Managerial economics assignment MBA

This assignment is aim to help MBA Students for doing the task on Managerial Economic given by lecturers. The contents of this report will be a valuable source for who are taking course of MBA in Business Administration. This a part of Macroeconomic matter and will assist you most in aspects of completing your MBA course.

MASTER OF BUSINESS ADMINISTRATION

INTERNATIONAL PROGRAM

ASSIGNMENT

MANAGERIAL ECONOMICS

Submitted to:

Submitted by:

ID No.:

Class: MBAOUM

Ho Chi Minh City, July 2013

SEMESTER 2013 MANAGERIAL ECONOMICS – BMME5103

ASSIGNMENT (60%)

Question 1

Read the following information and answer the questions below

Competition: the population factor

As the debate about the optimum size of the Australian population continues, one question that should be asked is whether the relatively small population creates difficulties

in maintaining an efficient and competitive economy And if this is the case, what is the solution?

There are two key consequences of a small population First, it can hinder economic efficiency On the demand side, Australia, with its small population, is handicapped by a relatively low domestic demand for goods and services, which limits the amount of production and robs companies of the opportunity to achieve the benefits of large-scale production On the supply side, even if demand is substantial – due to exports, for example – the work force is relatively small This means that in some industries, any economy of scale is harder to achieve in Australia than it is in countries with larger populations Second, in some Australian industries there will be fewer competitors and less competition that exists in the same industries in much larger economies In many Australian markets, only one or two large firms are needed to meet the existing demand adequately Their dominance may deter new market entrants A company considering entering a market may be deterred on finding that there is room to sell only a very small proportion of the production necessary to achieve economies of scale

Empirical research confirms there is a negative correlation between the size of population and the degree to which the economy is concentrated in specific sectors.

In Australia, there certainly seems to be a high concentration in many sectors, including manufacturing, retailing, transport, service industries and construction, due to such factors as population size and a historically weak or non-existent merger law The reduced completion lowers pressure on firms to operate efficiently, reinforcing the disadvantages of inefficiency created by small-scale production Having a small population can often mean inefficiency and lack of competition, causing high prices, reduced services and less innovation In Australia, the problem

is made worse by a widely dispersed population We may be highly urbanized but the

capital cities that hug the coastline are far apart, often requiring separate production facilities and inhibiting competition between businesses in different cities.

Are there any ways out of this problem? One answer is a larger population, but

achieving that would require many years of high population growth Moreover, this solution merely focuses narrowly on the demand and supply for everyday goods and services, and ignores some of the disadvantages of a large population, including crowding,

population and the depletion of natural resources Another way out of these problems is through trade If we increase exports, we can achieve access to much larger markets and

so gain the benefits of larger-scale production A flow of imports will often stimulate the

competition that is otherwise lacking in a small economy However, Australia’s position is

not the same as that of other countries closer to large markets Canada and Sweden, for example, are close to big markets and can more easily achieve these benefits (although, as the costs of transport and communication fall, this relative disadvantage is receding)

Third, do we need to compromise competition policy? Should all

anti-competitive practices and mergers be prohibited, as in the US, or should there be some compromise by making arrangements where the benefits of large-scale production can be achieved, albeit at a cost to competition? The answer is that, in many cases, such a compromise is not necessary First, sufficient import competition may justify a single producer in the Australian economy without compromising competition The Australian Competition and Consumer Commission has not opposed any mergers in the past decade where there has been import competition Second, in many sectors of the economy in Australia, economies of scale count, and where import completion is weak, that a balance may be required

Unlike the situation in most other countries, the law in Australia permits anti-competitive arrangements to be authorized if the applicants can demonstrate a sufficiently large public benefit to outweigh any detriment caused by the lack of competition An example of this is the proposal by Qantas and Air New Zealand to coordinate their prices and services This seems quite anti-competitive, but the applicants argue that there are benefits for both countries, such as the achievement of sufficient scale to develop a large world airline The authorization process allows for a careful, public and independent evaluation of these claims

Many social and economic factors require consideration in the population debate Questions about economies of scale and competitive outcomes are only one aspect but as the debate continues – and it has already been going for 100 years – these will continue to

be key issues for business and government

a Explain how a small population may mean that industries cannot benefit from economies of scale Are there exceptions to this?

(15 marks)

b Why might a small population mean industry has low concentration and high prices? Are there exceptions to this?

(15 marks)

c What are the three ways suggested in the article to improve efficiency and increase competition?

(10 marks)

[TOTAL: 40 MARKS] Question 2

A monopoly has the following demand and cost data as shown below

Assume fixed costs of $300

P ($) Q (units) TVC ($)

500 0

250 5 1410

200 6 1960

150 7 2710

100 8 3710

(a) For the output and cost figures given above, calculate the average variable cost (AVC), average total cost (ATC) and marginal cost (MC)

(6 marks)

(b) For the price and quantity figures given above, calculate total revenue (TR) and marginal revenue (MR)

(6 marks) (c) Based on the figures above, determine the short run profit maximizing (loss minimizing) output and total profit or loss for this monopoly

(6 marks) (d) Suppose the government were to impose a price ceiling at the allocative efficient price What is the value of this price and resulting level of output?

(6 marks) (e) Would the monopolist remain in business in the long run if the price ceiling remained

in place? Explain your answer

(6 marks)

[TOTAL: 30 MARKS] Question 3

Suppose you have the following game:

Firm A

Firm B

Low price High price

a Find out Nash equilibrium, if any

(6 marks)

b Explain the concept of mutual interdependence

(6 marks)

c Assuming no collusion, what is the likely outcome of the game?

(6 marks)

d Given your answer to (c), explain why collusion is mutually profitable

(6 marks)

e Why might there be a temptation to cheat on the collusive agreement?

(6 marks)

[TOTAL: 30 MARKS]

ANSWER

Question 1:

a A small population may mean that industries cannot benefit from economies of scale There are some evidences for this issue:

- A small population creates difficulties in maintaining an efficient and competitive economy

- It can hinder economic efficiency For example: with a small population, Australia

is handicapped by a relatively low domestic demand for goods and services, which limits the amount of production and robs companies of the opportunity to achieve the benefits of large-scale production

- There will be fewer competitors and less competition that exists in the same industries in much larger economies One or two large firms are needed to meet the existing demand adequately

There is exception due to economies of scale A company considering entering a market may be deterred on finding that there is room to sell only a very small proportion

of the production necessary to achieve economies of scale

b A small population mean industry has low concentration and high prices because there

is a relationship between the size of population and the degree to which the economy

is concentrated in specific sector Having small population lead to less efficient and lack of competition, causing high price, reduced services and less innovation as well

In this case, there will be no exceptions

c Three ways to improve efficiency and increase competition suggested from the article including:

- Firstly, a large population with high population growth, but also ignore some

disadvantages of large population such as crowding, population and the depletion

of nature resources

- Secondly is by through trade Once increase exports, we can achieve access to

much larger markets and so gain the benefits of larger-scale production

- Lastly, we do need to compromise competition policy In some cases, such

compromise is not necessary For example, in Australia, sufficient import competition may justify a single producer without compromising completion But

in many sectors of the economy in Australia the balance may be required due to economies of scale count and where import completion is weak On the other side, anti-competition brings benefits for both countries in corporation

Question 2:

(a), (b)

Whereas:

AVC =

TC = TVC + FC ATC =

MC =∆

∆

TR = P x Q

MR =∆

∆

Profits/ Loss = TR - TC

P ($) (units) TVC ($) Q FC

($)

AVC ($)

TC ($)

ATC ($)

MC ($)

TR ($)

MR ($)

Profits/Loss ($)

200 6 1960 300 326.67 2260 376.67 550 1200 -50 -1060

150 7 2710 300 387.14 3010 430 750 1050 -150 -1960

100 8 3710 300 463.75 4010 501.25 1000 800 -250 -3210

(c) Profits maximization where MC cuts MR from below (MR = MC) Based on the table above, the short run profits maximization is determined at MR = MC = 250$, with P = 350$ and at level of output is Q = 3 units, Profits = 60$

(d) Suppose the government were to impose a price ceiling at the allocative efficient price Then in monopoly, allocative efficiency achieve at Price equal to Marginal Costs (P = MC)

In this case, P = MC = 300$ and the level of output is at Q = 4 units, Profits/ Loss = -90$

(e) If the price ceiling remained in place, the monopolist would remain in long-run business due to loss will be recovered in short run, monopolist may get loss because of weak demand

or high cost, but when keeping the price ceiling, MC is decreasing allow monopolist to charge a fixed fee so that the loss will be recovered In the long run, monopolist remain in business if P ≥ ATC In this case, in the long run, company should produce at Q = 3 units

with P = 350$ which is smaller than ATC = 330$ If the price ceiling remain in place, in the long run, the monopolist will stop their business if P < ATC

Question 3:

a Nash equilibrium:

Firm A

Firm B

Low Price High Price

- When Firm A offers Low price, Firm B will get whether 20 or 0, then 20 > 0

- When Firm A offers High price, Firm B will get whether 100 or 80, then 100 > 80

- When Firm B offers Low price, Firm A will get whether 10 or 80, then 80 > 10

- When Firm B offers High price, Firm A will get whether 20 or 100, then 100 > 20

Therefore we find out the Nash equilibrium is at (80,100).

b Explain the concept of mutual interdependent:

In the market, each firm has its own power and recognizes that it must take into account the behavior of its competitors when it makes decisions Firm has to consider the actions and the possible reaction of rivals On one hand, each firm is in

a position to influence the price, output and profits of other ones in the market On the other hand, it cannot fail to take into account the reactions of others to its price and output policies Therefore, every firm should consider competitors carefully before making any decision Successful decision making depends on the prediction

of the rival firms’ reactions to the policy decisions of the firm

c If there is no collusion, each firm should use their Dominant strategy (or Maximin strategy, if any) to get the most benefits of them

Firm A

Firm B

Low Price High Price

High Price 80,100 100,80

Case 1: Dominant Strategy:

- If Firm A chooses Low Price and Firm B chooses Low price:

We can see that Low Price is the dominant strategy for firm B, because any strategy

firm A chooses, firm B still has the higher payoff at Low Price (20 > 0 and 100 > 80), so Firm B will offer a Low Price Firm A can increase their payoff from 10 to

80 by choosing High Price rather than Low Price

- If Firm A chooses High Price and Firm B chooses High Price

We can see that High Price is the dominant strategy for firm A, because any

strategy firm B choose, firm A still has the higher payoff at High Price (80 > 10 and

100 > 20), for Firm A will not change their decision in High Price

Firm B can increase their payoff from 80 to 100 by choosing Low Price rather than High Price

In summarize, there is Dominant Strategy for both of Firms which is Firm A will offer High Price and Firm B will offer Low Price

Case 2: Maximin Strategy:

 Firm A:

- If they choose a Low Price option, they will receive either 10 or 20 profit, depending on the option chosen by Firm B, so the worst Firm A will make 10 profits

- If they choose a High Price option, they will receive either 80 or 100 profits, so the worst Firm A will make 80 profits

Comparing between 10 and 80, the maximum (the best) of two minimum is 80

Therefore, Firm A will offer High Price Strategy.

 Firm B:

- If they choose a Low Price option, they will receive either 20 or 100 profit, depending on the option chosen by Firm A, so the worst Firm B will make 20 profits

- If they choose a High Price option, they will receive either 0 or 80, the worst is 0

Comparing between 0 and 20, the maximum (the best) of two minimum is 20.

Therefore Firm B will offer Low Price Strategy.

Conclusion, if there is no collusion, the outcome of the game is that firm A will offer High Price and Firm B will offer Low Price Strategy

d Collusion is mutually profitable: From results in (c), we can see that if there is no collusion then each of firm has its own strategy to maximine profits or minimine the lost

e There may be a temptation to cheat on the collusive agreement: Because all of cheating activities derive from benefits Who can cheat other then can get higher profits However in this game, there may be no cheating action due to each of them already get the best profits compare to the rest