Student ID : CGSSO00070051

Student Name : said mohamed ali

Course Code : BMME5103

Course Name : MANAGERIAL ECONOMICS

Program : MBA

Semester : THREE

Assignment : MANAGERIAL ECONOMICS

Prof : Dr. Mukhtar Alas

Deadline : 25/3/2023

Submission Date : 18/3/2023

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ASSIGNMENTS OF MANAGERIAL ECONOMICS

ANSWER 1 (CLO 1)

a. Scarcity and Opportunity Cost

One of the fundamental ideas in economics is scarcity. It indicates that there is a gap between the
supply and demand for an item or service. As a result, scarcity may restrict the options available
to consumers, who in the end drive the economy.

The "deceptive abundance" of water makes it an especially useful litmus test for evaluating
corporations and their commitment to long-term sustainability. PepsiCo is an example of a
corporation that has already taken action to reduce the risks that global water shortage poses to
its supply chain and overall business strategy.
Water is rarely a "scarce resource" in our minds because we use it daily, have almost unlimited
access to it, and it is inexpensive. Sadly, projections that we are entering an era of rising water
scarcity conflict with this impression. In fact, due in large part to a sharp rise in global water
withdrawals over the past 50 years, water shortage has become a catastrophe in many parts of the
world. This false belief—what some have referred to as "water's deceptive abundance"—has
prevented managers within businesses from aggressively planning their operations for a future in
which obtaining water will be more challenging and expensive.

PepsiCo should be extremely concerned as a major producer of food and drinks on a worldwide
scale. One reason is that one-third of all food production currently takes place in regions with
severe water stress, making PepsiCo's extensive agricultural supply chain particularly susceptible
to water scarcity. PepsiCo would experience the effects in the form of greater direct expenses
(because to lower agricultural output and higher water prices) as well as supply chain disruption
costs (i.e., the cost of not meeting demand or relocating operations from water stressed areas).
Also, PepsiCo is particularly exposed to reputational risk due to its enormous scale, with its
goods being consumed more than a billion times daily. This is because if the company does not
act swiftly enough to meet consumer expectations for sustainability.

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When economists talk about a resource's "opportunity cost," they're referring to the cost of the
next-highest alternative usage of that resource. You cannot, for instance, read a book at home
during the time you would have spent seeing a movie and spend the money you would have
spent on something else.

Many articles discuss actual instances where opportunity cost has been taken into account. One
of the circumstances is as follows: Oswaldo Cisneros requested that Pepsi, a well-known soft
drink corporation, purchase a portion of his business. The person in charge of Pepsi's markets in
Venezuela is Oswaldo Cisneros. Pepsi declined, reasoning that the price was excessive given the
advantages of the transaction. A few months later, Cisneros offered the same arrangement to the
Coca-Cola soft drink business, and they accepted it. Pepsi was severely harmed by this choice.
Because to that, they essentially lost all of their Venezuelan markets. As a result, Pepsi's choice
is debatable in terms of both its advantages and disadvantages. Even if the initial fee was high,
accepting the offer would have increased their wealth. This action demonstrates the idea of
opportunity costs. At the moment, Pepsi had two choices: accept the agreement or reject it. The
opportunity cost was accepting the agreement before Coca-Cola did because they opted to reject
it.. Unfortunately, it turns out that this alternative choice would probably have resulted in more
positive outcomes for the company. real situations in which opportunity cost has been reflected.
One of the situations is the following: Pepsi, a famous soft-drink company, was asked by
Oswaldo Cisneros to buy a part of his company. Oswaldo Cisneros is the person in charge of
Pepsi’s markets in Venezuela. Pepsi refused, deciding that the cost was too high compared to the
benefits of accepting this deal. A few months later, Cisneros made the same deal with the Coca-
Cola soft-drink company, who accepted the offer. Pepsi suffered drastically from this decision.
They lost practically all their markets in Venezuela due to it. Thus, Pepsi’s decision is
questionable in terms of the costs and benefits of it. The initial cost may have been pricey, but
accepting the offer would have brought them more wealth in exchange. The concept of
opportunity costs is reflected in this action. Pepsi’s options at the time were agreeing to the deal
or refusing it. They chose the option of refusing the deal, meaning the opportunity cost was
agreeing to it before Coca-Cola did. Unfortunately, it turns out that this alternative choice would
probably have resulted in more positive outcomes for the company.

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 b. Importance of Understanding the Mechanics of Supply and Demand
It is crucial for managers to comprehend the two since they must comprehend the necessary
equipment, labor, and raw resources. It is crucial for them to be aware of these facts so they can
plan ahead over the two seasons to avoid output shortages or surpluses. Understanding
mechanics also aids in general production planning that considers both supply and demand in the
market. For instance, the diamond and gasoline industries.

In order to effectively manage pricing strategies, production levels, and inventories, managers
must have a thorough understanding of supply and demand dynamics in both the short- and long-
term. Managers can modify their business operations to maximize profits and minimize losses by
understanding how changes in supply and demand affect the market.

Netflix is an illustration of a business that benefited from shifts in supply and demand. Early in
the new millennium, the business decided to switch from renting DVDs to offering online
streaming services in response to the rising demand for such services. By adjusting its strategy,
Netflix was able to take advantage of the rising demand for online content and increase its share
of the market. Because of this, Netflix has experienced exponential growth in revenue, making it
one of the most popular streaming services in the world.

Changes in supply and demand can have a big influence on businesses in the short term,
especially if they have a small amount of inventory or manufacturing capacity. For instance,
several businesses noticed a rise in demand for necessities like face masks and hand sanitizers
during the COVID-19 pandemic. Rapid production expansion enabled businesses to satisfy the
increasing demand and capitalize on the spike in sales. However, businesses with small
production capacities failed to keep up with the increasing demand, which resulted to lost sales
and poorer earnings.

On the long term, shifts in supply and demand can significantly affect an industry's competitive
environment. For instance, the desire for electric vehicles has shifted the automotive industry in
favor of electric vehicles, with firms like Tesla and Rivian gaining market dominance.
Conventional automotive firms who do not adjust to this change in demand may find it difficult
to compete in the long run and may lose market share to more recent, inventive firms.

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In conclusion, managers must have a thorough understanding of supply and demand principles in
order to make wise judgments about their companies' operations. Changes in supply and demand
can significantly affect a company's success or failure in the short and long term, as
demonstrated by real-world instances. Businesses that are able to adjust to shifting market
conditions might acquire a competitive advantage, while those who are unable to do so may
struggle to compete and possibly experience diminishing sales and market share..

Answer 2 (CLO 1)
a) SOLUTION
Demand function:

Qd= 20000-20000P+7500PK+0.8Y+500T
Qd= 20000-20000(5)+ 7500(4)+0.8(62500)+500(80)= 40,000
Supply function:

QS = 1,000 + 12,000P - 900PL - 1,000PC - 200T

Qs= 1000+12000(5)-900(10)-1000(0.12)-200(80)=35880

ii. change price to 4

Demand function:

Qd= 20000-20000P+7500PK+0.8Y+500T
Qd= 20000-20000(4)+ 7500(4)+0.8(62500)+500(80)= 40,000
Qd= 20000-80000+30000+50000+40000=60

Supply function:

QS = 1,000 + 12,000P - 900PL - 1,000PC - 200T

Qs= 1000+12000(4)-900(10)-1000(0.12)-200(80)=
QS=1000+48000-9000-120-16000= 23880

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 iii. Equilibrium price
Qd=Qs
20000-20000P=1,000 + 12,000P
20000-1000=12000P+20000P
19000=32000P= 19000/32000=32000P/32000
P= 0.59375

20000-20000P=1,000 + 12,000P
20000-20000(0.59375)=1,000 + 12,000(0.59375)
20000-11875= 1000+7125
8125=8125

b) We may determine the price elasticity of demand for cigarettes using the midpoint
method if an 80% rise in the retail price of cigarettes is required to result in a 30%
decrease in the quantity of cigarettes sold.
Price elasticity of demand is calculated as follows: 30%/[(80% + 100%)/2]= 0.375 (%
change in quantity requested / % change in price).

This suggests that the quantity demanded will drop by 0.375% for every 1% increase in
price.
As a result, the cigarette industry will suffer, but not much, as the response to a price shift
is not elastic. The industry would suffer as a result, as any potential tax increases would
be detrimental to it.

QUESTION 3 (CLO 2)

a) i. Derive the marginal product and average product functions.

Q= 2L+0.5L2-0.025L3
Qd= 2+L-0.075L2
1-0.15L=0

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 -0.15L= -1
L= 6.67
Q=(-b±√(b²-4ac))/(2a)
Q=(-1±√((1)²-4(-0.075)(2))/(2(-0.075)
Q=-1±√1.6/-0.15
Q=-1±1.265/-0.15
Q=-1+1.265/-0.15
Q=-0.265/-0.15= 1.77
Or
Q=-1-1.265/-0.15
Q=-2.265/-0.15
Q=15.1
ii. Calculate the units of labour that should be employed in order to maximise the
firm's total profit.
Q= 2L+0.5L2-0.025L3
P=20 w= 40
Qd= 2+L-0.075L2
Qd= 2+L-0.075L2
1-0.15L=0
MRP*P=W
=( 1-0.15L)20=40
=20-3L=40
=-3L= 40-20
=-3L=20
=-3L/-3= 20/-3
L= -6.7

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b) Given data

Labor classification Number labor Wage rate marginal product

Unskilled labor 100 400 $400
Factory machnicians 80 450 $500
Skilled machinist 30 550 $700
Skilled electricians 40 600 $750

1. marginal product of last unkilled laborer was 400 lights per week and wage of unskilled
laborer waas $400 per week

Calculate the marginal product per dollar input cost of unskilled laborer -
The marginal product per dollar input cost of unskilled laborer = Marginal product for last
unskilled labor/ wage of unskilled labor
400÷400= $1
The marginal product per dollar input cost of unskilled laborer is $1

2. Marginal product of last factory technician = 450 lights per week

Wage of factory technician = $500 per week
Calculate the marginal product per dollar input cost of factory technician -
The marginal product per dollar input cost of factory technician=marginal product of last factory
technician/ factory technician wage 450÷500=0.9
The marginal product per dollar input cost of factory technician is $0.90

3. Marginal product of the last skilled machinist = 550 lights per week

Wage rate of skilled machinist = $700 per week

Calculate the marginal product per dollar input cost for skilled machinist -
The marginal product per dollar input cost for skilled machinist is=Mg product of skilled
machinist/ wage rate of skilled machinist

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550÷700 =0.786

Marginal product of the last skilled electrician = 600 lights per week
Wage rate of skilled electrician = $750 per week
Calculate the marginal product per dollar input cost for skilled electrician =Mg product of skilled
electrician/ wage rate of skilled electrician= 600÷750=0.8

The marginal product per dollar input cost for skilled electrician is $0.80

ii. Recommendations to Produce Targeted Output

By putting the following suggestions into practice, Lobo Lighting Corporation can lower costs
and more effectively create its desired output according to the study of the marginal cost and
marginal product of each worker:
Decrease the number of factory technicians and unskilled workers: Factory technicians and
unskilled employees have a lower marginal product than their marginal cost. Lobo can enhance
its output while lowering its costs by reducing the number of unskilled laborers and factory
technicians and replacing them with experienced machinists.
Employ more skilled machinists since doing so will enhance output at a reduced cost. Skilled
machinists have a high marginal product compared to their marginal cost. Lobo can make more
lights for less money by bringing in professional machinists to take the place of some of the
unskilled laborers and manufacturing technicians.

Raise the pay of experienced electricians and machinists: Because they are now paid less than
their marginal products, competent electricians and machinists have high marginal products.
Lobo can increase its workers' pay and increase the productivity of its workforce by doing so.

These suggestions can help Lobo Lighting Corporation generate its desired production more
effectively, boost profitability, and maintain market competitiveness.

Task 2

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ANSWER 1 (CLO 3)

a. Reasons for the Existence of Monopolies

1) Control over a crucial resource

Access to a valuable resource can be limited and a monopoly can be created by a business that
has sole ownership or control over it. It will be hard for new sellers to enter the market due to the
essential resource's restricted availability. Despite the importance of this component in economic
theory, monopolies no longer frequently develop for this reason in the actual world. mostly
because the majority of resources are spread throughout a variety of global areas.

The twentieth-century diamond industry is a well-known illustration of a monopoly that

developed as a result of control over a vital resource. By direct ownership or exclusive
agreements, the firm De Beers essentially held control over the majority of the diamond mines in
the globe during this time. De Beers thus had complete control over the market and the ability to
dictate market prices at will.

2. Regulation by the government

A monopoly may develop as a result of legal restrictions on market entrance (such as patents or
copyright laws). As these policies support innovation as well as research and development,
governments often act in the public interest in this manner (R&D). Getting exclusive rights to
market a product is how companies may be rewarded for their R&D work. Many businesses
would find it more rational to let others conduct the research and then just replicate their goods
once they are on the market if this form of protection were not available. In the end, though, all
innovation and research would be eliminated.

The pharmaceutical sector has some of the most notable (and contentious) examples of
monopolies that are subject to government regulation. Companies frequently need more than ten
years to create a new medicine. But, if they are successful, the businesses may submit a patent
application and, for a certain amount of time, hold the exclusive distribution rights for the novel
medication. Because of their dominant status, they are able to generate sufficient earnings to
offset their significant R&D costs.

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3) Economies of Scale

In some sectors, a single company is able to provide an item or service at a cheaper cost than two
or more companies could. It is referred to as a natural monopoly (because it arises without
government intervention). In sectors with high fixed costs but considerable scale economies over
the relevant range of output, a natural monopoly may form. These conditions lead to declining
average total costs as output rises, which makes it more challenging for new businesses to enter
the market.

A typical illustration of a natural monopoly is the energy market. It is quite costly to build the
infrastructure necessary to provide a whole city with energy. As a result, entrance into the market
is difficult. Once the infrastructure is in place, however, adding a second residence to the
electricity grid is not too expensive. A single company may thus provide a whole city at a lesser
cost than two or more rival firms could.

b. Price Discriminations that exist in the Somali Market

price discrimination is defined as the practice of charging various clients for the same goods or
services at various rates. Price discrimination takes several different forms in Somalia, including:
Age-based pricing discrimination (cinema admission fees), location-based price discrimination,
time-based price discrimination, and quantity-based price discrimination.

The sort of price discrimination that is most tolerated in the Somali market is quantity-based
price discrimination. This is due to the fact that it is dependent on the quantity of the product or
service purchased as opposed to any other client attributes. Also, it is a typical practice in many
international marketplaces, and it is widely thought to be just and acceptable. Discounts are
frequently offered to customers who buy bigger quantities of a good or service, which can
encourage bulk buying and boost market effectiveness.

On the other hand, age- or location-based pricing discrimination may be perceived as unfair or
discriminatory since it may disadvantage some client groups who are unable to get the same
goods or services at a cheaper price. The discrimination against customers who can only access a
good or service at busy hours, when prices are higher, may be seen as unjust by those who
oppose time-based pricing discrimination. Businesses should think about how their pricing

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tactics will affect various client groups and make sure they are not unfairly discriminating
against any one group.

TASK2

ANSWER 2 (CLO 3)

Y X X^2 X1Y
1 160 15 225 2400
2 220 13.5 182.25 2970
3 140 16.5 272.25 2310
4 190 14.5 210.25 2755
5 130 17 289 2210
6 160 16 256 2560
7 200 13 169 2600
8 150 18 324 2700
9 210 12 144 2520
10 190 15.5 240.25 2945

1750 151 2312 25970

∑X 151

∑Y

= n ∑ XY-(∑X) (∑Y) n ∑X^2-(∑X^2)

= 10 (25970)-(151)(1750) 10 (2312)(151)

= 259700-264250

= -4550 -14.26

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 =Y-BX

= 175-14.26(15.1) = -40.326

Y X1 X2 X1^2 X2^2 X1Y X2Y X1X2

1 160 15 150 225 22500 2400 24000 2250
2 220 13.5 160 182.25 25600 2970 35200 2160

3 140 16.5 50 272.25 2500 2310 7000 825

4 190 14.5 190 210.25 36100 2755 36100 2755

5 130 17 90 289 8100 2210 11700 1530
6 160 16 60 256 3600 2560 9600 960
7 200 13 140 169 19600 2600 28000 1820
8 150 18 110 324 12100 2700 16500 1980
9 210 12 200 144 40000 2520 42000 2400
10 190 15.5 100 240.25 10000 2945 19000 1550

1750 151 1250 2312 180100 25970 229100 18230

= (∑X2^2) (∑X1Y) – (∑X1X2) (∑X2Y) (∑X1^2) -(∑X2^2) –(∑X1X2) ^2

= (180100)(25970)–(18230)(229100) (2312)(180100) – (18230) ^2

= 4677197000-4176493000 416391200 – 332332900

= 500704000 = 5.95

= (∑X1^2) (∑X2Y) – (∑X1X2) (∑X1Y) (∑X1^2)(∑X2^2) –(∑X1X2) ^2

= (2312)(22970) – (18230)(25970) (2312)(180100) – (18230) ^2

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= 529679200 – 473433100 –

= 56246100

∑ =1 0

∑X= 151 15.1

= - 175-5.95(15.1)

= 175-89.845 = 85.155

= - 175-0.669(15.1)

=175-10.1019 = 164.89

ANSWER 3 (CLO 3)

Understanding Porter's Five Forces

A business analysis framework called Porter's Five Forces can assist to understand why different
sectors are able to maintain varying levels of profitability. In Michael E. Porter's book
Competitive Strategy: Methods for Evaluating Industries and Competitors, the model was made
available.

The Five Forces model is frequently used to examine a company's industry structure as well as
business strategy. Porter, with some qualifications, established five indisputable factors that,
together, shape every market and sector in the globe. The competitiveness, attractiveness, and
profitability of an industry or market are widely assessed using the Five Forces model..

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1. Competitive rivalry

The first of the Five Forces is the quantity of rivals and their capacity to undercut a business. The
greater the number of rival companies and the more similar goods and services they provide, the
less influence a firm has.

If the competition is able to provide a better deal or cheaper costs, suppliers and purchasers will
look to that company's rivals. On the other hand, when there is no competition, a business has
more clout to jack up prices and dictate conditions of agreements to boost sales and profits.

2. The threat of new entrants

The force of new competitors entering a market may also alter a company's strength. The
position of a well-established firm may be severely undermined the quicker and cheaper it is for
a rival to enter and dominate a given industry.

The best industries for current businesses to operate in are those with high entry barriers because
they allow them to set higher prices and negotiate better conditions.

3. The bargaining power of suppliers

The third Porter model component looks at how quickly suppliers may raise input costs. It is
influenced by the quantity of suppliers of essential components for an item or service, the degree
to which these components are special, and the expense to a business of switching suppliers. A
firm would depend more on a supplier the smaller the industry's supply chain was.

Due to this increased leverage, the supplier is able to increase input costs and demand further
trade benefits. On the other hand, when there are several suppliers or low switching costs
between competitor suppliers, a business may keep its input costs low and increase its profits.

4. The bargaining power of customers

One of the Five Forces is the capacity of customers to influence price reductions or their degree
of power. It depends on a firm's number of buyers, the value of each client, and how expensive it
would be for the company to discover new markets or consumers for its products.

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Each customer has more negotiating power to secure cheaper pricing and better terms due to a
smaller and more consolidated clientele. A business will find it simpler to raise prices in order to
boost profitability if it has a large number of smaller, independent clients.

Businesses that use the Five Forces model can increase their earnings, but they must constantly
check for changes in the Five Forces and modify their business plans accordingly.

4. The threat of substitute products or services

The last of the Five Forces focuses on substitutes. Substitute goods or services that can be used
in place of a company's products or services pose a threat. Companies that produce goods or
services for which there are no close substitutes will have more power to increase prices and lock
in favorable terms. When close substitutes are available, customers will have the option to forgo
buying a company's product, and a company's power can be weakened.

Understanding Porter's Five Forces and how they apply to an industry, can enable a company to
adjust its business strategy to better use its resources to generate higher earnings for its investors.

b) Five Forces Analysis of Apple Inc. – Overview

According to the complaint, Apple's effort is intended to broaden the company's product
offerings beyond its well-known hardware items, like iPhones and Macs, and into fresh markets
like video streaming, news, gaming, and financial services. The slowing of iPhone sales and the
company's need to diversify its revenue sources in order to keep its competitive edge are
probably the driving forces behind this expansion.

Apple is experiencing difficulties in a variety of areas when it comes to competition. First, the IT
sector is rife with fierce rivalry as firms like Samsung, Google, and Amazon compete for market
share. Second, Hollywood studios and streaming services, which create original content and
compete for viewers' attention, are also posing a greater threat to Apple. Last but not least, there
is opposition from banks and financial institutions, which are attempting to profit from the
expansion of mobile payments and digital wallets.

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Apple is making use of its advantages in terms of its well-known brand, devoted client base, and
broad product ecosystem to meet these obstacles. Apple is attempting to strengthen its
relationship with its customers and retain them within its ecosystem by introducing a number of
new services and products. Apple wants to give its consumers a more attractive value proposition
by bundling these services, making it more difficult for them to switch to rivals.

In general, Apple's action is a deliberate response to the difficulties posed by the escalating
rivalry in the tech sector. Apple aims to keep its competitive edge and stay ahead of the curve by
expanding into new markets and diversifying its revenue sources. It is yet unclear whether this
tactic will be effective in the long run.

ANSWER 5 (CLO 3)

One or a small number of companies control the market in an oligopoly. A market is considered
highly concentrated when a small number of companies control it. There may be many small
businesses operating in the market even though a limited number of companies dominate. Car
manufacturing, gasoline retail, pharmaceutical manufacturing, coffee shop retail, and airlines are
a few industries that have oligopolies. Few big corporations are dominant in each of these
industries. When it comes to the air travel industry, large carriers like British Airways(BA) and
Air France frequently operate their routes with only a few close rivals, but there are also a lot of
small airlines that cater to tourists or provide specialized services. In a similar vein, the UK
market is dominated by the "Big Six" energy . Similarly, while the 'Big Six' energy suppliers
dominate the UK market, with a combined market share of 78% for electricity supply (according
to the energy regulator, Ofcom, there are currently 54 active suppliers.

Market share: Each company has a greater incentive to conspire to keep its dominant position the
larger its market share. Large market share companies also have more money to spend on
planning their strategies and upholding the agreement's requirements.
Product homogeneity: It may be simpler to coordinate pricing choices if the goods produced by
the firms in an oligopoly are comparable or identical. Customers are less inclined to switch
between items based solely on price, which makes it simpler for businesses to maintain their
market dominance.

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Entry hurdles: The less likely it is that new businesses would enter the market and overturn the
collusive agreement, the higher the entry barriers. So, existing businesses have more motivation.
Capacity to monitor and enforce the agreement: Collusive agreements are challenging to uphold,
therefore businesses must have the capacity to keep an eye on one another's actions and enforce
the agreement's provisions. This calls for substantial coordination and resources, which may not
be available to all oligopoly enterprises.
Legal restrictions: Collusive behavior is prohibited in many nations, and companies that are
caught engaging in it risk facing heavy penalties and legal action. This can discourage collusive
behavior, especially in sectors with strict regulations.

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