It sold all its production in that quarter as well as $5 million worth of masks that it had in its inventory at the beginning of the year and that were produced in 2019. If the production cost of these inventory masks in 2019 was $4 million, how much did the activities of SM Inc. contribute to the GDP in 2020Q1? Please remember to explain your answer in detail in addition to providing the calculated answer. [15]

Answer:

• Under the chain rule, we compare the GDP of each two consecutive years in terms of prices that prevail in the earlier year. For example, to compare 2017 and 2018, we must first calculate GDP in both years in 2017 prices. Consider an economy that produces only two goods, bread and cheese. The following statistics are available about this economy. In the following questions, round your answers to two decimal places.

• What is the growth rateof the real chain-rule GDP between 2017 and 2018? Please remember to explain your answer in detail in addition to providing the calculated answer. [10]

Answer:

• What is the growth rateof the chain-rule GDP between 2018 and 2019? Please remember to explain your answer in detail in addition to providing the calculated answer. [10]

Answer:

• What is the chain-rule GDP of 2019 valued in terms of constant 2017 dollars? Please remember to explain your answer in detail in addition to providing the calculated answer. [10]

       Answer:

• In the above question, if the chain-rule GDP is used as the measure of real GDP, what is the rate of inflationof the GDP deflator in 2018 and in 2019? Please remember to explain your answer in detail in addition to providing the calculated answer. [15]

Answer:

(a)  Explain how GDP is measured in your country. Provide real life examples.        (4 marks)

While your textbook is your first point of reference, you should consult other references in order to receive full marks. Use real life examples (with references) to support your discussion.   

(b) Explain the macroeconomic effects of COVID-19 pandemic on your country using economic theory, real life data and illustrate them on appropriate diagrams.   (10 marks)

This is your case study that you need to describe in details, provide relevant information, use table, diagrams where appropriate. You should use real data as much as possible. Refer to the textbook for the theoretical framework.

(b)   Using your home country as a case study outline two main economic measures government applied to the national economy due to COVID-19 pandemic. Analyze the effect of such measures on inflation, output and employment using economic theory. What measures would you suggest and why? Explain using theory and real data. (12 marks)

Use economic theory and real data to analyses the issues. Explain whether the measures are based on fiscal policy and/or monetary policy. 

Additional marks (4 marks)

Overall presentation of work, especially use of graphs, clear written expression.   2 marks

Appropriate use of referencing. 2 marks