BE274 Managerial Economics

Time allowed: Week 11, Autumn Term, Refer to FASer The paper consists of 4 questions.

Candidates must answer 4 questions

Candidates are advised to read the questions carefully before answering them.

Please follow the instructions below:

• All submissions must be presented in typescript (MS Word format), 12pt, 1.5 line spacing.
• Wherever, graphical plots are required, you can use spreadsheets for the plots and copy-paste the plots to your word document. Alternatively, you can draw them on the word document.
• Note that late submissions will not be accepted unless full details of extenuating circumstances are provided. For extenuating circumstances please see the link on the University website. If you have any queries about extenuation, please contact the Student Services Advisor (scebsugs@essex.ac.uk)
• Do not communicate in any way with any other candidate for your coursework.
• Avoid academic offence and strictly adhere to the guidelines of the University.

1. An electronic cable traded in the U.K has the following domestic supply and demand for various price levels as shown: (Overall: 20% of the total marks)

(a) What is the equation for demand? What is the equation for supply? (8% of the total marks)

(b) At a price of $9, what is the price elasticity of demand? What is it at a price of $12? (6% of the total marks)

(c) Do you think the product demand is elastic or inelastic at $9 and $12 respectively? (6% of the total marks)

2. I intend to sell food coupons from my restaurant to two groups of customers, namely, general consumers and students, whose demand curves are given by Qg and Qs respectively,

Qg = 500 -5P Qs = 200 - 4P;

where Q stands for quantity demanded and P is price. (Overall: 20% of the total marks)

BE274 Managerial Economics

(a) Can you graph the two demand curves with P on the vertical axis and Q on the horizontal axis? If I price the coupons at $35, can you identify the quantity demanded by each group? (6% of the total marks)

(b) Also, find the price elasticity of demand for each group at the current price and quantity. (2 % of the total marks)

(c) Am I maximizing my revenue by charging $35 for each coupon? Explain. (2% of the total marks)

(d) What price should I charge from each group if I want to maximize the revenue collected from coupon sales? (6% of the total marks)

(e) Normally, sellers try to maximize profits instead of revenue. In this case, explain if maximizing revenue is equivalent to maximizing profits. (4% of the total marks)

3. Suppose a consumer wants to buy a new house and has a budget of 50 million. The consumer cares only about the size (S) of the house and the quality of construction (Q) of the house. Assume that if the consumer wants one more unit of size, then the builder wants 10 million. If the consumer wants one more unit of quality, then the builder wants 5 million. (Overall: 20% of the total marks)

(a) Draw the consumer`s budget line for size and quality. Place size on the horizontal axis. (8% of the total marks)

(b) Suppose the consumer`s preferences are such that the marginal rate of substitution is equal to (-4S)/Q. What value of each index will the consumer like to have in her house? (6% of the total marks)

(c) Suppose the consumer`s marginal rate of substitution is (-S)/Q. What value of each index will the consumer like to have in her house? (6% of the total marks)

4. Read the case and answer the corresponding questions in detail below (max: 1000 words) The Case of a Pizza Company and its franchisees (Overall: 40% of the total marks)

BE274 Managerial Economics

A pizza company runs its business in a franchisee mode and has decided to conduct a $1 promotion for its double cheese supreme pizza. However, the Franchisee Association is unhappy and has filed a lawsuit alleging that the $1 promotion forces the franchisees to sell the pizza with at least a 10-cent loss. The association says that the $1 pizza typically costs at least $1.10 which includes about 55 cents for the cost of the meat, pizza base, cheese and toppings. The rest typically covers expenses such as rent, royalties, and worker wages.

The pizza company, however, justified the promotion by saying that the $1 double cheese supreme pizza will increase restaurant visits by as much as 20 per cent. But industry analysts say that as much as half of the gain recorded from increased traffic could be lost because customers are spending less when they ordered food. What is the equation for demand? What is the equation for supply?

The Pizza company’s franchisees pay a royalty to the company that is typically equal to 4.5% of the revenues of the restaurant.

Using your learnings from the managerial economics course, analyze the case and answer the following in detail --

• Do you support the idea that the pizza company’s franchises are losing money by selling

$1 double cheese supreme pizza? What factors need to be considered in making this decision? (6% of the total marks)

• What are the relevant costs to a franchise for selling a double cheese supreme pizza? (8 % of the total marks)
• Do you think that the goals of the pizza company and the franchises are different? If so, is there a problem with the misalignment of incentives? Can this be resolved? (6% of the total marks)