Leeds University

Business School

Online Examination Coversheet

Student ID Number: 2 0 1 6 0 2 1 2 4

Module Code: LUBS

Module Title: Economic for Management

Module Leader: Fazil Acar

Declared Word Count: 836

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Question 1a

Loss Aversion describes the negative emotional response associated with loss is stronger
than the positive emotional response individuals feel with the same amount of gain or
wealth. In the loss aversion diagram, we see that as wealth increases, utility initially has a
great increase however flattens out. As wealth decreases, we see the satisfaction decreases
further and steeper before flattening slightly.

The concept of diminishing marginal utility of income and wealth refers to when an
individual's income increases, each unit of income provides less income increase. Therefore,
the satisfaction from income gain has less effect as the individual's overall wealth rises. In
the associated diagram we see a concave curve which indicates that utility is high when
income increases initially however flattens as it diminishes the more income increases.

The two graphs main difference is their slope. Loss aversion is a steep graph comparing the
emotional response to loss and gain. Whereas the diminishing marginal utility shows a
concave graph, starting off steep and flattening to show the diminishing value of the gain.
Furthermore, Loss aversion focuses on emotional response and impact however the latter is
concerned with the diminishing satirisation of the wealth not emotion. Diminishing marginal
utility is a more general concept that applies to the overall utility. Loss aversion may be
more to subject as individuals could be influenced choices or situations. This means that the
emotional response may not be applicable to all or not the extent presented on the graph.
Question 1b
The theory of incentives suggests people are more inclined to behave a way if the
advantages outweigh the disadvantages. Individuals may be less likely to respond to price
reductions, especially if carrying a personal cup is more difficult than a normal plastic cup. It
can also be seen as an inconvenience or impractical if not already having their own cup. The
cost of a reusable cup may also mean the reduction is not sufficient to have effect.

The nudge hypothesis may steer students to take advantage of the incentive and supports
the effectiveness of the discount put in place. Using a discount as a nudge, other factors
might have effect on changing behaviour. The decisions made by pupils might be
significantly influenced by other contextual factors, such as social norms or environmental
messages which can be crucial in the choices students made.

The status quo bias, in which people tend to choose the default course of action, may also
affect students' choice-making. However, if using throwaway cups continues to be the
default option, the discount may not be successful. Students who are used to throwaway
cups will not feel the need to adhere to the discount if they see no real disadvantage or
inconvenience to their daily lives.

Café Nero putting in a place a discount will be effective to an extent. It may take a longer
duration before it becomes solidified and the new alternative due to perhaps social norms
and change, however students may recognise this is financially beneficial and environment
sustainable which could be enough reason to swap to reusable cups.
Question 2

A)640
B)
d) The pricing strategy used is price discrimination. This is when a business offers different
price to customers based on their willingness to pay. The pizza shop charges a lower price
for students of £5 whereas for everyone else charges a higher price of £7. This means the
shop can maximise number of customers and increases their overall profits.
Question 3
A)

b)
A potential strategy for KLM is to use competitive price. If KLM has a cost advantage over
JET2, it could deter the competitor from entering the market and offering their service. As
the demand only allows for one airline to operate and is relatively low, KLM has the
advantage where it has a known reputation being the only airline offering the service
currently. This could mean customers may be loyal and will continue to use their service,
ensuring that JET2’s potential profits would be limited.

However, we should also acknowledge that if KLM faces high costs and potential high
demands it will be hard to lower prices competitively. This may be a factor for JET2 to enter
the market aggressively and cause KLM to have direct competition. This uncertainty is a risk
that is needed to be considered carefully. Therefore, using monopoly pricing as a strategy to
ensure high costs does not become big losses may be beneficial in the long term. Although
this strategy ensures aspects of safety it doesn’t ensure all the customers will not go to JET2
if they decide to price competitively themselves.

In conclusion, without any outcome such as regulatory barriers or government regulations,

by pricing competitively will allow KLM to deter JET2 for entering and continue being the
only airline in the market.