Assignment 2

Economics for Managers

ECN 511

• Deadline: 11:59pm on Sunday, September 29, 2019. Note that the assignments delivered past
deadline will automatically get grade 0.
• You can deliver via Blackboard or by email (kgrabiszewski@mbsc.edu.sa).
• This is an individual take-home assignment. Prepare your answers on your own.
• In order to receive full credit for your work, you need to provide complete and detailed answers.
• Please use a font size at least 11. As of the rest -- style, number of pages, etc. – it is completely up
to you. I do not evaluate your assignment based on the literary criteria or number of pages.
• Please deliver only one file. Preferably, send a pdf file.

Exercise 1 (15 points)

In this exercise, you will analyze yourself as a consumer. First, pick two goods (products or services)
that matter to you; for example, something that you buy every week (e.g., food items). Write what
these goods, X and Y, are. Second, draw (in the 2-dimensional graph with X and Y axes) one
indifference curve; explain (in words) how you derived the curve. Third, based on that first indifference
curve, draw (in the 2-dimensional graph with X and Y axes) more indifference curves to get a sense of
how the indifference map representing your preferences looks like; explain (in words) how you
derived the map.

Exercise 2 (85 points)

In this exercise, you will analyze and try to modify a good using the concept of willingness-to-pay
(WTP). This exercise is practical in nature and is a mixture of economics, marketing, and strategy. The
main objective is for you to practice and polish your skills related to measuring, analyzing, and shaping
consumers’ WTP.

There is a significant learning-by-doing component of this exercise as you will need help from your
spouse, child, sibling, other family member, or a friend. The person who helps you will be the subject
of your study.

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(a) First, you should pick a good (product or service) that you will analyze. It is crucial that the good
you choose is something that
i. you personally never or almost never use/buy and do not know much about, but
ii. the subject is very familiar with and uses it frequently.

In this exercise, you will learn about the good (and later modify it) with the tools we used in class
(WTP). Imagine that you just got a job of the Chief Marketing/Strategy Officer in the company that
produces the good. As a consumer, you do not really understand what this good is since you do not
consume it. Hence, your first task is to learn about the good.1

In (a), you need to explain a good you chose. Here, it is not the place to talk about the “needs” (you
will do that in part (c)). What is required is a description of the good. Try to be as specific and detailed
as possible. For example, if the good is a “carton of milk,” then describing the good as “milk” or “carton
of milk” is not as specific as desired; rather, you might want to describe the brand (Lala), size (500 ml),
category (non-fat), and other attributes that matter.2 If you think that I might be unfamiliar with the
good (ideal scenario from my perspective as this would be more fun and learning opportunity for me),
then attaching a picture might be a good idea. Keep in mind that I need to be able to visualize what
the good is; your task in (a) is to help with that visualization.

The good can be whatever you choose as long as conditions (i) and (ii) are met. For example, food item
that you do not eat because of your preferences or allergies; or a cosmetic that you are not familiar
with; or software that your subject uses in professional capacity.3 I would recommend products
(tangible goods) instead of services as the latter are usually more difficult for analysis.

In a typical research study, we always describe the subjects (demographic variables). Since the study
involves just one subject who might not want you to share any information about her/him, I do not
require any description of the subject. There will be no score subtraction if you do not talk about the
subject. However, since this might also help with your analysis, consider as an option to provide a brief
explanation of who the subject is. Focus on what matters. For example, your relationship with the

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You got the job because you are very talented, have an ability to apply the relevant managerial tools, and learn
very fast.
2
Carton of milk might not be an appropriate good to be studied in this exercise as this is a product that all of us
are familiar with.
3
Just some ideas. If I were to study my wife as a subject, I would probably pick nail polish or something else for
make-up. If I were to study my son (3rd grade), I would probably pick something related to Minecraft. If my wife
was to study me, then the product would be software called STATA used for statistical analysis.

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subject or subject’s name should never be disclosed because this are not relevant (for WTP analysis)
pieces of information. You need to keep the study anonymous and professional. Do not provide any
personal details or information about the subject that she/he would not want you to share.

(b) Second, figure out subject’s willingness-to-pay (WTP) for the good described in (a). Here, I would
like you to explain in detail the process you and the subject went through. I leave it up to you if you
want to use real money when establishing WTP or conduct a hypothetical exercise (this should make
more sense if the good is expensive; here, you can use “fake” money). What matters is that you go
through the experience of evaluating subject’s WTP and describe that experience.

There are many procedures that you can use. One procedure I insist that you do not use is “asking.”
Do not ask the subject about her/his WTP; your challenge is to derive that WTP from the subject’s
behavior. Recall a simple method we use in class: subject chooses between (A) good and (B) cash. Cash
starts at 1 SAR, then 2 SAR, and so on. For low values of cash, subject chooses A. The amount of cash
at which subject switches to B indicates her/his WTP. You can use other methods; explain what
method you rely on.

(c) Third, determine two (2) main attributes of the good that affect its WTP. What are these attributes?
What needs do they satisfy? Having a discussion with a subject should help Summarize the discussion
and its conclusions. Next, figure out the importance of each attribute – here, you may want to do the
WTP-based study (how WTP changes when you modify the attributes). That is, you modify one
attribute by 1 unit (the other attribute remains constant) and measure WTP of the new good. Replicate
the same test for each attribute. Describe the process you and the subject went through and the
conclusions. In (c), we want to understand which attributes matter in determining WTP and how much
they matter in terms of changing WTP.

(d) Fourth, given the two attributes you identified in (c), propose how to increase WTP by changing
these attributes. The changes can be tangible or only reflected in the consumer’s perception. In short,
what would you do to make a good better (higher WTP) for the consumers? Note that I do not ask
about the costs of making the changes you propose; do not be constrained by the budget. (It is only
later on that we would determine the optimal strategy to boost WTP, but that is not part of this
exercise.) Be imaginative and innovative. Do not replicate what companies producing the good are
doing or did in the past. This is the moment for your creativity to shine.

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Bonus Exercise (5 points) (inspired by Abdullah AlSayed)
In class, we assumed that preferences are monotonic. This implies that indifference curves are
downward-slopping like in the graph below.

In this exercise, I would like you to think about cases when monotonicity makes no sense. An obvious
example is when one of the goods is “bad.” For instance, imagine that X represents the days when you
are ill; it would be rather absurd to assume that people prefer more, rather than fewer, sick days.

What I would like you to do is to think of not so obvious cases, please disregard all “bad” goods. To
give you a hint, look at the indifference curve below in Figure 1. First, you should recognize that
monotonicity is violated (how? where?); second, you might want to conduct self-analysis and try to
think whether there are any goods X and Y for which this indifference curve describes you.

Figure 1

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Additional three examples (Figures 2 – 4) of indifference curves which violate monotonicity are below.
As previously, in each case, you might start with recognizing how monotonicity is violated, then, you
might look for real-life examples where these indifference curves make sense. You can also think of
other graphs in which monotonicity is violated, and then explain why the graphs make sense.

Y Y

X X

Figure 2 Figure 3

Figure 4

Note that this exercise requires only one example of a pair of goods X and Y for which monotonicity is
violated. Your task is to find these goods X and Y, and explain how and why monotonicity is violated.