Question.3101 - Determinants of Demand-Taste, Income, Substitutes, expectations, number of buyers Determinants of Supply- Technology ,Factor Cost ,Substitutes, Taxes and subsidies, numbers of sellers 1. Southwest Airlines is adding $100 million a year in new fees. Under new rules customers only get a partial refund for missed flights, prices are being raised for a third checked bag and for early boarding slots. The airline wants to increase revenue by $ 1.1billion. A. Using the law of demand, do you predict that demand will increase, decrease or stay the same? Give your reason. B. The demand for airline flights appears to be elastic. What may happen to total revenue if Southwest raises its prices? 2. Multinationals operating in China has been setting up factories deep in the interior in search of affordable labor. For companies exporting to Europe shipping by air is too expensive. Hewlett –Packard –HP has transported 4 million notebook computers by rail. Shipping one container by rail costs $ 10,000, one-third the price of air transit. It takes only 21 days to ship by rail, 40 days by sea. Shipping costs are factor cost for suppliers. A. In your opinion will HP lower laptop prices or just increase profits? B. What is the price of air transit? Are marginal benefits greater than marginal costs? 3. The CEO of Bank of America Brian Moynihan recently stated that US taxpayer money should not be used to bail out major banks. The banks should be managed so that they will not need bailing out. B of A received $ 35 billion. A. Should our policy for major banks continue to be“Too Big to fail “or economic Darwinism? B. What might be the opportunity cost for $ 35 billion? Could taxpayers receive other goods or services instead of bailouts such as education, medical research or jobs? 4. What are the lessons from Societe’ General and JP Morgan Banks given their $ 7.1 billion and $ 6.2 billion losses respectively? Use the Organizational Architecture framework in your answers. 5. Distinguish between opportunity costs and sunk costs? 6. Toyota, Nissan and Honda will resume production at all Japanese locations later this month that were halted by the March 2011 earthquake. Japan’s Big 3 automakers said that their output will be only half of the normal volumes. The flow of auto parts and earthquake damage are 2 major factors. How will this impact the production function? 7. Monsanto discovered that the marginal product of magnesium a variable factor in manufacturing of fertilizer will lead to the eventual diminishing output as the use of the magnesium is increased. This illustrates what economic theory? 8. The IBM Corporation has 3 major plants in the United States. At each plant management quadrupled the inputs in an effort to increase output. At Plant A the output doubled, at Plant B the output increased 4 fold and at Plant C the output increased fivefold. For each plant what type of returns to scale was experienced? What conclusions could you make about the performance of Plant C? 9. Distinguish between elastic and inelastic demand. Give examples.
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Determinants of Demand-Taste, Income, Substitutes, expectations, number of buyers Determinants of Supply- Technology ,Factor Cost ,Substitutes, Taxes and subsidies, numbers of sellers 1. Southwest Airlines is adding $100 million a year in new fees. Under new rules customers only get a partial refund for missed flights, prices are being raised for a third checked bag and for early boarding slots. The airline wants to increase revenue by $ 1.1billion. A. Using the law of demand, do you predict that demand will increase, decrease or stay the same? Give your reason. As per the law of demand all other things remaining constant if price of a commodity or service increases the demand for the same falls. So the increase in price should effectively decrease the demand. But since there are different kind of customers such as business class where the increase in price would not matter the demand is inelastic in that case and there are people who travel for leisure for them the demand is elastic and would decrease with the increase in price. But the quantum decrease would depend on the elasticity of demand. B. The demand for airline flights appears to be elastic. What may happen to total revenue if Southwest raises its prices? If the demand for airline flight is elastic then an increase in price would lead to decrease in demand. Change in revenue would depend upon the elasticity of demand that is the responsiveness of demand with increase or decrease of price. Only if the elasticity is less than 1 then there would be increase in revenue otherwise the revenue would decrease with increase in price. 2. Multinationals operating in China has been setting up factories deep in the interior in search of affordable labor. For companies exporting to Europe shipping by air is too expensive. Hewlett –Packard –HP has transported 4 million notebook computers by rail. Shipping one container by rail costs $ 10,000, one-third the price of air transit. It takes only 21 days to ship by rail, 40 days by sea. Shipping costs are factor cost for suppliers. A. In your opinion will HP lower laptop prices or just increase profits? As the market for laptop is very competitive HP should reduce the price but not to the extent of saving of costs. It should balance by reducing price as well as increase profits by overall cost savings. This would help HP in capturing larger markets for laptop and a greater market share. B. What is the price of air transit? Are marginal benefits greater than marginal costs? Price of air transit is 10000*3=30000/container. Marginal benefits would definitely be higher than marginal costs. Only this would be the reason for multinationals to set up factories in interiors of China so that they can access cheaper labour and reduce cost of production which in turn would lead to higher benefits. 3. The CEO of Bank of America Brian Moynihan recently stated that US taxpayer money should not be used to bail out major banks. The banks should be managed so that they will not need bailing out. B of A received $ 35 billion. A. Should our policy for major banks continue to be“Too Big to fail “or economic Darwinism? According to theories banks could be allowed to collapse but the banks that were to collapse in the crisis of 2008 were bigger than ever. The idea of dismantling or “or economic Darwinism” of too big, too dangerous and powerful banks sounds foolish as it would lead to a collapse of the whole banking system. B. What might be the opportunity cost for $ 35 billion? Could taxpayers receive other goods or services instead of bailouts such as education, medical research or jobs? There have been budget cuts in 39 states that hurt families and vital services to vulnerable residents of those states have been reduced. It also includes services such as health coverage, medical funding, home for homeless etc, to children, the elderly, the disabled, the sick, the homeless, the mentally ill, as well as college students and faculty, and state government workers. This has also led to a rise in unemployment 4. What are the lessons from Societe’ General and JP Morgan Banks given their $ 7.1 billion and $ 6.2 billion losses respectively? Use the Organizational Architecture framework in your answers. Fragility of the financializing architecture, along with the unsustainability of the efficient capital market theory corresponds to the effects of the current financial crisis and, generally, to the economic recession. Globally integrated system of huge bank conglomerates and the so-called “shadow banking” – in-vestment banks, hedge funds and structured investment vehicles (SIVs) is a pillar and support to the New Financial Architecture. Over a long period of time, many private decisions were made, creating the shadow system that is institutionally and productively sensitive to the banking panic (credit crisis) as a systemic event. 5. Distinguish between opportunity costs and sunk costs? Opportunity cost is the profit foregone when one alternative is selected over the other. It is the net return that could be realized if the resource was put to use in the next best alternative. Sunk costs are the costs that were incurred in the past. They are irrelevant in any decision making as they cannot be changed. 6. Toyota, Nissan and Honda will resume production at all Japanese locations later this month that were halted by the March 2011 earthquake. Japan’s Big 3 automakers said that their output will be only half of the normal volumes. The flow of auto parts and earthquake damage are 2 major factors. How will this impact the production function? Production is a function of inputs and other factors of production. Hence if the flow of input is disturbed then the production function is bound to decline. The earthquake destroyed the production facilities hampering production and hence the production function would decline. 7. Monsanto discovered that the marginal product of magnesium a variable factor in manufacturing of fertilizer will lead to the eventual diminishing output as the use of the magnesium is increased. This illustrates what economic theory? The economic theory of diminishing marginal product states that the rate of output of a process, while other things remaining constant, with the increase in input would fall. The reason being the output of a process can be increased with increase in inputs only up to a certain extent beyond a point the rate of increase of output with that of input starts diminishing. 8. The IBM Corporation has 3 major plants in the United States. At each plant management quadrupled the inputs in an effort to increase output. At Plant A the output doubled, at Plant B the output increased 4 fold and at Plant C the output increased fivefold. For each plant what type of returns to scale was experienced? What conclusions could you make about the performance of Plant C? For Plant A decreasing return was experienced with the increase in inputs. The increase in inputs was 4 times but the output only doubled, which implies that the plant was operating at over capacity and hence the input output ratio fell. Decreasing returns to scale was experienced. Plant B has reached its maximum capacity as the input output ratio was constant. Hence constant returns to scale was experienced. Plant C the output increased 5 times with just 4 times increase in input which implies that plant C was operating under-capacity and with the increase in input the output increased more than the increase in input. This means Plant C experienced increasing returns to scale. 9. Distinguish between elastic and inelastic demand. Give examples. When the change in price is accompanied with the change in demand, the demand for the product is called elastic but when the change in price doesn’t affect the demand for the product or service then the demand for the product or service is called inelastic. For example, If the price for cars increase or price of fuel increases the demand for cars would decrease. This is called elastic demand. Luxury items demand are elastic. But if the price of water increases the demand will not change as water is a necessity and its demand inelastic, implying change in price will not draw any response from demand.More Articles From Economics
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