Economics for Management Decision Making Assignment Sample
Question 1
Part (A)
The equilibrium price means the price at which quantity of goods of goods supplied (Heckman, J. J. (2019), This is the intersection point of curves of market supply and market demand
When price of the gym membership is 80, the quantity demanded is 0 and when the price of the gym membership is 0, the quantity demanded is 80.
Therefore, + bp
– p
Working Note in quantity/change in price
- 80 / 80 –>
When price of the is 10, supply is made for 0 units, when price is 100 then supply is made for 90 units.
Therefore, + bp
+ p
Working Note in quantity/change in price
– 90 / 10 –>
At the point of equilibrium,>
80 – + p
>>
Now, –>
And +>
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Hence, equilibrium units and equilibrium and = 1,575.
ii. If government imposes a price limit of 50 per gym membership in the market
then the Quantity – = 30 Units
and the Quantity + + Units
As the price increased from equilibrium price there is decrease in quantity demanded and
Increase in quantity supplied.
We cannot sell more quantity than the quantity demanded by consumers.
Hence, and Quantity units.
It will result in shortage of sales.
= 1500. (75 less than equilibrium revenue).
iii. If government imposes a price limit of 40 per gym membership in the market
then Quantity – = 40 Units
and Quantity + + Units
As the price decreased from equilibrium price , quantity demanded has increased, and quantity supplies had decreased
Hence, and Quantity units.
It will result in increase in sales. Increase in sales will lead to surplus in revenue.
= 1600. (25 more than equilibrium revenue).
Part (B)
Reduction in price of monthly memberships.
There is an inverse relationship between price of a product and its quantity demanded. With an increase in price, demand for product decreases and vice - versa.
Demand and Supply in Quantity on X-axis and Price is on Y-axis.
At equilibrium price of 45 quantity units. We can observe from the above mention diagram as the Ace Body will reduces the prices for monthly memberships, there will be an increase in quantity demanded and a decrease in quantity supplied.
Advertising promotion given that provides up to 50% off gym memberships during the summer.
Price
Quantity Demanded
Quantity Supplied
45
35
35
22.5
57.5
12.5
Demand and Supply in Quantity on X-axis and Price is on Y-axis.
As the discount is offered by Ace Body gym, there is a significant increase in quantity demanded.
iii. Next Gen gym, competitor of Ace Body reduces its membership price and consumer income falls.
Demand and Supply in Quantity on X-axis and Price is on Y-axis.
If there is a decrease in income of consumers or the competitor decreases its price, the demand of our product decreases even when the price and supply of our product are constant.
In the above situation, Next Gen gym reduced its prices and also there is reduction in the income of consumers. Hence, the demand curve shifted to the left (Quantity Demanded 1) as compared to the original demand curve (Quantity demanded) due to fall in demand even though price and quantity supplied of Ace Body gym's membership is constant.
Question 2
Part (A)
Price elasticity of demand refers to a degree to which for a product changes (degree of change in quantity demanded) as its price changes. Generally, there is decrease in demand as the price increase. In short, price elasticity calculates the percentage change in quantity demanded when there is a percent increase in price, assuming other factors remains constant.
Price elasticity is negative in most of the cases (quantity demanded decreases as price increases and vice-versa). Exception to this are the goods that do not confirm the law of demand, such as Veblen and Geffen goods – they will have positive elasticity of demand.
The demand of the good is inelastic when the elasticity is not more than one and the demand for a good is elastic when its elasticity is not less than one.
In 2018, the revenue of Ace Body was 2.1 million. It was 35% less than the previous year.
Let the revenue of 2017 be x
– 2.1 million />
On solving the above equation, million
Hence, the revenue of year million.
Percentage change in – 22/ 20>
Percentage change in Quantity>
Price Elasticity of change in Quantity demanded / % change in price
/>
Cross – price elasticity determines how quantity demanded of a product responds to a change in price of another product. It is measured as the percentage change in quantity demanded for the first product that occurs in response to a percentage change in price of the second product.
A negative cross elasticity denotes to products that are complements, while a positive cross elasticity indicates two substitute products.
In the given question, Ace Body gym and home gyms sold by Amazon are substitute products and the sign of cross- price elasticity will be positive since a 70% reduction in the price of home gyms sold by Amazon will cause reduction in quantity demanded of memberships in Ace Body Gym.
Part (B)
Price discrimination occurs due to various reasons like differences in opinion or mind set of persons who buy the products, different kind of locality where the products are sold etc.
The first type of price discrimination is to take advantage of monopoly situation. The monopolist segment the market into customer groups and determine price based on capacity of each group. So, the Ace Body gym can charge different fees from each customer based on their willingness to pay.
Under second method of price discrimination, price changes depending on the quantity of product purchases which means per unit price will be low when quantity demanded is high and vice versa. For Body gym can charge different amount for one month, three months, half-year and annual memberships. The amount per month will reduce as the membership period will increase.
In the third type of price discrimination, price changes by qualities such as location or by customer segment. Here, the customers are divided into unique sub-markets and different price is charged in different sub-markets.
The relevant criteria of price discrimination which can be used for Ace Body gym is different prices should be charged for different quantities sold. Ace Body gym can charge different amount for one month, three months, half-year and annual memberships. The amount charged per month will reduce as the membership period will increase.
Question 3
Part A
Economies of scope – Economies of scope is a concept of economics, that states that per unit cost of producing a product will decrease as more varieties of products or similar products are introduced in production cycle.
In short, if a company produce a variety of similar products, per unit cost will fall.
Economics of scope reduces cost of operations, and Ace Gym can apply this approach to maximize profits. Instead of providing one service, Ace Gym should focus on providing multiple services as listed below:
Dietary advice
Personal training
Aerobics
Yoga
Medical training
Physiotherapy etc.
Providing these services will not add to a lot of cost, since gym instructors are well versed to provide them as well. Cost of these services will be very low, when compared to additional revenue that can be generated.
Part B
Economies of scale – Economies of scale is a concept of economics, which explains that when level of output increases, proportionate cost decreases. This means that when higher production is planned, company can gain benefit by way of reduction of cost per unit. This is mainly because of maximum appropriation of fixed cost, amongst other factors.
Benefits of economies of scale can be achieved in below mentioned ways
Technical Economies of scale – This benefit arise because a large-scale producing business can afford investing in high end machinery and expensive equipment.
If Ace Body Gym has a large number of customers, it can buy heavy machinery like cross trainers, treadmills etc. This will in turn attract more customers, thereby increasing revenue.
Ace Body Gym can also invest in additional facilities like sauna, spa etc., which will also increase customer base, and provide benefit.
If Ace Body gym did not have a lot of members, above mentioned benefits could not be achieved.
Financial economies of scale – Big firms enjoy better credit rating and investor trust than a smaller firm. They also have easy access to loans and other credits. Rate of interest applicable is also lower for large firms.
Ace Body Gym can easily borrow money from market for expansion and growth
Rate of interest will be lower than other gyms. This means the Gym can offer membership at prices lower than competitors
Part C
Marginal in total revenue/Change in number of units
Marginal in total cost/Change in number of units
Profit is maximized where (Marginal Cost)
Profit is maximum where and total revenue – total cost is maximum.
Here, marginal revenue and marginal cost are not equal at any level. However, total revenue – total cost is highest at level 2.
Therefore, 2 units must be produced for maximum benefits.
Question 4
Part A
Cash 100,000
Payback years + years 6 months or 2.5 years
Cash 250,000
Payback years + years 1.8 months or 3.15 Years
Ace Body should opt for project A, since its payback falls within the cut off of 3 years.
Part B
Asymmetric information – This information is also known as “failure of information”. This situation occurs when one party of the dealing has more material information than another. It can be said that most of the transactions have information asymmetries. For example, in a sale transaction, seller will have more information about product than buyer, or a doctor will have more information than patient.
Asymmetric information in a Gym industry – Gym industry is no exception to information failure. In most, if not all, cases, gym trainers and owners will have more information that members. Reverse is also possible in some cases, where members possess detailed information about gym techniques and are fitness enthusiasts. Other than that, members believe what is told to them by trainers.
There is an asymmetry of information, since members have less knowledge about the transaction that owners. However, due to increased technological changes, this situation is fast changing, since members fact check everything on internet, before accepting. This has created an information bridge in various circumstances
Part C
Measures than can be taken by government for regulation of gym and fitness industry:
Accountability of trainers – Trainers should be held accountable for any injury caused due to their neglect or absence. If a person suffers any injury while exercising, due action should be taken on trainer responsible, if proved that the injury was due to his neglect.
Defining the industry – At present, due to lack of proper regularization, there is no proper definition of what can be called a fitness center. Government must decide the scope to cover.
Compulsory registrations – Registration should be made mandatory. Unregistered gyms should be closed down. Activities of such gyms should be monitored to ensure nothing suspicious is going on, and that all the trainers are in fact suitable for the job they are entrusted with.
Limit on number of members – Government should place an upper ceiling on number of members that can be allowed to join at a particular time, depending on resources and area available. This should be done to ensure that gyms are not crowded and to prevent injury due to lack of space.
Infrastructure – Various infrastructural guidelines like separate bathrooms for men and women, proper ventilation etc. must be mentioned and should be strictly followed.
Major problems that the industry face at present is due to relatively unorganized sector and once government introduces adequate measures, this industry can provide a boom to economy.
Question 5
Part A
Market structure means market conditions, which will be determining relationships between sellers and buyers.
Ace Body Gym operates in an Oligopoly, in this type of market, there are a few big sellers and large number of buyers. There are restrictions of entry and prices are generally set high. Firms earn more profits, since supply is limited (Azar, J., & Vives, X., 2019). However, if prices are set too high, buyers will switch to substitutes. Pricing decisions needs to be made carefully. Output is also determined by market forces. Below is the graph of a firm in oligopoly.
Other forms of market prevailing are as follows:
Perfect Competition Structure - In this type of market, there are a large number of firms competing against one another. Sellers does not have power to cause fluctuations in industry. Products are same as those of competitors and there are no significant barriers of entry and exit. Price is consistent for all suppliers, and one supplier cannot affect price in such market (Azevedo, E. M., & Gottlieb, D., 2017). Firms have to accept price as is decided by market forces. Profit is low, as compared to other forms of market and output is also determined by market forces of demand and supply. Below is the graph of a firm in perfect competition.
Pure Monopoly – In this market type, there is a very large single firm, that controls supply. This firm is the only producer of the product, and therefore can charge any price for it. Profit in such structure is maximum, since there are no competitive products available. This is due to heavy restrictions on entry like patent rights, trademarks etc (Baur, D. G., 2019) Output depends on firm policy. Market forces of demand and supply are not very active in this market. Generally, monopolists reduce output level, to increase price and earn more profit. Below is the graph of a firm in pure monopoly.
Monopolistic Competition - In such type of markets, there a large number of firms competing with one another; however, products are not identical. Products are similar, but are highly differential (Bertoletti, P., & Etro, F., 2017). This gives power to the firms to charge higher prices for their products. Differences arise due to changes in marketing and advertising policy, firm name etc. Output is dependent on market forces of supply and demand, and profit s relatively high. Below is the graph of a firm in monopolistic competition
Part B
Barriers of entry – The reason why there are only a few numbers of buyers in oligopoly is because of existence of barriers of entry. Most important of these barriers are as below:
Patents – many industries take patents of products, so that no other business can copy them.
High startup costs – cost of starting up a new business is very high, due to which people are reluctant to enter.
Economies of scale – existing firms enjoy economies of scale benefit, and therefore can charge lower costs. New entrants need to charge high amounts to recover cost, and therefore buyers do not engage.
Question 6
Part A
Part (B)
Best payoff for Ace Body will be when Next Gen Gym invests in the equipment as well. Payoff in this case will be of $4.
Part (C)
If Next Gen Gym is the first mover, it will still be beneficial if Ace Body Gym invest in the equipment, else payoff will reduce.
Part (D)
The benefit in this scenario is to second mover, since Ace GYM can decide based on decision of Next gen Gym. If Ace Gym moves first, there are multiple circumstances, and profits will reduce. However, if it waits, there is a possibility that Next Gen Gym does not invest. In that case, Ace Gym will have maximum benefits.
Part (E)
Game theory is a framework designed to interpret situations amongst competitors and produce effective decision-making strategies (Gao, Y., & Zhang, J. 2019). It is based on assumption that all players in market are rational, and that they wish to achieve maximum payoff.
Using this approach, Ace gym and competitors can identify and base decisions on the basis of decision other players, so that they derive maximum payoff.
Reference
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