Business Economics

(MBA 510E)

Make-up Assignment For Grade Improvement

Submitted by:
Nowsheen Noor
ID # 1921251

Submitted to:
Prof. Faizul Latif Chowdhury
 SOLUTION TO QUESTION: 1

(a) What do you understand by price-elasticity of demand? Write and Explain

point-elasticity formula for calculating price-elasticity of demand? (Marks: 2+2)

Price elasticity of demand (PED or Ed), or elasticity, is the degree to which the desire for
something changes as its price rises. In general, people desire things less as those things become
more expensive. However, for some products, the customer's desire could drop sharply even with
a little price increase, and for other products, it could stay almost the same even with a big price
increase. Economists use the term elasticity to denote this sensitivity to price increases. More
precisely, price elasticity is gives the percentage change in quantity demanded when there is a
one percent increase in price, holding everything else constant.

The point elasticity of demand method is used to determine change in demand within the same
demand curve, basically a very small amount of change in demand is measured through point
elasticity. One way to avoid the accuracy problem described above is to minimize the difference
between the starting and ending prices and quantities. This is the approach taken in the definition
of point-price elasticity, which uses differential calculus to calculate the elasticity for an
infinitesimal change in price and quantity at any given point on the demand curve:

(b) What do you mean by the statement that PED for Soybean Oil in Dhaka city was
0.45 between 2017 and 2018? (Marks: 2)

Price elasticity of demand measures the responsiveness of demand to a change in price during

certain period. Since we know if price increases then demand decreases and if the price decrease
then the demand raise automatically. From this statement we can understand that during 2017
and 2018 the demand for soybean oil in Dhaka city was changed 0.95% when price changed 1%.

(c) Why is Price Elasticity of Demand (PED) useful for a producer of goods?
Explain appropriately. (Marks: 5)

Price Elasticity of Demand (PED) refers to the degree of responsiveness of quantity demanded
when there is a given change in the price of a product. PED can be useful to a producer in
maximizing revenue. PED can serve as a pricing policy, telling producer how to change prices to
increase revenue.

If the demand of an item is price elastic, firms should decrease price to increase revenue. This is
because when there is a drop in price, the increase in quantity demanded is more than
proportionate. Hence the producer is likely to gain more revenue since more people are buying,
even though the price is slightly lower. This is usually relevant to producers selling luxury goods
like branded bags and clothes, because these items are non-necessity. Consumers are likely to
buy them if there are drop in prices.

If the demand of an item is price inelastic, firms should increase price to increase revenue. This
is because when there is a rise in price, the increase in quantity demanded is more than
proportionate. Hence the producer is likely to gain more revenue since more people are buying,
even though the price is increase. This is usually relevant to producers selling basic necessities
like food and water, because these items are necessity. Consumers are likely to buy them if there
are increase in prices.

(d) Given other factors remaining constant, how would an increase in the price of
milk affect the demand for sweetmeat? (Marks: 2)
Milk is one of the vital ingredient in most of the types of sweetmeat, if not all. Increasing the
price of milk will increase the price of sweetmeat, and vice versa. This is because, milk being
one of the ingredients of many sweets, it will increase their cost and will have a prominent
impact on sweetmeat. Consequently, a raise in the price of sweetmeat may decrease its demand.
(e) Enumerate from the data given below what was the price elasticity of demand
for motor oil between 2001 and 2002. (Marks: 10)

Year Sale for motor Retail Price of Number of cars

Oil Motor Oil on road per year
2001 1500 metric tons BDT 1300 per kg 250,0000
2002 1650 metric tons BDT 1390 per kg 300,0000

Sells for motor oil in kg:

2001: 1500 metric-ton X 1,000 = 15,00,000 KG

2002: 1650 metric-ton X 1,000 = 16,50,000 KG

Consumptions of motor cars:

2001: 15,00,000 ÷ 250,000 = 6 KG

2002: 16,50,000 ÷ 3,00,000 = 5.5 KG

We know,

PED = % change in quantity ÷ % change in price

= (-) 8.33% ÷ 6.9%

= (-) 1.21%

Interpretation:

 The elasticity of motor oil with respect to change in price is (–) 1.21

 The negative sign is indicating inverse relationship between demand and price

 Price and demand is negative which indicates if the price changes 1%, demand will also change

 1% change in price means demand will decrease by 1.21%

 1.21 > 1
(f) Manufacturers such as Dunlop and Goodyear use both natural and synthetic
rubber to produce automotive tires. If the elasticity of the demand for natural
rubber with respect to changes in the price of synthetic rubber is negative, state if
the two types of rubber are Substitutes or Complements. Explain your answer.
(Marks: 2)

Substitute goods are products which all satisfy a common want. Complementary goods are
products which are consumed together.

Demand for a product’s substitutes increases and demand for its complements decreases if the
product’s price increases, vice versa.

Dunlop and Goodyear both produce automotive tires that use natural and synthetic rubber. So it
is obvious that tires can be made from both natural and synthetic rubbers. The absence of any
one of them will be filled by the other. Therefore, they are substitutes and not complementary.
 ANSWER TO QUESTION: 2

(a) What do you understand by break-even point? What is the purpose of carrying
out break-even analysis? Explain with the help of a graph. Describe and explain the
graph. (Marks: 1+2+3=5)
The break-even point can be defined as a point where total costs (expenses) and total sales
(revenue) are equal. Break-even point can be described as a point where there is no net profit or
loss. The firm just “breaks even.” Any company which wants to make abnormal profit, desires to
have a break-even point. Graphically, it is the point where the total cost and the total revenue
curves meet.

Calculation (formula)

Break-even point is the number of units (N) produced which make zero profit.
Revenue – Total costs = 0
Total costs = Variable costs * N + Fixed costs
Revenue = Price per unit * N
Price per unit * N – (Variable costs * N + Fixed costs) = 0
So, break-even point (N) is equal
N = Fixed costs / (Price per unit - Variable costs)
The main purpose of break-even analysis is to determine the minimum output that must be
exceeded for a business to profit. It also is a rough indicator of the earnings impact of a
marketing activity. A firm can analyze ideal output levels to be knowledgeable on the amount of
sales and revenue that would meet and surpass the break-even point. If a business doesn't meet
this level, it often becomes difficult to continue operation.

The break-even point is one of the simplest, yet least-used analytical tools. Identifying a break-
even point helps provide a dynamic view of the relationships between sales, costs, and profits.
For example, expressing break-even sales as a percentage of actual sales can help managers
understand when to expect to break even (by linking the percent to when in the week or month
this percent of sales might occur).
The break-even point is a special case of Target Income Sales, where Target Income is 0
(breaking even). This is very important for financial analysis. Any sales made past the breakeven
point can be considered profit (after all initial costs have been paid)

Break-even analysis can also provide data that can be useful to the marketing department of a
business as well, as it provides financial goals that the business can pass on to marketers so they
can try to increase sales.

Break-even analysis can also help businesses see where they could re-structure or cut costs for
optimum results. This may help the business become more effective and achieve higher returns.
In many cases, if an entrepreneurial venture is seeking to get off of the ground and enter into a
market it is advised that they formulate a break-even analysis to suggest to potential financial
backers that the business has the potential to be viable and at what points.

Here we have total revenue carve which indicates an organization’s total sale and also we have
one carve here which line just crossed under the total revenue carve is called total cost carve.
Where we have fixed cost and variable cost also. These two carves where intercept that point is
called breakeven point. Up left straight there is a line named P1, which is the minimum or need
to achieve revenue point or line. There is another line which shows came down straight from the
breakeven point named Q1. Which carve describes that up to this quantity a producer or an
organization should minimum produce or sale to avoid loss or we can say to cover its all cost. If
any organization sale or produce less than that breakeven point they will face loss (leftward from
Q1, downward from P1). And if any organization or producer sale or produce to earn profit, they
have to go upwards or rightwards from the breakeven point as we can see Q2.

(b) The Modern Foundry situated in Rayer Bazaar produces wrought iron Tube
Well. The fixed costs of the firm are BDT 60,00,000 per year and unit variable cost
is BDT 4,000 per Tube Well. It sells the Tube Wells through distributors across the
country at an ex-factory price of BDT 10,000 per Tube Well. Calculate the number
of Tube Wells that Modern Foundry must be able to produce and sell in a year to
break even. Write all steps in details. (Marks: 10)

Total fixed cost = 60,00,000 Taka

Variable per unit = 4,000 Taka

Unit Selling Price = 10,000 Taka

So the Breakeven Quantity = Fixed Cost ÷ (Price Per Unit – Variable Cost Per Unit)

= 60,00,000 ÷ (10,000 – 4,000)

= 1,000 Unit

* The Modern Foundry needs to produce and sale minimum 1,000 units to achieve its breakeven
point.

Per Unit Price = 10,000 Taka

BEQ$ = 1,000 Units X 10,000 Taka = 1,00,00,000 Taka

* The Modern Foundry needs to earn revenue of 1,00,00,000 Taka to achieve its breakeven
point.
(c) Refer to (b) above. What would be the amount of total profit if the actual annual
sale of Tube Well stands 10 percent over the break-even output level? Write all
steps in details. (Marks: 5)

Sale increased 10% so total sales (Referred to b) = 1,00,00,000 + (1,00,00,000 X 10%)

= 1,10,00,000 Taka

Production increased 10% from BEQ = 1,000 + (1,000 X 10%)

= 1,100 Units

So the revenue or profit will increase according to the earlier mentioned information,
1,100 Unit X 10,000 Taka (Per Unit Price)

= 1,10,00,000 Taka.

(d) Given (b), how many Tube wells will yield profit if unit variable cost falls by
10%? Write all steps in details. (Marks: 5)

Previous Variable Cost = 4,000 Taka

10% Decreased Variable Cost = 4,000 – (4,000 X 10%) = 3,600 Taka

So BEQ =Fixed Cost ÷ (Price – Variable Cost)

= 60,00,000 ÷ (10,000 – 3,600)

= 938 Units

So Modern Foundry need to sale or produce more than 938 Units to yield profit.
 SOLUTION TO QUESTION: 3

(a) Bell Helicopter is an American aircraft manufacturer mostly known for their
light, mid-size and military helicopters. The company has been active for nearly 100
years. ‘Bell Helicopter’ changed to simply ‘Bell’ in the 2018 for rebranding. The
following table contains data relating to the monthly production of Bell-430. The
main task is to determine the monthly profit-maximizing output. Respond to tasks
given below. (Marks: 6)

Marginal Marginal
Output Fixed Cost Variable cost Price Total Profit
Cost Profit
No of aircrafts Million ($) Million USD Million ($) Million ($) Million ($) Million ($)
0 Output 45
1st Bell-430 45 4.0 4.0 6 2 2.0

2nd Bell-430 45 4.5 4.5 6 1.5 3.5

3rd Bell-430 45 5.0 5.0 6 1 4.5

4th Bell-430 45 5.5 5.5 6 0.5 5.0

5th Bell-430 45 6.0 6.0 6 0.0 5.0

6th Bell-430 45 6.5 6.5 6 (-)0.5 4.5

7th Bell-430 45 6.5 6.5 6 (-)0.5 4.0

Task 1 Describe the case briefly

The case is about an aircraft company, which was previously named as Bell Helicopter, and has
now been changed to Bell for rebranding purpose in the 2018. A table is given where a few data
are given. From there we have to calculate and fill up all the empty boxes and determine the
profit maximizing output.

Task 2 What is the marginal revenue for the 3rd Bell-430

We know that marginal revenue/profit means the profit of addition of each unit.
Therefore,

Revenue of 3rd Bell-430 = Price of 3rd Bell-430 – Marginal cost of 3rd Bell-430

= 6 million – 5 million

= 1 million

Task 3 How will you calculate marginal profit?

We know that marginal revenue/profit means the profit of addition of each unit.

So, the calculation will be done as follows

(Selling Price - Marginal Cost/Additional Cost)

Task 4 What will be the total profit if Bell produces 5 helicopters a month?
For 5 helicopters, the total profit that Bell-430 will make is the addition of the profit made till the
5th Bell-430 altogether. Therefore, the total profit is

= 2+3.5+4.5+5+4.5

= 19.5 million

Task 5 Fill up all the empty boxes with appropriate numbers.

*Completed above*

Task 6 Which is the profit maximizing output? Explain your answer.

We can see from the table in the 5 th Bell-430 column, their variable and marginal cost was 6
Million where they did not get any additional revenue or profit but on the same time their total
profit was not affected or did not face any loss, so its remaining same as 5.0 Million whether that
time they had the maximum output. So, we can consider this 5 th Bell-430 output with 5.0 Million
total profit as the profit maximizing output.

b) What is the main characteristic of a perfectly competitive market? Can a firm operating in
perfectly competitive market situation increase the product price to secure higher profit
margin per unit of product? (Marks: 1+2)

A perfectly competitive market has several important characteristics:

  All producers contribute insignificantly to the market. Their own production levels do not
change the supply curve.

 All producers are price takers. They cannot influence the market. If a firm tries to raise its
price consumers would buy from a competitor with a lower price instead.

 Products are homogeneous. The characteristics of a good or service do not vary between
suppliers.

 Producers enter and exit the market freely.

 Both buyers and sellers have perfect information about the price, utility, quality, and
production methods of products.

 There are no transaction costs. Buyers and sellers do not incur costs in making an
exchange of goods in a perfectly competitive market.

 Producers earn zero economic profits in the long run.

 There are many buyers and sellers in the market.

 Each company makes a similar product.

 Buyers and sellers have access to perfect information about price.

 There are no transaction costs.

 There are no barriers to entry into or exit from the market.

As far as increasing the product price to secure higher profit margin per unit of product in a perfectly
competitive market is concerned, there are two aspect to this-

 Yes, it may because the firm can sell the product at the market price.

 No, because rising marginal and average costs will eventually make expanding
production unprofitable.

c) What is the profit maximizing condition for a firm operating in perfect

competition? Explain. (Marks: 7) (Copy necessary graph from Internet)
Profit Maximization
In order to maximize profits in a perfectly competitive market, firms set marginal revenue equal
to marginal cost (MR=MC). MR is the slope of the revenue curve, which is also equal to the
demand curve (D) and price (P). In the short-term, it is possible for economic profits to be
positive, zero, or negative. When price is greater than average total cost, the firm is making a
profit. When price is less than average total cost, the firm is making a loss in the market.

Perfect Competition in the Short Run: In the short run, it is possible for an individual firm to
make an economic profit. This scenario is shown in this diagram, as the price or average
revenue, denoted by P, is above the average cost denoted by C.

Over the long-run, if firms in a perfectly competitive market are earning positive economic
profits, more firms will enter the market, which will shift the supply curve to the right. As the
supply curve shifts to the right, the equilibrium price will go down. As the price goes down,
economic profits will decrease until they become zero.

When price is less than average total cost, firms are making a loss. Over the long-run, if firms in
a perfectly competitive market are earning negative economic profits, more firms will leave the
market, which will shift the supply curve left. As the supply curve shifts left, the price will go up.
As the price goes up, economic profits will increase until they become zero.

In sum, in the long-run, companies that are engaged in a perfectly competitive market earn zero
economic profits. The long-run equilibrium point for a perfectly competitive market occurs
where the demand curve (price) intersects the marginal cost (MC) curve and the minimum point
of the average cost (AC) curve.
Perfect Competition in the Long Run: In the long-run, economic profit cannot be sustained.
The arrival of new firms in the market causes the demand curve of each individual firm to shift
downward, bringing down the price, the average revenue and marginal revenue curve. In the
long-run, the firm will make zero economic profit. Its horizontal demand curve will touch its
average total cost curve at its lowest point.

The Demand Curve in Perfect Competition

A perfectly competitive firm faces a demand curve is a horizontal line equal to the equilibrium
price of the entire market.

In a perfectly competitive market the market demand curve is a downward sloping line,
reflecting the fact that as the price of an ordinary good increases, the quantity demanded of that
good decreases. Price is determined by the intersection of market demand and market supply;
individual firms do not have any influence on the market price in perfect competition. Once the
market price has been determined by market supply and demand forces, individual firms become
price takers. Individual firms are forced to charge the equilibrium price of the market or
consumers will purchase the product from the numerous other firms in the market charging a
lower price (keep in mind the key conditions of perfect competition). The demand curve for an
individual firm is thus equal to the equilibrium price of the market.
Demand Curve for a Firm in a Perfectly Competitive Market: The demand curve for an
individual firm is equal to the equilibrium price of the market. The market demand curve is
downward-sloping.

The demand curve for a firm in a perfectly competitive market varies significantly from that of
the entire market. The market demand curve slopes downward, while the perfectly competitive
firm’s demand curve is a horizontal line equal to the equilibrium price of the entire market. The
horizontal demand curve indicates that the elasticity of demand for the good is perfectly elastic.
This means that if any individual firm charged a price slightly above market price, it would not
sell any products.
 SOLUTION TO QUESTION: 4

The question about fitting a model for forecasting demand for Saree and estimating the same
with SPSS. Sprite Textiles produces ordinary cotton saree for wearing at home. The management
of Sprite Textiles intends to know which variables impact the sale of Saree and to what extent.

It has been possible to collect data for 17 years from 2003 to 2019 relating to Sale of Saree, Price
of Saree, and average income of people and Sale of two-piece set of Salwer-Kamiz (see Table-
4A below). Accordingly, a regression model has been fitted to estimate Sale of Saree (dependent
variable) based on 3 (three) independent variables (predictor), namely,

(a) Price of Saree (BDT per piece, Negative or inverse relationship with Sale of Saree)

(b) Income of people (USD per capita, Positive relationship with Sale of Saree), and

(c) Sale of 2-piece set of Salwer-Kamiz (Number of sets, Negative or inverse relationship with
Sale of Saree).

SPSS package has been used to carry out linear multiple regression analysis. Three output tables
generated by SPSS has been reproduced on the next page (Table-4B).

Answer following questions.

a. Describe the regression model. (Marks: 2)

Regression analysis is a form of predictive

modelling technique which investigates the
relationship between a dependent (target) and
independent variable (s) (predictor). This technique is
used for forecasting, time series modelling and
finding the causal effect relationship between the
variables.

It is assumed that a linear regression equation as follows:

Y = a – b1x1 + b2x2 - b3x3

Here, Y = Sale of Shari and b1, b2 & b3 are coefficient of independent variables. The independent
variables are;

(a) Price of Shari (in BDT per Piece) = x1

(b) Average annual income of people (in USD per capita), = x2

(c) Sale of 2 pieces set of Salwer-Kamiz = x3

b. Interpret the estimated value of the Constant as in the Coefficient table. (Table-
4b below) (Marks: 2)

Based on the coefficient table as above, we can write the estimated value of the constant as
follows;

a = 181.772

b1 = (-) 0.119

b2 = 0.072

b3 = (-) 0.099

c. Comment on the sign and value of unstandardized coefficient of Price as in the

Coefficient table. (Marks: 3)
Here, we can see,

b1 = (-) 0.119 which means this value negative. Elaborately we can say, the sale of Shari will
increase by 0.119 million pieces if the price of Shari is reduced by 1 taka. The coefficient has
negative sign. So the relationship with the dependent variable is negative or inverse.
d. Examine the Coefficients table of the SPSS Output (Table-4b below). Write the
‘operational regression equation’ based on the estimated value of unstandardized
coefficients of three independent variables. Explain all variables & parameters.
(Marks: 3).
Based on the coefficient table, we can write the operational regression equation since we use it
for predicting sales of Shari as follows;

Y = a – b1x1 + b2x2 - b3x3

Y = 181.772 – 0.119 X1 + 0.072 X2 – 0.099 X3

e. Estimate the sale of Saree produced by Sprite Textiles in 2020, assuming that the
Price of Saree will be fixed at BDT 1000 per piece while people’s annual average
Income will rise USD 3200 per capita, and Sale of 2 piece Salwer-Kamiz sets will be
increase to 750 million sets. (Marks: 15)

In 2021, price of Sharee will be the fixed at BDT1000 per piece, annual average income will be
USD 3200 per capita and sale of 2-piece sets will be 750 million sets, then sale of Sharee will be
as follows;

Y = a – b1x1 + b2x2 - b3x3

Y = 181.772 – 0.119 X1 + 0.072 X2 – 0.099 X3

Y = 181.772 – 0.119 × 1000 + 0.072 × 3200 – 0.099 × 750

Y = 218.922 million pieces of shares

So, it is estimated that about 218.922 million pieces of Shares will be sold in 2021, given the
change in piece of Saree, income and sale of 2 piece Salwer Kamiz sets. Notably, the figure was
221 million pieces in 2020.