TASK 1

QUESTION 1 (CLO 1)

a. Scarcity and Opportunity Cost

According to Hirschey, Bentzen, and Scheibye (2016), Coca-Cola has successfully used

managerial economics principles to make decisions that have propelled it to become among the

most valuable global brands.

One of the fundamental concepts of economics is scarcity, which according to Buchanan

(1991), is the economic concept that resources are limited, and firms need to make choices about

how to allocate those resources. Coca-Cola is a company that has to make decisions about where

to allocate its resources to maximize its profits. In recent years, Coca-Cola has been investing

heavily in producing new products, such as Coca-Cola Energy and Coca-Cola Zero Sugar. The

company has recognized that the market for traditional soft drinks is becoming increasingly

saturated, and they need to find new sources of revenue. To allocate resources effectively, Coca-

Cola has used market research and data analysis to identify consumer preferences and trends. An

example is how the company recognized the growing trend towards healthier beverage options

and responded by introducing new products like SmartWater and Honest Tea. By investing in

these products, Coca-Cola is not only responding to consumer demand but also creating new

revenue streams that could potentially offset any declines in the demand for traditional soft

drinks.

Another essential concept of economics, according to Commons (1924), is opportunity

cost. Commons (1924) defines opportunity cost as the economic concept that refers to the cost of

forgoing one option in favor of another. If Coca-Cola, for example, decides to invest in the

production of new products, the opportunity cost is the potential revenue that it could have

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earned if it had invested those resources in its existing products. To make informed decisions,

Coca-Cola must weigh the potential benefits of investing in new products against the opportunity

cost of not investing in their existing products. An example of how Coca-Cola has considered

opportunity cost in its decision-making process is its decision to acquire Costa Coffee in 2018.

Coca-Cola recognized that the coffee market was growing rapidly, and by acquiring Costa

Coffee, it could expand its product portfolio and tap into this new revenue stream. However, the

opportunity cost of this decision was the potential revenue that they could have earned by

investing those resources in their existing products.

In conclusion, Coca-Cola is a company that has to make strategic decisions to allocate its

resources effectively to maximize its profits. By using market research and data analysis to

identify consumer preferences and trends, Coca-Cola has invested in new products to create new

revenue streams. Additionally, the company has successfully considered opportunity costs in its

decision-making process, such as the decision to acquire Costa Coffee to expand its product

portfolio.

b. Importance of Understanding the Mechanics of Supply and Demand

It is essential for managers to understand the mechanics of supply and demand in both the

short-run and long run because it enables them to make informed decisions about pricing

strategies, production levels, and inventory management. By understanding how changes in

supply and demand affect the market, managers can adjust their business operations to maximize

their profits and avoid losses.

An example of a company whose business was helped by changes in supply and demand

is Netflix. In the early 2000s, the company recognized the growing demand for online streaming

services and decided to shift its business model from DVD rentals to online streaming. This

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strategic shift allowed Netflix to capitalize on the growing demand for online content and gain a

significant market share. As a result, Netflix's revenue has grown exponentially, and the

company has become one of the most successful streaming services worldwide.

Another example of a company whose business was hurt by changes in supply and

demand is Nokia. In the early 2000s, Nokia was the market leader in mobile phones, with a

dominant market share. However, the company failed to recognize the shift in consumer demand

towards smartphones and instead focused on developing traditional mobile phones. This failure

to adapt to changing market conditions resulted in a significant decline in Nokia's revenue and

market share and the company eventually sold its mobile phone business to Microsoft.

In the short run, changes in supply and demand can have a significant impact on

companies, especially those with limited production capacity or inventory. During the COVID-

19 pandemic, for example, many companies experienced an increase in demand for essential

goods, such as hand sanitizers and face masks. Companies that were able to increase their

production quickly were able to meet the increased demand and benefit from the surge in sales.

On the other hand, companies with limited production capacity struggled to meet the increased

demand, resulting in lost sales and lower profits.

In the long run, changes in supply and demand can have a significant impact on the

competitive landscape of an industry. The increasing demand for electric cars, for example, has

led to a shift in the automotive industry towards electric vehicles, with companies such as Tesla

and Rivian gaining market share. Traditional automotive companies that fail to adapt to this shift

in demand may struggle to compete in the long run and may lose market share to newer, more

innovative companies.

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 In conclusion, understanding the mechanics of supply and demand is crucial for

managers to make informed decisions about their business operations. Real-life examples show

that changes in supply and demand can have a significant impact on a company's success or

failure in the short and long run. Companies that are able to adapt to changing market conditions

can gain a competitive advantage, while those that fail to do so may struggle to compete and may

even face declining revenues and market share.

QUESTION 2 (CLO 1)
a.
i. The Ice-Cold Beverage Demand and Supply Curves
To express the quantity demanded and supplied as a function of price, we can substitute

the given values for PK, Y, T, PL, and PC into the demand and supply functions and solve for

QD and QS at different price levels.

Demand function:

QD = 20,000 - 20,000P + 7,500($4) + 0.8($62,500) + 500(80)

QD = 20,000 - 20,000P + 30,000 + 50,000 + 40,000

QD = 140,000 - 20,000P

Supply function:

QS = 1,000 + 12,000P - 900($10) - 1,000(0.12) - 200(80)

QS = 1,000 + 12,000P - 9,000 - 120 - 16,000

QS = -24,120 + 12,000P

So the demand curve is:

QD = 140,000 - 20,000P

And the supply curve is:

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 QS = -24,120 + 12,000P

ii. The Surplus or Shortage of Ice-Cold Beverage when P = $4.

To calculate the surplus or shortage of ice-cold beverages at a price of $4, we need to

compare the quantity demanded and supplied at that price.

Demand at P = $4:

QD = 140,000 - 20,000($4) = 60,000

Supply at P = $4:

QS = -24,120 + 12,000($4) = 23,880

So at a price of $4, there is a surplus of ice-cold beverages:

Surplus = QD - QS = 60,000 - 23,880 = 36,120

This means there are 36,120 more ice-cold beverages demanded than

supplied at a price of $4.

iii. The Market Equilibrium Price-Output Combination

The market equilibrium price-output combination is the point where the quantity of goods

or services demanded equals the quantity supplied, which is determined by the intersection point

of the demand and supply curves.

Demand function: QD = 140,000 - 20,000P

Supply function: QS = -24,120 + 12,000P

Setting QD equal to QS:

140,000 - 20,000P = -24,120 + 12,000P

32,000P = 164,120

P = $5.13 (rounded to the nearest cent)

Substituting P = $5.13 into either the demand or supply function to find the equilibrium

quantity:

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 QD = 140,000 - 20,000($4.76) = 38,480

or

QS = -24,120 + 12,000($5.13) = 38,480

So the market equilibrium price-output combination is $5.13 per beverage

and 38,480 beverages per game.

b.
If an 80% increase in the retail price of cigarettes is necessary to cause a 30% drop in the

number of cigarettes sold, we can calculate the price elasticity of demand for cigarettes using the

midpoint formula:

Price elasticity of demand = (% change in quantity demanded) / (% change in

price)

= (30%)/[(80% + 100%)/2]

= 0.375

This means that a 1% increase in price will lead to a 0.375% decrease in

the quantity demanded.

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 QUESTION 3 (CLO 2)

a. Lobo Lighting Corporation

i. The Marginal Product and Average Product Functions

To derive the marginal product function, we need to find the derivative of the production

function with respect to L:

Q = 2L + 0.5L^2 - 0.025L^3

dQ/dL = 2 + L - 0.075L^2

Therefore, the marginal product function is:

MP = dQ/dL = 2 + L - 0.075L^2

To derive the average product function, we divide the production function by the labor

input, L:

Q/L = (2L + 0.5L^2 - 0.025L^3)/L

AP = Q/L = 2 + 0.5L - 0.025L^2

Therefore, the average product function is:

AP = Q/L = 2 + 0.5L - 0.025L^2

ii. Units of Labor to be Employed to Maximize Profit

The total profit (π) of the firm is given by:

π = TR - TC

Where TR is the total revenue, and TC is the total cost. The total cost is

the wage rate (W) multiplied by the labor input (L), or TC = WL. Total revenue is

the product of price (P) and output (Q), or TR = PQ.

Substituting the production function into the total revenue equation and simplifying, we

get:

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 TR = PQ = P(2L + 0.5L^2 - 0.025L^3) = 20(2L + 0.5L^2 - 0.025L^3) =

40L + 10L^2 - 0.5L^3

The total cost function is:

TC = WL = 40L

So the profit function becomes:

π = TR - TC = 40L + 10L^2 - 0.5L^3 - 40L = 10L^2 - 0.5L^3

To maximize profit, we take the derivative of the profit function with respect to L, set it

equal to zero, and solve for L:

dπ/dL = 20L - 1.5L^2 = 0

L(20 - 1.5L) = 0

L = 0 or L = 13.33

Since the marginal product function is positive for L > 0, the profit-

maximizing labor input is L = 13.33 units.

i.

ii. Recommendations to Produce Targeted Output

With regards to the analysis of the marginal cost and marginal product of each worker,

Lobo Lighting Corporation can reduce its costs and produce its targeted output more efficiently

by implementing the following recommendations:

 Hire more skilled machinists: Skilled machinists have a high marginal product

compared to their marginal cost, which means that hiring more skilled machinists

will increase output at a lower cost. By replacing some of the unskilled laborers

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 and factory technicians with skilled machinists, Lobo can produce more lights at a

lower cost.

 Reduce the number of unskilled laborers and factory technicians: Unskilled

laborers and factory technicians have a lower marginal product compared to their

marginal cost. By reducing the number of unskilled laborers and factory

technicians and replacing them with skilled machinists, Lobo can increase its

output while reducing its costs.

 Increase wages for skilled machinists and skilled electricians: Skilled machinists

and skilled electricians have a high marginal product and are currently being paid

less than their marginal product. By increasing their wages, Lobo can attract more

skilled workers and improve its production efficiency.

By implementing these recommendations, Lobo Lighting Corporation can produce its

targeted output more efficiently, increase its profits, and remain competitive in the market.

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QUESTION 2 (CLO2)

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÷ n151÷ 10=15.1

∑Y÷ n 1750÷ 10=175

β = n ∑ XY-(∑X) (∑Y)÷ n ∑X^2-(∑X^2)

= 10 (25970)-(151)(1750)÷ 10 (2312)(151)Type equation here .

= 259700-264250÷ 23120−22810

= -4550÷ 319=¿ -14.26

β =Y-BX

= 175-14.26(15.1) = -40.326

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 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

β 1= (∑X2^2) (∑X1Y) – (∑X1X2) (∑X2Y) ÷ (∑X1^2) -(∑X2^2) –(∑X1X2) ^2

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

= 4677197000-4176493000 ÷ 416391200 – 332332900

= 500704000 ÷ 84058300= 5.95

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

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

= 529679200 – 473433100 ÷ 416391200 – 332332900

= 56246100 ÷ 84058300=0.66

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 TASK 2

QUESTION 1 (CLO 3)

a. Reasons for the Existence of Monopolies

Monopolies, according to Braeutigam (1989), exist in a particular industry when a single

firm has the power to control the market and prevent new firms from entering the industry. The

following are some of the reasons for the existence of a monopoly:

 Key resources control: If a firm controls key resources required for production in

an industry, it can prevent other firms from entering the market and establishing

themselves. An example is De Beers, a diamond company based in South Africa,

which has historically controlled the majority of the world's diamond supply,

allowing them to maintain a monopoly in the diamond industry.

 Barriers to entry: When there are high barriers to entry, such as high start-up costs

or government regulations, it becomes difficult for new firms to enter the market

and compete with existing firms. This allows the existing firms to maintain their

monopoly power. Electricity utility firms are, for example, often considered

natural monopolies because of the high costs of building and maintaining the

necessary infrastructure.

 Patents and copyrights: When a firm has exclusive rights to produce or sell a

particular product due to patents or copyrights, it can prevent other firms from

entering the market and competing. Pharmaceutical companies, for example, often

have patents on their drugs, which allows them to maintain a monopoly on the

production and sale of those drugs. Microsoft would be a good example of a

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 monopoly that dominates the computer operating system market due to its strong

patent protection, which has enabled it to maintain a near monopoly in the

industry for a significant number of years.

 Economies of scale: When a firm can produce goods at a lower cost than its

competitors due to economies of scale, it can dominate the market and prevent

new firms from entering. Microsoft, for example, is a monopoly on the PC

operating system market because it can produce its software at a lower cost than

its competitors.

In conclusion, monopolies exist in a particular industry due to various reasons such as

high barriers to entry, control of resources, patents and copyrights, and economies of scale.

These reasons prevent new firms from entering the market and allow existing firms to maintain

their monopoly power.

b. Price Discriminations that exist in the Somali Market

Price discrimination is described by Varian (1989) as the practice of charging different

prices to different customers for the same products or services. In Somalia, there are several

types of price discrimination exist, including:

 Age-based price discrimination: This is where different prices are charged to

different age groups. For example, cinemas may charge lower ticket prices to

children and seniors.

 Location-based price discrimination: This is where different prices are charged in

different geographic locations. For example, hotels and resorts may charge higher

prices for rooms with better views or locations.

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  Time-based price discrimination: This is where different prices are charged for

the same product or service at different times of the day or week. For example,

restaurants may offer lower-priced lunch menus during weekdays than during

weekends.

 Quantity-based price discrimination: This is where different prices are charged

based on the quantity of the product or service purchased. For example, retailers

may offer discounts on bulk purchases of certain products.

In my opinion, quantity-based price discrimination is the most acceptable type of price

discrimination in the Somali market. This is because it is based on the volume of the product or

service purchased rather than any other characteristics of the customer. It is also a common

practice in many markets around the world and is generally viewed as fair and reasonable.

Customers who purchase larger quantities of a product or service are often rewarded with

discounts, which can help to incentivize bulk purchasing and improve the efficiency of the

market.

Age-based or location-based price discrimination may, on the other hand, be viewed as

unfair or discriminatory as it may disadvantage certain groups of customers who are unable to

access the same products or services at a lower cost. Time-based price discrimination may also

be viewed as unfair as it may discriminate against customers who are only able to access a

product or service during peak times when prices are higher. It is important for businesses to

consider the impact of their pricing strategies on different customer groups and ensure that they

are not unfairly discriminating against any particular group.

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 QUESTION 3 (CLO 3)

a. Porter’s Five Forces Strategic Model

Dälken (2014) posits that Porter's five forces strategic model is a framework used to

analyze the competitiveness of a particular industry. It considers five key factors that affect the

profitability and sustainability of companies within that industry. The five forces are:

 The threat of new entrants: The degree to which new competitors can enter the

market and compete with established players. It can be difficult for new

competitors to enter the market when there are high barriers to entry, such as the

need for substantial capital or strong brand recognition. In the case of Apple, even

though the threat of new entrants in the tech industry is typically high, Apple's

loyal customer base, well-established brand, and high capital requirements for

creating new products, such as hardware and software, act as significant barriers

for new competitors looking to enter the market.

 Bargaining power of suppliers: The degree of control that suppliers have over the

price and quality of goods and services. Suppliers who possess significant

bargaining power have the ability to demand higher prices for their goods and

services or lower the quality of their products. In the case of Apple, the threat of

suppliers in the technology industry holds significant bargaining power due to

Apple's notable brand recognition and vast purchasing power. Nonetheless, Apple

is not entirely immune to the bargaining power of some of its major suppliers,

such as Intel and Qualcomm, who have an influential positions in certain markets.

 Bargaining power of buyers: The degree of control that buyers have over the price

and quality of goods and services. Consumers who possess significant bargaining

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 power have the ability to demand either lower prices or higher product/service

quality from the industry. In the case of Apple, their customers generally have a

considerably high bargaining power because of the availability of many

substitutes in the Tech industry. Apple's loyal customer base and strong brand

recognition, however, serve as significant factors that reduce this threat to a

certain degree.

 The threat of substitutes: The extent to which alternative products or services can

replace those offered by established companies. Industries with high availability

of substitutes may appear less appealing and less lucrative. In the case of Apple,

the presence of numerous alternative products in the tech industry, provided by

companies such as Google and Samsung, poses a significant threat to substitutes.

 The intensity of competitive rivalry: The degree of competition between existing

companies in the industry. Fierce competition can result in decreased profitability

and lower prices for all companies operating within an industry. In Apple's case,

the technology industry has an intense level of competitive rivalry, with numerous

firms vying for a larger market share. Nevertheless, Apple's loyal customer base

and strong brand recognition confer a competitive edge on the company.

b. The Move by Apple as Written in the Case

Apple's move, as described in the case, is aimed at expanding the company's offerings

beyond its traditional hardware products, such as iPhones and Macs, and into new areas, such as

video streaming, news, gaming, and financial services. This expansion is likely motivated by the

recognition that iPhone sales have been slowing down and that the company needs to diversify

its revenue streams to maintain its competitive edge.

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 From a competitive standpoint, Apple is facing challenges from a number of directions.

First, there is intense competition in the tech industry, with companies such as Samsung, Google,

and Amazon all vying for market share. Second, Apple is also facing increased competition from

Hollywood studios and streaming services, which are producing original content and competing

for viewers' attention. Finally, there is also competition from banks and financial institutions,

which are looking to capitalize on the growth of mobile payments and digital wallets.

To address these challenges, Apple is leveraging its strengths in brand recognition, loyal

customer base, and extensive product ecosystem. By offering a suite of new services and

products, Apple is looking to deepen its relationship with its customers and keep them within its

ecosystem. By bundling these services, Apple is also hoping to offer a more compelling value

proposition to its customers, making it harder for them to switch to competitors.

Generally, the move by Apple represents a strategic response to the challenges of

increasing competition in the tech industry. By diversifying its revenue streams and expanding

into new areas, Apple is seeking to maintain its competitive edge and stay ahead of the curve.

Whether this strategy will succeed in the long run remains to be seen, but it is clear that Apple is

taking proactive steps to stay ahead of the game.

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 QUESTION 5 (CLO 3)

Friedman (1982) defines oligopoly as a market structure characterized by the domination

of a few large firms that have a significant impact on each other's behavior. According to Asch

and Seneca (1976), collusion, on the other hand, involves the cooperation of firms to reduce

output, increase prices, and maximize profits. The ability of firms to engage in collusion,

therefore, is influenced by various variables, i.e.;

 The number of firms: The smaller the number of firms in the market, the easier it

is for them to collude and maintain their market power. A duopoly or triopoly

may find it easier to coordinate its pricing and output decisions than a larger

oligopoly.

 Market share: The higher the market share of each firm, the more incentive they

have to collude to maintain their dominant position. Firms with large market

shares also have more resources to invest in coordinating their actions and

enforcing the terms of the agreement.

 Homogeneity of products: If the products of the firms in the oligopoly are similar

or identical, it can be easier to coordinate pricing decisions. This is because

customers are less likely to switch between products based on price alone, making

it easier for firms to maintain their market power.

 Barriers to entry: The higher the barriers to entry, the less likely it is that new

firms will enter the market and disrupt the collusive agreement. This gives

existing firms more incentive to collude and maintain their market power.

 Ability to monitor and enforce the agreement: Collusive agreements are difficult

to maintain, and firms must have the ability to monitor each other's behavior and

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 enforce the terms of the agreement. This requires significant resources and

coordination and may not be possible for all firms in the oligopoly.

 Legal restrictions: Collusive behavior is illegal in many countries, and firms may

face significant fines and legal action if caught engaging in collusion. This can act

as a deterrent to collusive behavior, particularly in highly regulated industries.

In conclusion, the ability of oligopolistic firms to engage in successful collusion depends

on various factors, including but not limited to the number of firms, market share, product

homogeneity, barriers to entry, ability to monitor and enforce the agreement, and legal

restrictions. Collusion is a complex and risky strategy that requires significant coordination and

resources, and firms must carefully weigh the potential benefits against the risks and costs before

engaging in such behavior.

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 References

Hirschey, M., Bentzen, E., & Scheibye, C. (2016). Managerial economics. Independence, KY:

Cengage Learning.

Buchanan, J. M. (1991). Opportunity cost. The world of economics, 520-525.

Commons, J. R. (1924). Law and economics. Yale LJ, 34, 371.

Braeutigam, R. R. (1989). Optimal policies for natural monopolies. Handbook of industrial

organization, 2, 1289-1346.

Varian, H. R. (1989). Price discrimination. Handbook of industrial organization, 1, 597-654.

Dälken, F. (2014). Are porter’s five competitive forces still applicable? a critical examination

concerning the relevance for today’s business (Bachelor's thesis, University of Twente).

Friedman, J. (1982). Oligopoly theory. Handbook of mathematical economics, 2, 491-534.

Asch, P., & Seneca, J. J. (1976). Is collusion profitable?. The Review of Economics and

Statistics, 1-12.

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