Assignment Cover Page

Course Code ECON1194B (Prices & Markets)

Student Name Le Nguyen Nha My

Student ID S3877634

Class & Group Thursday 3PM - SGS 11

Lecturer Pham Duy Man

Assignment Title Assignment 2 - Profit Maximization Analysis

Word count 1465 words

Question 1
a. Cost structure of garage services
● Part I

The production function q=f(L,K) with K is constant because it’s capital (fixed cost) and L is
labour which is a variable cost. In order to create output, labour and capital are necessary
inputs to run garage services. Some variable inputs that garages must have are labour and
materials like fuel, screw, etc; some fixed inputs are machines like air compressors, vehicle
lifts and rental cost. Labour plays an essential part in producing services (Dallas Fed 2013).
Car garage services need about five workers to fix cars with a cashier to operate well (VATC
n.d.). It also needs a place with big space and machinery like vehicle lifts to work properly.
Machines and materials are really important for garage services because it helps the repair or
install process easier. Moped garage services also have similar inputs but have some
difference in the quantity. Compared to car garages, scooter garages only need 2-3 people,
and it doesn't need a big place. Materials for scooter garages are identical but machines in
scooter garages are smaller and cheaper.

● Part II

I agree with the argument that repairing cars is more costly than scooters. Cars contain more
materials than scooters and require more people to repair because it’s more difficult than
repairing scooters. Usually, it takes a day or a week to repair a car depending on the situation
of the car while a scooter only needs a few hours or two days to be fixed (Probst n.d.). A car
needs 1-2 people to fix while a scooter only needs one person. An average wage for an
automobile mechanic is about 10-15 million VND/month which is more expensive than a
worker for scooter repair service (5-8 million VND) (VVCT n.d.). Wage is a variable cost, it
can be more expensive if workers work more so repairing cars is more expensive than
scooters. Moreover, vehicle lift for cars is about 30,000,000VND which is more expensive
than the one for mopeds (12,000,000VND) (thietbig20 n.d.). Wage is VC and machine is FC
which is explicit costs. The implicit cost is the time spent repairing cars compared to
scooters.

● Part III

To identify whether average total cost increases or decreases, we should look at the marginal
cost of the repair services. MC and ATC have a relationship because both costs are related to

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the total cost (Nipun n.d.). MC is a change in total cost resulting from the changes in one unit
of the quantity produced and ATC is the output divided by the total cost (RMIT 2021). When
MC>ATC, ATC increases and when MC<ATC, ATC decreases. I defend the argument
because cars require more workers to repair compared to scooters. In this case, labour is the
only variable input, referring to the answer in part (ii), labour in car garages is more costly
than labour in scooter garages. As the garage services receive more cars and scooters to
serve, labour rises leading to a growth in MC, the MC of car garages will be higher than MC
of scooter garages. Moreover, FC of two garages decreases as the number of cars and
scooters served grow but the FC of car garages go down less than moped garages because the
number of mopeds served are greater than cars due to the time spent to repair cars is longer
than mopeds. The average fixed cost falls with output increases because the FC spreads over
further units (Aziroff 2020). Both results from MC and AFC lead to the increasing ATC of
car garages while ATC of moped garages decline with respect to the quantity of vehicles
served.

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 b. Cost efficiency of garage services
● Part I
When a firm increases an input with other inputs staying constant results in small growth in
output is diminishing marginal return (RMIT 2021). From the function q=f(L,K) with K is
constant, there’s an increase in labour with the rise of output so there’s a DMR in labour.
Since the garage increases the number of workers, we use the formula MC=w/MPL with w is
wage and MPL is marginal product of labour and know that MC and MPL have a negative
relationship. When MPL goes down, MC goes up leading to the increase in ATC. The orders
keep increasing and ATC also rises means that the garage isn’t using the labour efficiently
and keeps hiring more workers. In order to lower the product costs, the garage should update
new equipment and machinery to improve the quality of the garage in the long run and have
staff cutbacks.

● Part II
Some possible methods to gain economies of scale is to specialize workers, have a good
management system and negotiate with suppliers (RMIT 2021). To specialize workers, you
need to give them training to improve skills, gain more experiences and workers should have
a friendly attitude to customers so they will come back. The garage can hire a manager to
manage the production process so the system can be efficient and flexible. Lastly, the garage
should negotiate with suppliers to buy materials and machinery with good prices in a large
amount. The role of IT that can apply in the chain of garage services is e-commerce and
managing the inputs of the chain. For example, the garage service can sell materials for cars
on places like Shopee, Lazada, etc. Furthermore, it can use IT platforms like Access to
manage inputs in the garage chain. With a good platform that can manage the system well,
the garage might not need to hire a manager.

Question 2
a. The degree of competition in a market

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To know why small firms enter in the price competition, we should look into some
characteristics of perfect competition market. First, everyone is a price-taker which means
customers and firms cannot affect prices so aggressive price competition occurs. Secondly,
firms sell similar products with competitors and have freedom to enter the market so the
barrier to entry is low. Lastly, the market has perfect information meaning customers know
all about the product quality and prices and cost of trading are low since it’s easy and fast for
consumers and sellers to trade products. Because of these characteristics, small firms cannot
decide the price itself and join in the competition.

I defend the argument that small firms will not lose all their customers if they increase prices
of products. In real life, there’s no perfect competition because firms can rise or decrease
prices of their products, but prices should be reasonable and not too different from others.
When small firms increase their prices, they won’t lose all customers; however, they will lose
some customers as firms believe that customers will buy their products when they have better
prices compared to competitors (Heda, Mewborn & Caine 2017). Some customers will buy
products of their rivals, but some still stay with small firms due to the differentiation in
products. An example of a monopolistic market is coffee shops, both Highlands Coffee and
The Coffee House sell drinks with different prices because their drinks taste different. In
Highlands Coffee, a cup of peach tea with peach jelly is 49.000VND while in The Coffee
House, it costs 45.000VND with real peach.

b. Firm’s market power

● Part I

Market power refers to the ability of a company that can control prices of its products or
services in the market (CFI n.d.). Factors that influence a firm's market power are elasticity of
demand, product differentiation and barriers to entry. Firstly, a company that has inelastic
demand in its products could have the market power because consumers always need those
products regarding the price. Next, firms that create differentiated products or services that
can attract customers tend to have pricing power resulting in more market power. Lastly,
players in markets that have high barriers to entry have more chances to hold market power.
Due to low barriers to entry, homogeneous products and everyone is price-taker with intense
competition, perfect competition market has no market power. Monopolistic competition also

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has some identical factors with perfect competition but differentiation of products is the
factor that helps firms have a limited market power (RMIT 2021).

● Part II
Vinamilk is well-known by the consumers in Vietnam, on Shopee, a combo of 4 cartons of
Vinamilk is 40.000VND while a same combo of Ovaltine only costs 28.000VND. From the
difference in prices between Vinamilk and Ovaltine, we can see that Vinamilk has more
market power because they differentiate their products by specializing their images to
become friendly with consumers, especially kids and parents. Vinamilk has an original taste
of milk and creates fun advertisements so it can be better known while Ovaltine has chocolate
taste, and it doesn’t promote their products as much as Vinamilk does. When Vinamilk has
market power, it can increase the prices without losing customers compared to its
competitors.

- References
Aziroff 2020, Average Fixed Cost, Aziroff, viewed 16 July 2021,
<https://aziroff.com/average-fixed-cost/>.
CFI n.d., Market Power, CFI, viewed 18 July 2021,
<https://corporatefinanceinstitute.com/resources/knowledge/economics/market-power/>.
Dallas Fed 2013, Labor, Dallas Fed, viewed 15 July 2021,
<https://www.dallasfed.org/~/media/documents/educate/everyday/labor.pdf>.
Heda, S, Mewborn, S & Caine, S 2017, How Customers Perceive a Price Is as Important as
The Price Itself, Harvard Business Review, viewed 20 July 2021,
<https://hbr.org/2017/01/how-customers-perceive-a-price-is-as-important-as-the-price-
itself>.
Highlands Coffee n.d., Thuc don giao hang Highlands, Highlands Coffee, viewed 19 July
2021, <https://www.highlandscoffee.com.vn/vn/thuc-don.html>.
Man, P 2021, ‘Industry Analysis and Costs of Production’ PowerPoint Slides, ECON1194,
RMIT University.
Man, P 2021, ‘Monopolistic Competition’ PowerPoint Slides, ECON1194, RMIT University.
Man, P 2021, ‘Perfect Competition’ PowerPoint Slides, ECON1194, RMIT University.
Nipun S n.d., Average Cost and Marginal Cost, Economics Discussion, viewed 17 July 2021,
<https://www.economicsdiscussion.net/relationship/average-cost-and-marginal-cost-
production-economics/25484>.

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The Coffee House n.d., Menu, The Coffee House, viewed 19 July 2021,
<https://www.thecoffeehouse.com/collections/menu>.
Thietbig20 n.d., Cau nang xe o to nhap khau gia re, Thietbig20, viewed 18 July 2021,
<https://thietbig20.vn/cau-nang-o-to>.
Thiet bi TPP n.d., Ban nang xe may am nen, Thiet bi TPP, viewed 18 July 2021,
<https://thietbitpp.vn/ban-nang-xe-may-am-nen-tt03>.
VATC n.d. Tu van mo garage o to toan tap duoc nhieu nguoi xem, VATC, viewed 17 July
2021, <https://oto.edu.vn/tu-van-mo-garage-o-to/>.
Vietnam Vocational College of Technology-Handicraft n.d., 4 nghe nghiep luong hap dan,
khong yeu cau bang dai hoc, Vietnam Vocational College of Technology-Handicraft, viewed
19 July 2021, <https://vcth.edu.vn/new/new?new_id=185>.