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MASTER OF BUSINESS ADMINISTRATION

JANUARY / 2019

BMME 5103

MANAGERIAL ECONOMICS

MATRICULATION NO : CGS01797001
IDENTITY CARD NO. : 891201-08-6421
TELEPHONE NO. : 012-3791684
E-MAIL : navin.perpakaran@gmail.com
LEARNING CENTRE : Tanjong Malim Learning Centre

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Table of Contents

Part 1 ............................................................................................................................................... 2

Part 2 ............................................................................................................................................... 7

Part 3 ............................................................................................................................................. 10

Part 4 ............................................................................................................................................. 13

Part 5 ............................................................................................................................................. 14

Reference list ................................................................................................................................ 19

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Part 1

Question 1: Demonstrating the knowledge regarding Economic and business profit with
examples. Stating the advantages of computing economic profits

In order to identify the difference between business profits and economic profit, it is important to
identify the factors that are mainly associated with these two terms.

Business or accounting profit


Normally business profit is also known as the accounting profits. Accounting profits or business
profits can be determined from the formula of Gross revenue - explicit costs. Now within any
kind of business, the explicit costs generally signify the deductible expenses. For example, Mr B
is running a pastry shop and he is interested in calculating the business profit for his
organisation. Suppose the total revenue is $300,000 and the explicit costs are $50,000 then the
business profit will be accounted as $300,000-$50,000=$250000.

Economic profit
On the other hand, economic profits will be highlighting the subtraction of both implicit and
explicit costs from the total revenue. Now implicit costs are the opportunity costs which cannot
be seen or cannot be accounted like the explicit costs. Now the opportunity costs are those costs
which are forgone or the benefit that could have been earned if the money was invested in some
other business (Carayannis et al. 2015). From the above example, it can be cited that if Mr B
would work in some other firms or he could have invested the money in some other business.
Now suppose implicit costs are $75000 and the implicit revenue was $30,000. The economic
profits would have been $300,000+ $30,000- $50,000-$75000=$205,000. Thus it can be said
that economic profit is always less than the business profit.

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Advantages of computing economic profits
● One of the major advantages of computing economic profits is that it will be helpful to
identify the long-run supply curve of any goods and services by the economy.
● The second advantage will be in the form of identifying opportunity costs that are closely
related to the development of the business.
● The third advantages of accounting economic profits will be to identify the resource
allocations as it will identify the implicit costs and implicit revenues.

Question 2: Discussing the factors that will be having an influence on the wealth of
stakeholders. Identification of the managerial actions that will be taken to influence
shareholders wealth

Stakeholders play a significant role in the development of any kind of organisation. It is the main
responsibility of the stakeholders to bring more investments in the economy and they should look
for more and better opportunities to channelise the investments. Some of the factors that are
closely related to the development of the wealth of stakeholders that are described below.

The education level of the employees


The education level of the employees is one of the crucial factors that actually determine the
development of stakeholder’s wealth. It is important in the sense that if the organisation is having
well educated and skilled employees then the production ability of the organisation will increase
by a huge margin (Erkut et al. 2015). Since employees are also one of the stakeholders that the
companies aim in full utilising. Through the implementation of better technologies, it will be
highlighting the development of business as the quality will be enhanced.

Business environment
The business environment in the form of both internal and external will be more supportive for
the development of stakeholder’s wealth. It is important in the sense that it will be increasing the
agility and availability of the employees so that they will not be able to use backward qualities of
inputs. Better business environment will automatically ignite the collaborative atmosphere that
will allow the employees to exchange their views among each other. Communication will
improve by a huge margin (Korschun, 2015). It will be important for the companies to indulge
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better training facilities that will be easily adopted by the organisation in presence of better
business environment.

In order to identify the managerial actions that will be required to influence stakeholder’s wealth
are as follows

Effective policies
Development of better and effective policies within any organisation is one of the actions that
can be taken to influence the wealth of stakeholders. A wealth of stakeholders will not only
include the monetary wealth but will also include the level of the education, skills and
potentiality that the employees are acquiring. Through the implementation of better policies, it
will be effective for the organisation to maintain the discipline among the employees. Effective
policies will bring the development of business requirements that will bring investments. It will
be important in the sense that due to the presence of effective policies the communication among
the employees will be increased largely.

Increasing the opportunity to invest


It is important for every organisation to increase the development of investment opportunity. It is
important for every organisation to increase investment opportunity. This will easily increase the
areas to implement upgrade in the skills and technologies that the employees will be able to
adopt. This adaptation will definitely increase the urge of the employees to learn new
technologies. Utilising the urge the employees will be able to exchange the amount of the
communication system that will not only increase the development of the business. It is
important for the organisation to identify the new sources of investment that will improve the
marketing of the products, production technologies. These technologies will definitely increase
the profitability of every organisation.

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Question 3
a) Demand function of the MacroCon Newsletter is Q= 581-P. Therefore P= 581-Q. Total
revenue is PQ =(581-Q)*Q and TR = 581Q- Q^2. on the other hand, TC =
35+20Q+0.5Q^2. Therefore the total profit is TR-TC and that gives TP = 561Q-1.5Q^2-
35 and the first derivative of total price with respect to quantity is ΔTP/ΔTQ = 561-
3Q
b) In order to determine the optimal price of the newsletter, we are following the first order
necessity condition of profit maximisation and that is MR = MC ( MR = ΔTR/ΔQ and
MC = ΔTC/ΔQ). MR = 581-2Q and MC = 20+3Q. Equating MR =MC we get Q = 112
and putting this value in P function we get optimal P = 468.8
c) In the given condition, with P= $468.8 and quantity of 112, the total revenue earned
is $52,505.6 and now if the price is $394 and the quantity sold is 187 then the total
revenue earned is $73,678 and that is profitable.

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Part 2

a) Linear regression equation


Summary Output
Regression Statistics
Multiple R 0.986332534
R Square 0.972851868
Adjusted R Square 0.959277801
Standard Error 6.987230599
Observations 10

ANOVA
df SS MS F Significance F
Regression 3 10497.07165 3499.024 71.66989 4.33211E-05
Residual 6 292.9283486 48.82139
Total 9 10790

Coefficients Standard t Stat P-value Lower 95% Upper 95% Lower Upper
Error 95.0% 95.0%
Intercept 205.8623651 19.35443588 10.63644 4.07E-05 158.5037666 253.2209637 158.5038 253.221
Price -12.24176622 1.407116137 -8.6999 0.000127 -15.68485538 -8.798677074 -15.6849 -8.79868
Income 1.41400836 0.422247717 3.348765 0.015443 0.380805416 2.447211304 0.380805 2.447211
Advertisements -3.344347666 1.798328298 -1.8597 0.112271 -7.744698492 1.056003159 -7.7447 1.056003

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Table 1: Regression table
(Self-Developed)
From the above table, the linear regression that is obtained is
Quantity (Y) =205.8623651-12.24176622 Price (X1)+1.41400836 Income (X2)-3.344347666
Advertisements (X3). In the above equation, X1, X2, X3 are three independent variables and
quantity is the dependent variables.

b) Coefficient of determination
The coefficient of determination actually helps in the identification of degrees of dependence of
Y on Xi's. In the given equation, the coefficient of determination in determining the number of
households that will be demanded given the factors like income, price and advertisements. The
regression equation is claiming the fact that given the data on the price, income and
advertisements the number of households that will be determined by the economy. The
coefficient of determination will highlight the changes that will occur in Y due to 1 unit changes
that are made in Xs (Chatterjee and Hadi, 2015).

c) Importance of signs of the coefficient of determination


The signs of coefficients of determination are important in the sense that it will identify the
direction of dependence between the dependent variables and the independent ones. In the above
equation, it can be identified that the quantity of housing demanded is negatively related to the
price of the housing and the advertisements that are made for the housing. Only the factor
income is positively related to the quantity of housing demanded. This is because of the negative
relationship among price and quantity is getting reflected by the law of demand. The
advertisement is having a negative relation to the number of households demanded because of
the fact that if the price of advertisements for the producer increases then the price rise will be
reflected in the price of the housing that will again lower the demand in turn. Critical t-statistic is
important in the sense that it will be highlighting the P-value of the t distribution. On the other
hand, alpha is generally the level of the confidence interval.

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d) If Price = 2.0, Income = 35 and Advertising = 9.5 then putting these values in the
multiple linear regression equation will give the predicted sales of the quantity demanded.
Therefore
Quantity (Y) =205.8623651-12.24176622 Price (X1)+1.41400836 Income (X2)-3.344347666
Advertisements (X3)
Y= 205.8623651-(12.24176622*2)+(1.41400836*35)-(3.344347666 *9.5)
Y = 205.8623651-24.48353244+49.4902926-31.771302827
Y = 199.097822433

e) Price and income elasticities


Price elasticity of demand in a linear model of regression can be obtained as Price elasticity =
Coefficient of price x Average price/Average consumption. The average of price and
consumption has been calculated in the following table below.
Quantity Price Income Advertisements

120 8 10 3

165 4 22 7

120 7 20 5

165 3 20 8

180 4 30 8

90 10 19 6

150 4 18 10.2

190 1.6 25 9.3

160 5 30 8

200 2 35 9.5

Average

154 4.86 22.9

Table 2: Average of price and consumption


(Self-Developed)
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Price elasticity = -12.24176622*4.86/154
Price elasticity = -0.386331063825974. Similarly, the income elasticity of the quantity
demanded are Income elasticity = Coefficient of income x Average income/Average
consumption. Thus Income elasticity will be 1.41400836*22.9/154 that is
0.2102648795064935. From the law of demand, the price elasticity of quantity demanded will
always be negative. On the other hand, the negative income elasticity of quantity demanded will
be associated with inferior goods and positive income elasticity of quantity demanded will be
associated with normal goods.

f) In order to use forecasting techniques, the above model can be used. It will be helpful to
predict the quantities of housing that will be determined can be identified by putting various
quantities of price, income and advertisements in the multiple regression model that has been
formulated using the coefficient of determination (Harrell, 2015). The process of predicting has
been shown in the above part.

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Part 3

a) Stages of production
In economics, three kinds of curves mainly exist. These are the total product curve, the average
product curve and the marginal product curve. The total product curve will highlight the firm's
overall production and is the basis of the two other curves. The average product curve is the
quantity of the total output produced per unit of a "variable input," such as hours of labour. On
the other hand, the marginal product curve highlights the changes in the output due to one unit
change in input.
i) Use of TP, AP and MP curve in determining stages of production
Stage one
In this stage of production, all the firms and industries are having high and increasing marginal
return. This means, in this stage, the variable inputs that are invested by the firms will increase
the output by more than one unit. All the three curves are increasing and positive sloping in this
stage of production.
Stage two
In this stage, the marginal rate tends to decrease. The variable input will be producing the output
but the rate of return will be slow compared to stage one. Holding all the fixed inputs increase in
one unit of variable input will give the output in a decreasing return. The total product curve will
be rising even in this stage but the average and marginal curves are decreasing in nature.
Stage three
In this stage, the marginal product curve tends to be negative. Holding all the fixed inputs same,
one unit increase in the variable input will literally decrease the production. In this stage, the
total product curve will show a downward trend, the average product curve will be negative and
the marginal product curve will be negative.
ii) Use of elasticity of production in the determination of the three production stages
In the first stage of production, the elasticity will be high and in the third stage, the elasticity will
be low or inelastic in nature. Due to high elasticity in the stage, one will give rise to the
development of an increase in total production ability of the goods and services that will create
problems if the unit of variable resources decreases then the organisation will be
underperformed.
iii) Stages 1 and 3 considered as an irrational area of operation

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Unlike the first stage to which it shows each additional variable could enhance more
production and such this it signifies an increase of marginal return but for this case, it
do not give out the direction in permanent production since labours are needed fewer
and in the decrease quantity of labour can bring underproduction.

Figure 3: Stages of production


(Source: Zhang and Kleit, 2016)
Also, the third stage marginal return is negative because in adding more variable inputs
will further lead into adding more number of labour hence the increase of labour will
contribute to under production as it may be due to labour capacity and efficiency
concern.

b) Short-run production function for Superfast Hairdryers, Inc., where X is material


inputs, and Q is output. Q = 10X - 0.25X2
The selling price of each hair dryer is $10 per unit. Cost of input is $20 per unit. Therefore
the cost of producing one unit is 20 X. total revenue function is 20 (10X - 0.25X2)
TR = 200X- 5X2
TC= 20 X(10X-0.25X2)
Tc = 200X2-5X3
MR = 200-10X and MC = 400X-15X2. Equating MR and Mc will give 3X2-82X+40 and X=
14.

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i) in order to determine the MRP of the product = MR*MP. Now MP or
marginal product is determined by 14*20 (10X - 0.25X2)= 14*20 (10*14-
0.25142)

= 280 (140-196)
= 280* 56 = 15680

Therefore MR = 60. Thus MRP= 15680*60= 940, 800


ii) MC function is 400X-15X2

iii) the optimal value of X is 14

iv) Price of hair dyer if increases will reduce the sale that in turn will reduce the
quantity supplied in the economy.

v) rise of capital will increase the MRPL of the products

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Part 4

In order to increase the position of the company in the market, Bosnia needs to identify the
market demand for their products. In order to implement the pricing strategy for their products, it
is important to make the market segmented depending on the demand of the customers. It is
important to identify the development of the products based on the strategies that will be set by
their competitors. It is important in the sense that it will be highlighting the development of
pricing strategy for the company. In order to increase customer satisfaction, the company needs
to increase the development of a wide range of products that will easily increase the accessibility
of the products and providing the goods to the customers at a discount price will definitely
increase the trust and confidence of the customers for the brand Braun Buffel. It is important to
identify the porters five forces in order to make any changes in their pricing strategies.

Bargaining power of suppliers


It is important to estimate the bargaining power of suppliers in order to determine the prices of
any products. This is important in the sense that it will be delivering the best quality of products
and raw materials if the number of suppliers is less in number.

Bargaining power of buyers


If the number of buyers is more then they will tend to have an impact on the price of goods and
services. On the other hand, the delivery of goods and services of any reputed brands will be
looking forward to increasing the development of price strategies.

Competitive rivalry
The existence of rivalry among the competitors will allow the companies to perform better and in
an effective way. On the other hand, it is important for companies to deal with the development
of better innovation in the industry. This will stop the haphazard movement of prices in the
economy. Fixing a particular price ceiling or price roof will allow the companies to indulge in a
competitive price strategy. This will allow companies to indulge in better tradings of their goods
and services.

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Threat of substitution
It is important for the development of the threat of substitution that will automatically connect
the development of better quality of the products. It is important in the sense that it will bring
innovations in the form of using new and advanced technologies. In order to retain the customer
base, it is important for the development of a wide range of products.

The threat of new entrants


The threat of new entrants is significant in the competitive market that will automatically
increase the development of better and better products.

Part 5

Question 1
a) Five important cartels in the world are Sinaloa Cartel, Medellin Cartel, Gulf Cartel, Los
Zetas and Juarez Cartehl. Here in this regards it needs to be stated that the Sinaloa cartel
is the most important drug trafficking cartel in the world and operates from Baja
California. Here it has also been evident that this cartel has dominated the drug trade in
the North America and therefore can be considered to be significantly successful. The
Medellin cartel is the Spanish drug cartel which is also of significantly successful nature
because of the nature of the organisations operating. the gulf cartel is the cartel of the oil
exporting countries in the gulf region aiming to extract the maximum out of the oil trade
and is fairly successful due the conjoint efforts and the promise made towards one
another los zetas is among the most dangerous drug trafficking cartels aiming to draw the
best profits out of the trade. Juarez cartel is also a drug trafficking cartes=l of north
America and functions on the principles of the above mentioned cartes and the success
rate for the cartel is of similar value .
b)
● Price offered by the formation of the cartel
● Parties comprising the cartel is also of important value
● Advantage of cartel
● Type of product offered by the cartel
● Mitigating price

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Question 2
a) Here in this regards it needs to be stated that the total profit function for Muhibah’s total
profit function would be
P1 = 60-2Q1
P2 = 40-Q2
TC = 10+8(Q1+Q2)
Π = R-C
= (100-3Q)Q-(10+16Q)
=100Q-3Q2-10-16Q
=84Q-3Q2-10
b) Profit maximising price and quantity would be
Π =84Q-3Q2-10
d Π/dQ= 84-6Q=0
84-6Q=0
6Q=84
Qmax=84/6
=14
Therefore the profit maximising quantity would be
Q=14 units
The profit maximising price for Retail Outlets would be
P1=60-2Q1=60-2(14)
=60-28
P1=32 units
Mother company
P2=40-Q2
= 40-14
P2=26 units

c) At this level the marginal revenue would be


Retail market
MR1=dTR/dQ
=d/dQ1 (60-2Q1)Q1
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=d/dQ1 (60Q1-2Q12)
=60-4Q1
=60-4(14)
=60-56
=4
The marginal revenue for the
Mother company would be
MR2= dTR/dQ
=d/dQ2 = (40-Q2)Q2
= d/dQ2= 40Q2-Q22
= 40-2Q2
=40-2(14)
=40-28
MR2=12

d)
If the company is able to charge different prices in the different markets the total
profit would be
Π= (60-2Q1)Q1+ (40-Q2)Q2- (10+8(Q1+Q2))
=60(32)-2(32)2+40(26)-(26)2-(10-8(26+32))
=1920-2048+1040-676-(10+8(26+32))
=1920-2048+1040-676-(10+8(58))
=1920-2048+1040-676-(10+464)
=1920-2048+1040-676-564
=1920-2048+1040-676-564
=328

e)
The profit maximising levels of output are Qmax = 14.
The profit maximising level of price
P=100-3Q
P=100-3(14)
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Pmax=58
Π=84Q-3Q2-10
Π=84(14)-3(14*14)-10
=1176-588-10
=578

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Reference list

Carayannis, E.G., Sindakis, S. and Walter, C., 2015. Business model innovation as a lever of
organizational sustainability. The Journal of Technology Transfer, 40(1), pp.85-104.

Chatterjee, S. and Hadi, A.S., 2015. Regression analysis by example. John Wiley & Sons.
Erkut, H., Nosenzo, D. and Sefton, M., 2015. Identifying social norms using coordination games:
Spectators vs. stakeholders. Economics Letters, 130, pp.28-31.

Harrell Jr, F.E., 2015. Regression modelling strategies: with applications to linear models,
logistic and ordinal regression, and survival analysis. Springer.

Korschun, D., 2015. Boundary-spanning employees and relationships with external stakeholders:
A social identity approach. Academy of Management Review, 40(4), pp.611-629.

Zhang, K. and Klein, A.N., 2016. Mining rate optimization considering the stockpiling: A
theoretical economics and real options model. Resources Policy, 47, pp.87-94.

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