Portfolio assessment B: Grade 18.5/20 PDF

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PORTFOLIO ASSESSMENT PART B – Elasticity Q1) Overseas trips would have a higher price elasticity of demand than prescription medication. This is because an overseas trip is a luxury, whereas prescription medication is a necessity. If the price of overseas trips were to increase, then people would be less inclined to go, and opt for a cheaper alternative such as domestic trips.

Q2) Coffee sold in a café would have a higher price elasticity of supply than hotel accommodation. This is because a café can simply increase the amount of inventory held, such as coffee beans and milk in response to increase in quantity demanded. Whereas a hotel can not easily increase its inventory held, as they only have a fixed number of rooms.

Q3) The pineapple farmers would have, as a group benefited from the floods. Because prior to the floods, price was at equilibrium and quantity demanded=quantity supplied. When the floods hit, several firms (farmers) left the market because their crops were destroyed, resulting a shift to the left on the supply curve. The shift created a shortage, as quantity demanded was greater than quantity supplied. Because price always moves to equilibrium in order to regulate the market, the price of pineapples increased until a new equilibrium was met. The total revenue (price x quantity) that the farmers gain would increase because when demand is price inelastic, an increase in price leads to an increase in total revenue because

price increased is higher than loss of quantity produced.

Cost of production

Q1) A licence fee on every ‘television network’ would be a fixed cost because the cost of the license fee does not increase with the amount of television watched. In other words, the cost (licence fee) remains constant as output changes (tv watched).

Q2) The new contract would be a variable cost, because each new phone produced requires a lens to be purchased and inserted into the phone, therefore the cost (new price lenses bought) is changing as the output produced changes (phones produced).

Q3) The minimum efficient scale occurs where the level of output at which all economies of scale have been exhausted. Economies of scale occur when a firm’s long-run average costs

fall as it increases its scale of production and the quantity of output it produces. The graph shows that as output produced increases (Q), the average total cost (ATC) falls, until the minimum efficient scale is reached. If a firm fails to reach minimum efficient, then they will likely run out of business, as they are not increasing their scale of production and quantity of output produced, as a result their long-run average cost does not fall, essentially making production more costly, and the output to be smaller, causing the firm to lose money.

Q4) An explicit cost is a cost that involves money being spent, whereas implicit costs are costs that are not necessarily in the form of money. Examples of explicit costs for a small business are; wages, rent for the store and electricity bills. Examples of implicit costs are; depreciation of machinery, training new employee’s (loss of hours training, rather than performing set roles) and salary given up (by the owner) in order to cut costs.

Market Power

Q1) The statement is false, because a monopoly (that isn’t regulated by the government) cannot charge high prices for the sake of charging high prices. A monopoly must pay attention to quantity demanded (as quantity demanded is solely determined by customer demand) and seek maximising profits. In order to maximise profits, a monopolistic firm must combine information on marginal cost (change in total cost/ change in quantity), marginal revenue (change in total revenue/ change in quantity), quantity demanded and average total cost. Profit maximisation occurs when marginal revenue equals marginal cost, however if marginal cost is less than marginal revenue, profit should still exist. The graph provided shows the price area in which profit can be achieved, any higher, and quantity demanded will lower, and marginal revenue will lower, and if the price is any lower, marginal cost will be higher than marginal revenue, causing profit loss.

Q2) If Callaway released the new set of clubs, it would see shift to the right in demand, as female golfers would want to own a set of the golf clubs. As a result of the shift in demand, a

new marginal revenue would be established, meaning that a new profit maximising price and quantity would be established as the new marginal revenue crosses marginal cost. The graph provided, shows that in the long run, the release of the new golf clubs causes a shift to the right on the demand curve, which, as the new profit maximising price is reached, Callaway will sell the golf clubs at a higher price, quantity demanded will also increase and as a result Callaway will have a higher overall profit.

If many companies started selling similar products to Callaway, then firstly, Callaway would no longer be a monopoly, and instead become a monopolistic competitor. Because new firms have entered the market, the demand curve and marginal revenue would shift to the left, resulting in an overall reduction in profit, meaning Callaway would have to lower its prices and quantity it produces in order to keep profiting. The graph below shows that new firms entering the market, cause demand and marginal revenue to shift to the left, the new profit maximising price to lower, quantity demanded to lower and overall profit to lower as well.

Business Strategy and Market Failure

Q1) The negative externality in the article is road congestion. This is a negative externality on consumption because a consuming activity (using the roads) is imposing costs on others who are not directly involved in that activity (pollution in the air harming those who do not drive) and no compensation is paid. Because this is a consumption externality, there is a difference between the private benefit and social benefit. Private benefit is the benefit received by a consumer of a good or service, where as social benefit is the total benefit, including private and external benefit of consuming a good or service. In the case of the article, the private benefit for the consumer is to drive on the roads, as it is better than public transportation. The private benefit is greater than the social benefit, as more people driving on the road causes there to be more road congestion, making more pollution which harms people who don’t drive cars and they must pay more for health care. The graph provided shows the effect of traffic congestion as a negative externality. The y axis represents price of using the roads(P) and the x axis, amount of people using the roads (Q). The market demand curve (Dp) is representing the private benefits from driving on the roads. However, people who do not drive on the roads are harmed by increased traffic congestion contributing to pollution. The means that the social benefit is lower than the private benefit, meaning that the market equilibrium (where Qp and Pp intersect) is ineffective, and the quantity people on the roads is too high. If the market demand curve was instead reflected on the social benefit demand curve, the point at which Qs and Ps intersect would be at an efficient equilibrium and would be at a socially efficient level. Concluding that economic efficiency would be improved if less cars drove on the roads Two ways the government could address the externality could be to implement ‘transport lanes’ on roads where only people who car pool can use that lane and to increase the cost of registration of vehicles to encourage people to take public transportation and discourage people from driving, which both of these could decrease private benefit and create efficient equilibrium.

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The negative externality of road congestion Cost for producer of fuel

Q2) Nash equilibrium is when each firm in an oligopoly chooses the best strategy, when given the strategies that other firms have chosen. This is the optimal outcome of a payoff matrix as no player has an incentive to change their strategy after considering an opponent’s choice because an individual can receive no additional benefits from changing strategies.

Q3) The Nash equilibrium for both companies is to conduct R&D. This is because when given the strategies of another firm, both firms choose the best strategy in response to the other firms’ strategy. In the case of Intel, if Intel were to conduct R&D, it would earn $5 million dollars of profit, however if they were not to conduct R&D, they would only earn $3 million dollars of profit, and AMD would earn $12 million dollars of profit therefore the Nash equilibrium for Intel is to conduct R&D. In the case of AMD, if they were to conduct R&D, they would earn $3 million dollars of profit, if they were not to conduct R&D, they would earn $1 million dollars of profit and Intel would earn $20 million dollars of profit, therefore nash equilibrium is to conduct R&D. Therefore, Nash equilibrium for both Intel and ADM is to conduct R&D....