KATHMANDU UNIVERSITY

School of Management
End-Semester Examination

EMBA
Spring Semester (March – June 2021 Session)

SUBJECT : Managerial Economics TIME : 150 Min

YEAR :I F.M. : 80

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Please read the questions carefully and write the answers in your own words.

Answers should not be a direct copy of any book or text or website, but it should be
your original reflection and analysis. If you have referred to any book or website
please do provide the citations.

On the first page of your Answer Sheet specify clearly: Your Roll Number, Registration
Number, Subject and the Date of Examination.

Please keep track of the timing so that you will be able to write an answer, scan it into
a PDF and send it to the given link within the time specified.

NOTE: If answers of the students are found to be similar, all concerned will be
marked zero.
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Attempt ALL questions. (8 Questions × 10 Marks each = 80 Marks)

Read the cases and answer the questions given.

1. Pricing at Gold-X Revised: January 17, 2017

In a time of crisis in the personal computer industry, Gold-X is taking a hit. In the first
months of 2015, its net margin dropped to less than six percent of sales. However, among
the top six US PC manufacturers, Gold-X was the only to report a profit during the first
quarter of 2001.

Gold-X’s relative success can be attributed to many factors. Its business model is quite
different from those of its rivals: Gold-X builds machines to order and sells them directly
to the customer, rather than through independent dealers. Another distinctive
characteristic is the company's almost obsessive concern with cost cutting. It is estimated
that Gold-X’s overhead amounts to 11.5 cents of every sales dollar, compared to 17 cents
 at Gateway, 25 cents at Compaq and 28.5 cents at Hewlett-Packard. Recent staff
reductions are likely to make Gold-X’s number even lower.

But low overhead is only part of the story. Gold-X has a system of "real time" cost
information that it uses in pricing decisions. Information collected from suppliers and from
Gold-X’s own factories is used to create a "cost package." Based on this package, one
can estimate fairly accurately how much it would cost to supply a given model today or a
month from today (taking into account, for example, predicted changes in the price of
memory chips or of an Intel microprocessor).

Gold-X’s representatives have access to this information and are given significant
flexibility in their pricing decisions. They are expected to take into account variables such
as the buyer's willingness to pay, how much competition there is, the proposed delivery
dates - and, of course, cost. For example, representatives may offer a special discount if
the buyer is willing to order in advance, stagger its purchases, or simply delay them,
depending on which would imply a lower cost for Gold-X.

By contrast, other PC manufacturers tend to follow a system of estimating sales, drafting

a corresponding production plan, and negotiating long-term component purchases. Some
rivals have attempted to embrace Gold-X’s practices, but only to a limited degree. They
have, however, responded to Gold-X’s aggressive pricing. Gateway now has a database
system to monitor rivals' prices, primarily Gold-X’s. Compaq, IBM, and Hewlett-Packard
are instructing dealers to match any Gold-X quote, regardless of their own costs. "They'll
do anything, anything they can, if it's within reason to keep Gold-X from getting the deal,"
says one dealer.

Based on the case given, address the following questions. Your answer needs to
be linked with the economic concepts of production, costs and markets.

a. How can you justify the success of Gold-X - is it magic or something beyond
magic?
b. Contrast the competitive advantages that come from having low costs vs having a
good knowledge about costs. Which one is more difficult for Gold-X’s competitors
to imitate?
c. Comment on the following quote: "By matching Gold-X’s prices, we are getting the
benefits from flexible prices without incurring the costs of setting up a detailed cost
information system.”

2. Gongsang: A New Steel Plant in India

China and India are widely expected to be the two growth engines of the world economy
in the 21st century. The two economies, however, are a study in contrasts. While China's
economy is dominated by manufacturing, India's has a relatively larger share in
agriculture.
Consistent with the difference in economic structures, India produces much less steel. In
2018, India's annual steel manufacturing capacity was 45 million metric tons, which was
less than one-seventh that of China's 330 million tons. Ironically, India is one of the world's
top four producers of iron ore, the others being Brazil, Russia, and Australia.

Lured by prospects of future growth in manufacturing and India's iron ore deposits, five
international steel-makers have announced plans to build or expand capacity in India. The
combined increase in capacity would be 85 million tons, or about 8.5% of current global
production.

India's second-largest producer, Tata Steel, plans to increase capacity at its plant in
Jamshedpur, Jharkhand State, from 7 to 35 million tons a year. Mittal Steel announced
plans for a 14 million ton facility, also in Jharkhand State.

Seeking to expand overseas, Korea's Gongsang contracted with the government of Orissa
State for up to 800 million tons of iron ore over 35 years. Gongsang committed to build a
17 million ton steel mill at a cost of US$15 billion. The mill would be built in four phases,
with the first phase capacity of 6 million tons a year.

Chairman and CEO of Gongsang, Mr Hyun-woo, recognized the risks. “The world's
leading steelmakers have purchased steelworks abroad but have never constructed
steelworks abroad from scratch."

Meanwhile, in China, steel-making capacity will increase by 60 million tons in 2018, and a
further 40 million tons in 2019. This increase in supply, and prospects of a glut, would
increase the downward pressure on steel prices.

Based on the case given, address the following questions. Your answer needs to
be linked with the economic concepts of markets and Game Theory.

a. Consider the investment decisions of Tata and Gongsang in India. If only one
company expands capacity, then it will earn profits from the increased capacity,
while the other earns and loses nothing. If both expand, then there will be excess
supply and both companies will incur losses from their additional capacity. Using
a suitable game in strategic form, identify the Nash Equilibrium.
b. Now, suppose that one company can commit to its investment before the other.
Using a suitable game in extensive form, identify the equilibrium.
c. Referring to your answer (b) above, explain how Gongsang's long-term contract
with Orissa State to purchase iron ore can be a strategic move to persuade other
steel manufacturers not to expand capacity.
3. Resolving China's Power Shortage

Shanghai is China's financial and business hub. In late July 2015, with daytime
temperatures reaching 37 degrees Celsius, the city's electricity consumption surged to a
weekly record of 18.35 million kilowatt hours. The city authorities resorted to asking 2,900
businesses to operate at night, and a further 3,500 others to adjust operating hours.

Even high-profile multinational companies were not spared. General Motors and
Volkswagen were ordered to suspend production for more than a week each. Shanghai
Volkswagen spokesman Lu Jun explained, "It's a rule. We have to cut power for 15 days...
We've cut power and so have had to stop production. It's all over Shanghai".

The Shanghai episode mirrored a nationwide shortage of electric power. In Beijing, on

July 22, 2015, the Municipal Power Supply Bureau imposed the capital's first brownout of
the year, disrupting supply to suburban areas for 57 minutes in the afternoon.

The Chinese government has certainly been working tirelessly to resolve the power crisis.
Thermal coal is the principal fuel used to generate electric power in China.

In July, Premier Wen Jiabao exhorted, "Railway departments should do their utmost for
the transport of coal for electricity generation". The Ministry of Railways increased train
speed and freight loads, and allocated 90% of freight capacity to transport key materials.
In the first half of 2015, Chinese railways shipped 490 million tons of coal, up 12.2% over
the same period last year.

The Ministry of Communications has also pitched in. It diverted ships from overseas routes
to domestic coal transport and approved emergency coal transportation on various roads
and waterways.

China is the world's second-biggest coal exporter. In 2014, China exported 95 million tons
of coal, including 83.8 million tons of thermal coal. To assure supplies to the electric power
industry, the Chinese government has limited coal exports to 80 million tons in 2015. China
Coal Import & Export Vice President Zhou Dongzhou predicted that exports of thermal
coal would fall to 70 million tons.

Since the 1960s, the Chinese government has regulated the supply of thermal coal to
electric power plants. It requires coal mines to supply power plants with about one-quarter
of coal purchases at a contract price.

The government regulates the supply of coal to support its regulation of the electricity
industry. In the late 1990s, the Chinese government dissolved the Ministry of Electric
Power, and divided its functions between the State Electricity Regulatory Commission
(SERC) and the State Power Corporation of China.
The State Power Corporation owns five of the six transmission grids (Northwest, North,
Northeast, Central, and East) and about half of the national generating capacity.
Regulation is necessary to ensure that the State Power Corporation does not abuse its
monopoly power.

The SERC regulates all aspects of the electricity industry, except pricing. With regard to
electricity pricing, the SERC's role is to advise the National Development Reform
Commission (NDRC).

To ensure that electric power generation is economically viable, mines are required to sell
coal cheaply to power plants. Typically, the government sets the contract price below the
spot market price. For instance, in 2014-15, while the spot market price of thermal coal
rose by 25%, the contract price rose by only 10%.

Many mines have ignored their contracts with power plants and sold coal on the spot
market to earn higher profits. Some power plants cut back production, exacerbating the
national power shortage.

Some estimate that the nationwide power shortage will soon reach 30 million kilowatts,
which is more than double Shanghai's peak consumption.

With China headed for a power crisis, the government is under pressure to increase
electricity prices. In June 2015, following persistent rises in the cost of fuel, the NDRC
increased electricity prices by an average of 3.2 fen per kilowatt hour in the East, North,
Central, and South grids.

But, apparently, this increase has not been sufficient. The threat of a power crisis
continues.

Based on the case given, address the following questions. Your answer needs to
be linked with the economic concepts of elasticity and demand.

1. Explain how the impact of a price increase on electricity consumption depends on

the price elasticity of demand.

2. Many Chinese organizations ignore the market system. For instance, they borrow
money from banks and refuse to repay, thus creating "bad debts" for lenders.
Likewise, they might consume electricity without bothering to pay the power
supplier. Do such organizations cause the demand for electricity to be more or less
price elastic? Why?