Name Sakina Niazi

IMS ID 193751
Assignment 1
Managerial Economics
Q.1 Some have argued that higher cigarette prices do not deter smoking. While there are
many arguments both for and against this view, some find the following argument to be
the most persuasive of all: “The laws of supply and demand indicate that higher prices
are ineffective in reducing smoking. In particular, higher cigarette prices will reduce the
demand for cigarettes. This reduction in demand will push the equilibrium price back
down to its original level. Since the equilibrium price will remain unchanged, smokers
will consume the same number of cigarettes.” Do you agree or disagree with this view?
Explain.
Ans : The tobacco industry is not classically influenced by demand and supply, as it is always
a sensitive topic for government policies and economics in general. Since tobacco products
(cigarettes) are not an ordinary product, but impose a threat to health instead, their prices are
mostly influenced by government or regulatory body decision, rather than general market
rules.So, if cigarette prices become higher (as an aftermath of a regulatory body decision), they
will remain that way, no matter if the demand decreases.

Q.2 G.R. Dry Foods Distributors specializes in the wholesale distribution of dry goods,
such as rice and dry beans. The firm’s manager is concerned about an article he read in
this morning’s Wall Street Journal indicating that the incomes of individuals in the lowest
income bracket are expected to increase by 10 percent over the next year. While the
manager is pleased to see this group of individuals doing well, he is concerned about the
impact this will have on G.R. Dry Foods. What do you think is likely to happen to the
price of the products G.R. Dry Foods sells? Why
Ans : There are three types of goods Inferior goods Normal Goods and Luxury Goods. The
fact that the manager of G.R. Dry Foods is concerned may be because the dry goods sold by
this company maybe Inferior Goods. In economics, Inferior Goods behave differently from
Normal Goods. The inferior goods, which are associated with the lower strata of the socio-
economic groups, the demand of the goods decreases as the income of the group increase. Some
other examples of Inferior Goods may be cheap cars or public transport. As the income of the
society increases, they would want to upgrade to better branded cars and hence the demand for
cheap cars will decrease over time. So the manager is right to be concerned as increasing
income for those in the lowest bracket will adversely impact his business dry beans and rice
are probably inferior goods if so increase in income shifts demand for these goods to left
resulting in a lower equilibrium price. Therefore G.R Dry foods will likely have to sell its
products at a lower price.

Q.3 You are the manager of a midsized company that assembles personal computers. You
purchase most components—such as random access memory (RAM)—in a competitive
market. Based on your marketing research, consumers earning over $80,000 purchase
1.5 times more RAM than consumers with lower incomes. One morning, you pick up a
copy of The Wall Street Journal and read an article indicating that input components for
RAM are expected to rise in price, forcing manufacturers to produce RAM at a higher
unit cost. Based on this information, what can you expect to happen to the price you pay
for random access memory? Would your answer change if, in addition to this change in
RAM input prices, the article indicated that consumer incomes are expected to fall over
the next two years as the economy dips into recession? Explain
Ans : Increase in the technology it will reduce production cost the supply curve for RAM will
shift rightward., resulting in a lower equilibrium price of RAM chips. If in addition, income
increases demand of RAM will increases because they are normal goods. If demand of RAM
increases the price will increase too. The supply and demand will change due to which the
equilibrium will be change. Depending on the increase in demand ad supply due to which price
of chips may go up or down.