BUSN2043 - Managerial Economics PDF

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Tutorial 1 – Industry Application questions The point of this exercise overall is for students to think about what is involved in an industry; how industries can be very different and to relate their economic studies to think about, given the nature of the products/services being produced, why the i...

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Tutorial 1 – Industry Application questions The point of this exercise overall is for students to think about what is involved in an industry; how industries can be very different and to relate their economic studies to think about, given the nature of the products/services being produced, why the industries have the characteristics they do.

Questions: 1. Define the industry that you are applying these concepts to. Your industry ought to be pretty precisely defined and this is not necessarily an easy thing to do. Note that it can be just as important to say what is NOT included, as what is. It is OK to use the IBISWORLD definition, or any sensible attempt at defining the industry. IBISWORLD definitions are below 1 mark 2. What does this industry do? ie use plain English to describe, in a little bit of detail, what this industry does. 2 marks

What are the key products in your industry? List or briefly describe a few of the most important ones. 2 marks

3. Economics categorises all the inputs of the production process into four different categories-: Land, Labour, Capital, Entrepreneurship (reviewing the key selling industries may give you some hints as to the types of inputs needed for this industry’s production) (i) Provide several examples of key “land” resources used in your industry. 3 marks (ii) Provide several examples of key “capital” resources used in your industry. 3 marks Discuss the labour resources required – how important is skilled labour? What are the types of skills required? Does the industry use much unskilled labour? Do they mainly use full time, part- time or casual labour? 3 marks (iii)

Discuss the nature of the entrepreneurship resource-: 2 marks a. Are there many entrepreneurs who have created businesses that are currently operating in your industry? OR b. did the real entrepreneurship occur a long time ago, and the business is really run by managers for investors now? c. Are the entrepreneurs close to the business – for example, they run and/or work in the business or monitor it closely? Tutorial 2 – Industry Application Questions

4. Describe the producers in your industry. For example, how many firms are in your industry? Are there some major players, and/or a range of smaller players? Who are the few biggest firms? What does a ‘normal’ firm look like in this industry? 3 marks NOTE to students- For Water supply industry – please describe the industry but focus on the industry in Sth Australia too. The population of Sth Aust in 2015 was 1.699 million Example answer to this question-: Motor Vehicle Manufacturing industry in Aust-: (This industry manufactures motor vehicles including passenger cars, SUVs, light commercial vehicles, buses and vans, along with medium, heavy and special-purpose highway trucks. Automotive engine manufacturing is also included in this industry.)

There are 452 firms in this industry, but there are 3 major players in Australia. They are Toyota with 37.2% of the market, GM Holden with 16.1% and Ford with 8.9%. Each of these firms have large factories based in different locations in Australia – Toyota in Altona, Victoria; Ford in Geelong and Broadmeadows, Victoria and GM Holden in Elizabeth, Sth Aust. The rest of the industry is made up of the 449 smaller firms distributed through all states of Australia, except for Tasmania, NT and ACT. Each major manufacturer sells their cars via their own Australia-wide network of dealers, and there is a small export market.

5. Who are the major buyers (demanders) of the products of your industry? Do buyers buy locally for local use, or is the product traded nationally, and / or internationally? 2 marks 6. How do buyers and sellers come together to trade in your industry ie how and where are 2 marks the goods and services exchanged? 7. Give examples of each of the 5 non-price factors of demand that would influence the demand for the key products in your industry. Which do you think are the 2 most important factors for 5 marks + 2 marks your industry? 8. Explain the difference between a movement along the demand curve, and a shift of the demand curve, in your industry. 4 marks 9. Give examples of each of the 5 non-price factors of supply that would influence the supply for the key products in your industry. Which do you think are the 2 most important factors for your industry? 5 marks + 2 marks 10. Explain what would happen in the market for one of the key products in your industry if there was an increase in the cost of inputs to production. Ensure you draw a diagram and provide a full explanation of what would occur. 4 marks

Industry report additional pages that will be useful for this week (you may also need to use previous weeks’ too in order to answer these questions)-:

Grain Growing – Pgs 3 – 5, 13-15 and 20-22 inclusive. Cafes & coffee shops – Pgs 3-5, 12-14, 17-19 and 22-23 inclusive Supermarkets & Grocery stores – Pgs 3-5, 14-16, 19-21 and 23-27 inclusive Water supply – Pgs 3-6, 8, 13-15, 18-20 and 22-28 inclusive Tutorial 3 – Industry Application Questions Question 1 Discuss each of the factors that determine the price elasticity of a product with respect to the product or product category listed for your industry. Do you think this product or product category is likely to have a price elasticity of demand that is elastic or inelastic at their current market price levels, looking over a period of 6 months? 5 + 2 marks

Question 2 The CEO of the Industry Association that works to advise firms in your industry wants to increase total revenue in your industry, and is considering advising all the firms in the industry to increase their recommended retail price for the appropriate product or product category as above in question 1. Write a short paragraph that explains to CEO of the Industry Association whether this is a suitable course of action for them to recommend, and why. 4 marks

Question 3 Irrespective of your answers to questions 1 and 2 above, assume your product or product category has a price elasticity of demand of 1.2 How would demand for the product change if the price of the product decreased by 10%? Would total revenue for 3 marks the product or product category increase or decrease?

Question 4 Give the formula for income elasticity of demand. What do you think is the likely income elasticity of demand for products in your industry (ie is it positive or negative? A large number or a small number?). Justify your answer with reasons. 1+2 marks

Question 5 Give the formula for cross price elasticity of demand. What do you think is the likely cross price elasticity of demand for products in your industry compared to the product category shown against it below (ie is it positive or negative? Close to zero or a long way 1+2 marks from zero?)? Justify your answer with reasons. 

Water Supply industry products and new pool construction



Supermarkets and Grocery Stores industry products and restaurant meals



Cafes and Coffee shops industry products and restaurant meals



Grain Growing industry products and butter sold for human consumption Tutorial 4 – Industry Application Questions

1. Is it likely that, in your industry, there is some consumer surplus? Is there likely to be any producer surplus? Why, or why not? 3 marks

2. Has the government ever set the price in your industry? Why would they do that, or why not? For water supply industry, think of Sth Aust situation only 3 marks

3. Australia has a GST (goods and services tax) of 10% that works very similarly to a VAT (valueadded tax) in other countries (ie they simply use a different name for it, and the amount may be different). However, unlike most other countries, Australia allows some products and services to be GST free. Does the Government tax the products of your industry? 2 marks (See https://www.ato.gov.au/Business/GST/When-to-charge-GST-%28and-when-not-to%29/GSTfree-sales/ and https://www.ato.gov.au/Business/International-tax-for-business/Australiansdoing-business-overseas/Exports-and-GST/

4. Go to this site, and have a look at the first paragraph that begins “GST basics” and ends just before “The nitty-gritty”. http://www.taxpayer.com.au/KnowledgeBase/10236/SmallBusiness-Tax-Super/GST_basics . There is an error in one of the dot points they have listed there. What is it? Explain what the reality of the situation is, and draw a diagram to help your explanation. 4 marks Hint: ensure you review the last part of the lectures for this week. There is no need to discuss what we did not cover; but you ought to be able to discuss what we did cover. Tutorial 5– Industry Application Questions

1. For each of the following concepts, define the concept. Then give an example of it using a product or product category in your industry -:

(i) Total utility

2 marks

(ii) Marginal utility

2 marks

(iii) The Law of diminishing marginal utility.

2 marks

(Your industry may not sell their products directly to the end consumer. In that case, select any end product that is consumed directly by the end consumer that your product or product category significantly contributes to: it is ultimately consumer demand - your customer’s customers - that is going to dictate demand for your industry’s products. )

The Industry Application questions for Assignment 1 consist of all the Industry Application questions from Tutorial 1 to Tutorial 5 inclusive.

Assignment 2 will consist of Industry Application questions from Tutorials 7 to 11 inclusive.

Tutorial 6 Questions Question 1: Define an equilibrium. Draw, and give a full explanation of how an equilibrium is reached if the current market price is 50cents. (You should be able to refer to specific numbers on the graph in your explanation).

Question 2: Draw, and give a full explanation of what happens to the market for this normal good if there is an increase in consumer income. (You should refer to various prices and quantities on your diagram in your explanation)

Question 3: Draw, and give a full explanation of what happens to the wheat market in equilibrium, if the price that producers can get for wool decreases. Question 4: The demand schedule below shows the demand for avocadoes purchased per day in a shop in Adelaide, ceteris paribus, at a range of different possible prices-: Price 2.50

Quantity Demanded 40

3.50

35

4.50

30

5.50

25

6.50

20

7.50

15

8.50

10

%change P

%change Q

Ed

TR

A) Graph the demand curve B) Calculate the total revenue at each price. C) Underneath your demand curve, using the same x-axis Quantities, plot total revenue. D) Calculate the elasticities between all the points, using the mid-point formula. E) Describe how total revenue and elasticity changes as the price of avocadoes is changed from $2.50 to $8.50. F) What is the price from the table that will maximise total revenue for the shop? What can you say about the value of the elasticity at that point? See the lecture slides or Tutorial 3 question 6 or the text book Figure 4.3 on page 99 if you are unsure how to do this.

Question 5: Use the information on the market for toy aeroplanes in the following table to answer the following questions. PRICE (PER TOY)

QUANTITY DEMANDED (MILLIONS OF TOYS PER YEAR)

QUANTITY SUPPLIED (MILLIONS OF TOYS PER YEAR)

$11 10 9 8 7 6

1 2 4 6 8 10

15 12 9 6 3 1

a. Determine the equilibrium price and quantity. Draw a graph showing the market equilibrium and the area representing the expenditure by consumers on toy aeroplanes. In equilibrium, will there be any consumer unable to buy a toy aeroplane or any toy aeroplane producers who are unable to find a buyer for their product at the market price? Show the areas of consumer and producer surplus on your graph. Is this an economically efficient outcome? Why? b. Suppose the government decides that toy aeroplanes help children develop aeronautical skills and they want to make sure more families can purchase them. The government imposes a price ceiling of $6 per toy. What is the quantity of toy aeroplanes demanded, and what is the quantity of toy aeroplanes supplied? How many are traded? How much is expended by consumers on toy aeroplanes now?

c. Assume that all toy aeroplane producers abide by the law. Use your graph from a) to illustrate the impact of this price ceiling on the market for toy aeroplanes. Make sure you indicate on your diagram each of the following: (i) the area representing consumer surplus after the price ceiling has been imposed, (ii) the area representing producer surplus after the price ceiling has been imposed, and (iii) the area representing the deadweight loss after the ceiling has been imposed. Who are the winners, and who are the losers under the price ceiling? Is this an efficient outcome? d. Assume that the quantity of toy aeroplanes traded is the same as you determined in part (b). Now assume that producers ignore the law and sell this quantity of toy aeroplanes for the highest price they can get. Briefly explain what this price will be. How does this impact the consumer and producer surplus?

e. Would the government be achieving the aims of their price ceiling policy? What would be a better policy? Why? Question 6: Use the following diagram of the market for cigarettes per annum to answer the following questions.

a. What is the free market equilibrium price and quantity?

b. According to the diagram, how much is the government tax on cigarettes?

c.

What price do consumers pay after the tax? What is the quantity sold?

d. What price do producers receive after paying the tax?

e. How much tax revenue does the government collect?

f. What is the tax incidence (or tax burden) on consumers, and on producers? Question 7: A. Fill in the values for Marginal utility, and for Marginal Utility per dollar of the price. Pizza = Drinks $ 10 =$ 5 Pizzas/w Total drinks Total k Utility Utility /wk 0 0 0 0 1 100 1 36 2 190 2 68 3 270 3 98 4 340 4 126 5 400 5 152

6 7 8 9

456 508 556 602

6 7 8 9

176 198 218 236

B. Using the utility maximising rule, what is the combination of pizzas and drinks per week that maximises Tom’s utility? He has a budget constraint of $50 per week. (see prices for pizza and drinks above columns). C. Now repeat part B, changing the price of a pizza to $8, and then repeat again changing the price of the pizza to $15. Keep the $50 (income) assumption the same and the $5 price of drinks (the prices of other goods) the same, in addition to using the same utility data (keeping his preferences for the goods the same). D. Draw the Demand curve for Tom for pizzas per week with the points that you have derived from the above. E. Describe the income and substitution effects for Tom’s demand for pizza per week. Tutorial 7 – Industry Application Questions

11. Give 2 examples of technological changes that have occurred in your industry within the last 20 years, and briefly describe how that change has benefited firms in the industry. 4 marks (use the internet to have a brief look and your own knowledge of what has occurred) Water supply industry is the hardest one. If any problems, talk to your tutor or attend a student consultation time. See http://www.theguardian.com/sustainable-business/newwater-technologies-save-planet for some hints.

12. Describe the method of production in your industry for a typical firm. That is, is the method of production highly capital intensive? Is it labour intensive? Does a typical firm operate on a large scale? 3 marks Water supply – regard SA Water as a typical firm Grain growing – a typical firm is a typical farm Supermarkets – regard the Woolworths company as a typical firm Cafes – a typical café is a typical firm

13. Name three fixed costs and three variable costs in your industry.

6 marks

14. How can firms in your industry increase production in the short run? 2 marks Water supply (think of Sth Aust situation only)

15. Draw a diagram (not copy & paste; you need to draw and label it) showing AVC, ATC and MC for the short run for firms in your industry. No need to include AFC. Explain the shapes of these curves - what economic principle is behind their shapes? Explain where the MC cuts the AVC and ATC curves. (use your own words to demonstrate your understanding of these principles) 6 marks

16. If firms in your industry thought that demand was going to increase in the future by a significant amount – say, by 50% or more – they would need to change the scale of their operation. Briefly explain which of the resource inputs to their production process would probably take the longest to change, to be able to increase production by such a large amount? (please name a specific input, not the category of input type). Therefore, explain how long you think the short run would be likely to be for your industry? 2 marks Water supply (think of Sth Aust situation only) Tutorial 8 – Industry Application Questions Note: for water supply industry, think of Sth Aust situation only in all industry applied questions

1. Are economies of scale important to the firms in your industry? Explain why, or why not. Give two examples of economies of scale in your industry. 4 marks Water supply Page 30 Supermarkets and grocery stores Page 28 Cafes and coffee shops Page 24 – 25 Grain growing industry

Pages 26-27 (these page numbers may help you with this – plus, of course, the lecture notes and text book) 2. Are diseconomies of scale possible in your industry? Explain. Give an example of a diseconomy of scale for a firm in your industry. 3 marks

3. Draw a long run cost curve for firms in your industry and explain its shape. 2 marks Students should draw their own graph (NOT copy & paste) no need for numbers – this is a conceptual question

4. Explain how your industry compares against each of the important conditions that define a perfectly competitive market structure. Is your industry a perfectly competitive industry? 4 marks + 1 mark

5. How does each firm in a perfectly competitive industry decide the price they will charge, and the quantity they will sell? Explain. 3 marks

Tutorial 9 – Industry Application Questions

1. Is it possible for firms in a perfectly competitive industry to make an economic profit or an economic loss in the short run? Explain, using a diagram. 5 marks

2. Is it possible for a firm in a perfectly competitive industry to make an economic profit or an economic loss in the long run? Explain, using a diagram. 10 marks

3. Discuss the efficiency of the grain industry.

6 marks

4. What do the results you have discussed in the questions above suggest to you about these issues for the grain industry-:



How desirable the grain growing industry is for new firms to enter the industry, opening up new areas as grain growing farms. 2 marks



A firm spending significant sums to advertise their product (eg television advertising campaign; widespread national promotion) 2 marks

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A firm spending a small amount to advertise their product (eg local newspaper advert; small scale promotion of their product) 2 marks



Whether the firm would have the funds to be able to spend significant sums of money on research & development, in order to develop better (cheaper) production processes. 2 marks



Whether a grain farm ...