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MNGT3012 Strategic Business Management

tag 0 Download 0 Pages / 0 Words tag 21-06-2022

Answer:

Problem A

  1. The production possibilities frontier for the above figure is as highlighted below:
  2. Production possibility frontier (PPF) is a theoretical construct which provides an estimation of the various possible combination of the two products or services that can be produced with the help of available resources. It is apparent from the PPF curve that the points which lies on the curve shows the most optimum output combination for the production of Schmechkt Gut Energy Bar and Schmechkt Gut 2.0 bars given the available resources Nicholson, W. & Snyder,
  3. The demand of the Schmechkt Gut Energy Bar and Schmechkt Gut 2.0 bars has increased from 3000 to 4000 and 18000 to 20000 respectively.
The three major possibilities in regards to meet the increased demand of the products are as outlined below (Krugman & Wells, 2013).
  • Installing additional production units in the existing plant so as to boost production to meet increased demand
  • Use efficient machinery and state of art technology for the production in order to increase the production capacity The assumption is that technology used is not state of art and hence efficiency gains could be possible.
  • Import the respective units from other countries assuming that surplus production is available for trade.
The sustainability of the various solutions proposed is indicated below (Mankiw, 2014).
  • Production of additional units would require incremental resources which would not possible as the current resources available are already being used for the existing production levels. Thus, due to unavailability of incremental resources, increase in production will not be feasible.
  • In the given case also, the technological improvement would essentially indicate improvement in factors of production and thus unless such an improvement happens, under the current circumstances and resource availability, this may not be feasible.
  • Importing from a foreign nation seems to be the most feasible choice under the given resources as it does not amount to incremental production.

Problem B

Question 1

The revenues obtained by the company for different prices are as follows.

Unit Price (p)

Quantity Demanded (Q)

Revenue (‘ 000 $) (p*Q)

1

30

30

1.5

25

37.5

2

20

40

2.5

15

37.5

3

10

30

From the above table, it is apparent that the revenue maximising price for Schmeckt Gut would be $ 2 per unit (Nicholson & Snyder, 2011).

Price elasticity of demand = Percentage change in quantity demanded /Percentage change in price

Percentage change in price = (2.5-2)/2 = 25%

Percentage change in quantity demanded = (15-20)/20 = -25%

Hence, price elasticity at revenue maximising price = -25/25 = -1

Question 2

  1. Change in price (%) = (2-1)/1 = 100%

Change in quantity demanded from the above table (%) = (20-30)/30 = -33.33%

Hence, requisite price elasticity = --33.33/100 = -0.33

  1. Change in price (%) = (2-1.5)/1.5 = 33.33%

Change in quantity demanded from the above table (%) = (20-25)/25 = -20%

Hence, requisite price elasticity = --20/33.33 = -0.6

Question 3

In this question, we need to ascertain the cross price elasticity of Fly high energy bar with regards to Schmeckt Gut energy bar. The requisite formula is listed below (Krugman & Wells, 2013).

Cross price elasticity (EA,B) = % change in quantity demanded of A/ % change in price of B

Here A = Fly High energy bar  and B = Schmeckt Gut energy bar

Percentage change in price of Schmeckt Gut energy bar = (2-3)/3 = -33.33

Percentage change in quantity demanded of Fly High energy bar = (9-11)/11 = -18.18%

Hence, requisite cross price elasticity = -18.18/-33.33 = 0.545

Question 4

Since the cross price elasticity computed above has come out to be positive, it indicates that the two products are substitutes of each other (Mankiw, 2014).

There is a decrease in the price of Schmeckt Gut energy bar which would lead to an increase in the quantity demanded for Schmeckt Gut energy bar. As Fly High energy bar is a competitor, hence the quantity demanded is witnessing a fall since a cheaper substitute is available in the form of Schmeckt Gut energy bar. Had the two products been complements, then the quantity demanded for Fly High would have also increased. Further, in case of no relation between the two, the price and quantity changes in Schmeckt Gut would not have any impact on the quantity demanded for Fly High (Pindyck. & Rubinfeld, 2001).

References

Krugman, P. & Wells, G. (2013), Microeconomics (3rd ed.), London: Worth Publishers

Mankiw, G. (2014), Microeconomics (6th ed.), London: Worth Publishers

Nicholson, W. & Snyder, C. (2011), Fundamentals of Microeconomics (11th ed.), NY: Cengage Learning

Pindyck, R. & Rubinfeld, D. (2001), Microeconomics (5th ed.). NY:Prentice-Hall Publications

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