ECO701 Economics and the Business Environment Coursework May 21 Semester

Coursework 1

This coursework contains a series of questions. Please complete all of the questions utilising economic concepts,
models and wider reading. There is no specific format required i.e. report or essay format, please note the question
that you are addressing and provide an answer to the question.

The word limit of this coursework i.e. completion of all questions is 2000 words (excluding graphs, tables and
references).

The Deadline for submission is by 23:59 on the 11/07/2021. Submissions should be made via the Blackboard site for
this module. The submission link can be found in the Assessment section, titled as: Coursework 1 Deadline: 11/07/21
by 23:59.

Question 1

In this question assume the role of a consultant who has been hired to advise a relatively new company that makes
virus and malware protection software for Personal Computers (PCs) and Laptops that use Windows operating
software. Using your knowledge of Demand address the following questions. All answers provided must be justified.
Be sure to utilise relevant graphs and wider reading to support your answers. (Note only consideration of the
demand curve is required for these questions).

a. The Owners of the company noticed some recent changes in the market. For each of the noted changes
explain the likely effect on the demand of the protection software.
i. Increases in the prices of Laptops
ii. Decreases in the price of relative software made by a rival company
iii. Increases in the stories published about hacker attacks on PCs and Laptops through viruses and
malware

(10 marks)

b. The Owners share data they have gathered regarding their attempts to change prices and prices changes of
potentially related products. The Owners charge a monthly rate for their software and allow the customer to
stop usage at any time as long as they give a one month notice. A sale is classified as someone paying for the
software in a month. Using your knowledge of Elasticity, identify/solve relative elasticities, interpret the
answer and provide any applicable advice to the company. (Please give numerical answers to 2 decimal
places)
i. When the Owners changed the fee for their standard virus protection software from £8.99 per
month in Quarter 1 to £5.99 per month Quarter 2, sales changed from 10500 in Quarter 1to 11000 in
Quarter 2. Calculate the price elasticity of demand between Quarter 1 and Quarter 2. What
suggestions would you make to the Owners regarding changing their prices given your answer?

ii. When the Owners changed the fee for their online gaming specialist virus and malware protection
software from £10.99 per month in Quarter 1 to £12.99 per month Quarter 2, sales changed from 12000
in Quarter 1 to 9000 in Quarter 2. Calculate the price elasticity of demand between Quarter 1 and
Quarter 2. What suggestions would you make to the Owners regarding changing their prices given your
answer?

iii. The Owners notice that the average monthly income of their regular subscribers changed from
£3000.00 per month to £2400.00 per month. They also noticed sales of their Premium virus
protection software decrease from 9000 to 6500 during this time period. Calculate the income
elasticity of demand and identify whether the protection software is a necessity or a luxury good.
 (15 marks)

Question 2

A package delivery company has seen a significant increase in demand. In the attempt to satisfy the increased
demand, the company management feels that they are being inefficient. They have found themselves paying ad hoc
overtime, hiring additional bikes/vans a short notice, having to outsource different tasks/orders/business functions
etc. They also have a small working team conducting various roles but with the increased orders some mistakes are
being made resulting in additional costs to rectify issues (e.g. compensation, hiring short notice support etc.). They
have a rather basic information system and mainly use spread sheets (MS Excel) for most operating functions.

The company feel that they are in a position where they need to plan for the future and hire you as a consultant to
consider means in which they can reduce average costs in the long run so that they can efficiently keep up with
demand. Using your knowledge of economies of scale and diseconomies of scale consider means in which the
company can reduce average costs over the long run. (N.B you should use diagrams to support your answer, you do
not need to consider actual costs but you should consider initiatives that would aid reducing average costs over the
long run)

(10 Marks)

Question 3

A market analyst asks for your help to forecast changes in different markets. The market analyst would like you to
look at the following markets; Traditional Board Games, Plant Pots, Personal Surveillance Equipment for Home
Security, Electric Bicycles.

When conducting research related to the relevant markets the following articles appear to given strong indication of
relevant market changes: Children are playing less with traditional toys and more on electronic devices; There are
many blogs and social media posts providing advice on caring for plants as tending to plants became a popular
hobby for many during national lockdowns; There are an increased number of thefts in packages delivered to
homes; There is a disruption to the supply chains that provide parts required to produce personal surveillance
equipment; There is an increase in popularity to find alternative modes of transport than cars and public
transport; The technological process related to the manufacturing of electric bicycles improves.

Given the above noted articles, consider how they may affect the market price and quantity of the markets that you
are reviewing. Ensure that you use supply and demand diagrams to support your answers.

(15 marks)

Question 4

Consider the diagram below that shows the market for local ferries that transports vehicles and people across rivers.
The government believe that this service is important to the citizens of the economy and enforce a maximum price
on the good. The maximum price applied is shown as price Pm. Use your knowledge of producer surplus, consumer
surplus and deadweight loss to answer the following questions. (For these questions you need to indicate the
relevant areas using points noted on the diagram below or by providing your own illustration with relevant areas
clearly highlighted).

a. Identify Domestic Consumer Surplus and Producer Surplus at the original equilibrium, Pe.
b. Identify Domestic Consumer Surplus and Producer surplus at Price Pm i.e. the maximum price.
c. Does any deadweight loss occur from the application of the minimum price?
d. Do you believe that imposing a maximum price was beneficial overall?
(10 marks)
Question 5

The supply and demand for peanuts are given by QD = 900 – 10P and QS = 5P, where P is price per bag (in pence)
and Q measures bags per day. (It would be useful to illustrate the factors noted in a demand and supply diagram to
make aspects clearer to see).

a) What is the equilibrium price and quantity?

b) Calculate consumer and producer surplus
c) Suppose the government imposes a price floor of 70p per bag. Is there a shortage or surplus of peanuts and,
if so, what is the size?
d) Calculate consumer and producer surplus with the price floor.
e) What is the size of the deadweight loss?

(15 marks)

Question 6

Ashley sells hand-made scarves in a perfectly competitive market for £15 per scarf. Ashley’s fixed costs are £10, and
she is capable of producing up to 6 shawls per week.

a) Use that information to fill in the table below. (Hint: The variable cost of the first unit of production equals
its marginal cost and total variable cost is simply the sum of the marginal costs up of the units of production
up to any particular quantity of output)

Quantity Total Fixed Variable Cost Total Profit= Revenue Marginal Marginal
Revenue Cost Cost – Total Cost Revenue Cost
0 0 10 --- ---

1 15 5
2 9

3 15
 4 24

5 35
6 49

b) Given the Profit Maximising condition, what quantity of scarves should Ashley produce in order to maximize
her profit?

c) Ashley finds a new place to sell and a new supplier so her fixed cost falls to £7 and there would be a change
to her variable costs. However, due to a decrease in market demand the selling price has changed to £12 per
scarf. Information related to Ashley’s new cost and revenue projection is given in the table below. Calculate
the new revenues and costs as per this new change and the table below. Does the quantity that Ashley
should produce change given the new costs?

Quantity Total Fixed Variable Cost Total Profit= Revenue Marginal Marginal
Revenue Cost Cost – Total Cost Revenue Cost
0 0 7 --- ---

1 9 2
2 6

3 12
4 21

5 32
6 46

(10 Marks)

Question 7

Conduct an analysis of market structures:

Are perfectly competitive markets and their outcomes more preferred than monopolies? Consider this from the
perspective of consumers, producers and a welfare maximising government.

(15 marks)