HELLENIC OPEN UNIVERSITY

SCHOOL OF SOCIAL SCIENCES

MASTERS DEGREE PROGRAMME IN BUSINESS ADMINISTRATION


Module: Economics for Managers



1st Written Assignment (WA1)


STUDENT: GEORGE DOULIGERIS
AM: 96611
MBA-ATH-2

[2]

Subject 1

a) According to the demand function increasing the disposable income (Y) by 2.5
ths the quantity increases by 7. More analytically, this result derives from
the following equation :

Where 2.8, is the slope of the disposable income from the original demand
function.

b) From the previous answer we know that the Q=7. So to offset the increase it
is necessary to increase the price by 1.3. Moreover the equation above gives
the effect :


So resolving for Pk we have 1.

c) The demand function and more specifically the slope of Pb (negative here)
indicate that the goods are complements. In other words the Cross Price
elasticity (Ekb) for the two products is:
b -PbQk

Since the Pb,Qk>0 so the Ekb<0 that means that goods are complements.
That means that an increase of product of PK firm causes decrease of demand
for the both products.

d) We know that the Elasticity of Demand (y) derives from the following
relation:

Eyslope of Deand Function Q
Where, Y=Income, Q=quantity of good

To estimate the elasticity needs first to find the quantity. Substituting the
values to original demand function we have that Q=107. Also we know that
Y=12 (from the problem) so the elasticity is:

Ey 7

e) To find the effect on profits by increasing the expenses of advertising first
needs to find the new quantity (after the increase of Advertisement).
Substituting the original data to the demand function now we have Qa=107,8.
The effect on profits is derived from the relation below:


So substituting the values to the equation we have:



Summarizing our results worth to refer the effect on Profits will be 4 ths. .
[3]

Subject 2

a) Each firs supply curve is siply its marginal cost curve: P=MC. So to find
the curve is necessary to find the first derivative of the total cost function. The
1
st
derivative is:



So the supply curve for the i-th firm is:
. (

) .
b) To calculate the short run supply industry curve needs to sum up horizontally,
1000 individuals supply curves. In other words the total industry supply is
derived from the following equation:
(

c) In the short run equilibrium occurs when the total supply (Qs(P) equates with
the total demand (Qd(P). From the problem we know that

(1)
and from the previous question we know that

(2)

From (1) & (2) solving for P we have; P* = 10. Now substituting the P*=10 to
demand equation we have Q*=5500 units. Summarizing, the equilibrium point
is (P*,Q*)=(10,5500).

Subject 3

a) The firm maximizes its profit where MR=MC. From the hypothesis we know:

The Demand function of Group 1 is:
(

(1)
The Demand function of Group 2 is:
(2)
Now we can estimate through (1) the Total revenue for Group 1 (TR1) is:
(-

) -

(3)
Similarly the Total revenue for Group 2 (TR2) through (2) is:

(4)

Here we can estimate MR1 and MR2 where are the 1
st
derivatives of (3) and
(4) equations.
So

and

Also the Total Cost (TC)=2Q=2(q1+q2) so

(5)
[4]

And

(6)
Equating MR1=MC1 and MR2=MC1 to find the equilibrium points where the
firm maximizing its profits we have:
.Similarly for MR2 we have:



Finally we know that
and and setting the values of
quantities for q1,q2 in (1) & (2) we have P1*=4 and P2*=3.

Concluding our findings the total output which is produced from the
monopolist is Q*=4000+1000=5000. Offers the production for Group 1 at
price equals with 4 (P1=4) and at Group-2 price is 3 (P2=3).


b) The price discrimination is a tool for the firm to gain more profits capturing a
part or the entire Consuers surplus (1
st
Degree).The successful
implementation of this strategy based on specific conditions. It is worth to
refer the most important. Firstly, the firm must have market power (can
influence the price without loses the customers).Secondly, the subgroups or
submarkets must be separated or far away to avoid the reselling (consumer
arbitrage). Thirdly, the demand functions and specially the price elasticity
must differ. On the above situation there are two groups isolated with different
demand functions and they have different price elasticity. Each group is
charged with different prices for the same product. To go a step away there is
a relation which says that Marginal Revenue (MR) is:

).
Substituting the values from the 1
st
answer (equilibrium values) I found that
the elasticity for the 1
st
group equals with -2 and for the second group is -3. So
this lead us to the conclusion that the groups which are related with higher
elastic demand the pricing is lower comparing with the groups with lower
demand. Concluding our thoughts should stay in the main point that the firm
in our situation is benefited from the pricing discrimination. Allows the firm
to enhance their profits.

Subject 4

a) To calculate the prices and quantities first need to derive the inverse demand
function. From the hypothesis we know:
(1)
From the profit function of the firm 1 and 1
st
order condition we can find the
reaction functions. Generally the profit function ((P1,q1) is:
(P1,q1)= Total Revenue(TR)-Total Cost (TC) (through (1))

From the 1
st
order condition we have:
[5]

(2)

The equation (2) indicates the reaction function for Firm 1.Since the two firms
are syetric have the sae cost we can refer that the second firs
reaction function is:

(3) .

Solving simultaneously the (2) & (3) we have q1*=q2*=10.

Setting these values to (1) we have P*=51-10-10=31 and Q*=q1*+q2*=20.

b) It is necessary to find the equilibrium points according to PL Inc. firs
interests. In other words where it maximizes its profits and then we can decide
what the authorities can suggest comparing the consumer surplus in each
situation.

The PL Inc act as monopoly so the firm maximizes its profits where Marginal
Revenue (MR)=Marginal Cost (MC).

From the problem we know that TC(q)=5q+20. Thus, the MC=

=5 (1).
Also the Total Revenue (TR)

and hence
the Marginal Revenue (MR) is:

(2).
Setting the relations (1) & (2) equals we have
and from the inverse demand function we have P*=51-23=28.

So the equilibrium point where PL Inc maximizes their profit is P*=28 and
offers q*=23 units.

To answer whether the authorities should admit the merger of the firms we
owe to compare the consumer surplus on two situations. Generally, the
Consumer surplus (CS) is the area under the inverse demand curve and above
the price up to the quantity. It is triangle with base the quantity and height the
difference between the intercept of demand function (when the price=0) and
the price. To illustrate the CS1 for the first case is:

{ }

Similarly, the Consumer surplus (CS) for the monopolist case is:
{ }

Comparing both consumer surplus (CS1 < CS2) we can refer that is beneficial
for the consumers the operation of a monopolist firm in the market. All the
evident lead us to the point which is the authorities should permit the merger.