Important question

Question 1

a. The demand for gym membership at Ace Body is linear and when the price per membership is £80, zero units are demanded. When the price of gym membership is £0, then 80 units are demanded. The supply of gym membership is also linear and when the price for gym membership is £10, zero units are supplied. When the price of gym membership is £100, then 90 units are supplied.

i. Given the above information, what is the equilibrium quantity and equilibrium price in this market?

ii. Suppose a price ceiling of £50 per gym membership is imposed in this market by the government. Would this result in a shortage or surplus? Explain. 

iii. Suppose a price ceiling of £40 per gym membership is imposed in this market by the government. Would this result in a shortage or surplus?  Explain.   

b. With the use of diagrams, analyse the effects of the following on the equilibrium demand and supply for gym membership at Ace Body gyms, clearly identifying any changes in price and quantity.

i. Ace Body reduces the price for monthly membership.

ii. Ace Body gym embarks on an advertising promotion giving up to 50% off gym memberships over the summer.

iii. Next Gen gym, one of Ace Body closest competitors, reduces its membership price and at the same time customers see a decrease in their incomes.  

Question 2

a. Ace Body revenue for 2018 was £2.1 million, down 35% over the previous year. Management attributes the decrease in revenue to a decrease in quantity demanded by 20% as a result of a change in price from £20 to £22 per month. Given this information calculate Ace Body PED.

b. What would be the sign of the cross-price elasticity between gym membership and a 70% reduction in the price of home gyms sold by Amazon?

c. Explain three ways in which Ace Body gym can practise price discrimination in their markets. What criteria are relevant for price discrimination to be effective for Ace Body?  

Question 3

a. Explain how Ace Body gym can benefit from economies of scope.   

b. Identify two ways in which Ace Body gym can benefit from technical and financial economies of scale.

c. Using the information in table 1 below, calculate the marginal cost and marginal revenue for Ace Body Gym and indicate the level of production where profit will be maximized. 

    Table 1         

Question 4

a. Ace Body is considering purchasing a new piece of equipment and has two possible choices, but can only raise enough funds to proceed with one of them. Using the Payback Period decision model, which purchase would you recommend Ace Body to undertake if there is a three year cut-off period for recapturing the initial cash outflow?  Assume that the cash flows are equally distributed over the year for Payback Period calculations.