Microeconomics Assignment

Part I (10 marks)

QI.You run a small firm. Two management consultants are offering you advice. The consultant A says that your firm is losing money on every unit that you produce. To reduce your losses, the consultant recommends that you cut back production. The consultant B says that if your firm sells some additional units, the price will more than cover your increase in costs. In order to reduce losses, the second consultant recommends that you should increase production.

Explain which consultant/s is/are factually true and who is offering the correct advice?

Explain your answers by drawing the relevant diagram/s.

AnsI:

Case 1:

After observing the above diagram, the following inferences can be drawn based on the AC, MC and MR curves.

When Quantity Q1=1 units,

MC (Marginal Curve) = $40 (point 3)MR (Marginal Revenue) or Price = $99 AC (Average Curve) = $121

We can observe from above data that AC > MR or Price , according to the below equation

Profit = q *(P - AC) where P = price/MR and q=Quantity.

= 1 *(99-121)

= -22The profit is coming out to be negative. The firm will incur a loss. This inference proves that Consultant A could be assumed to be correct when it said that your firm is losing money on every unit that you produce.

But at Q1, the Price > MC, this tells us that an additional unit of output increases revenue more than costs leading to greater profit. At point 4 when MC=MR/Price=$50, the profit will be maximized. This inference proves that Consultant B is correct that if your firm additional units, the price will be more than cover your increase in costs.

The firm should follow the recommendation from Consultant B in order to avoid losses and maximize its profit.

Case 2:

Lets consider point (5). Here MC > MR, If marginal revenue is less than marginal cost (MR < MC), then an additional unit of output increases costs more than revenues leading to less profit. Hence in this case Consultant A is correct since increase in quantity will result in decrease in profit . So the firm should try to cut back production in order to reach to a point where MR=MC thereby maximizing the profit.

Part II (20 marks) (maximum word limit 1500, tables/graphs additional)

Competitive forces in the market ensure that todays big firms will not remain market leaders always.

QIa.Using data from 1990 to 2012 for the Fortune 500 list of the top corporations in the United States, illustrate how companies fall behind when they stand still, but when they innovate they can leap ahead of the competition

AnsIa.Yahoo! Inc.(Fell Behind)Yahoo Inc.(styled asYahoo!) is an Americanmultinationaltechnology companyheadquartered inSunnyvale, California. It is globally known for itsWeb portal,search engineYahoo Search, and related services, includingYahoo Directory,Yahoo Mail,Yahoo News,Yahoo Finance,Yahoo Groups etc. The company was founded in January 1994 by Jerry Young and David Filo and was incorporated as Yahoo! Inc. on March 1, 1995.

After enjoying a decade long run of huge successes and big wins, Yahoo! Inc. was tipped to be a huge player in the industry in the coming future. However, this did not hold true.

Yahoo did not take the right decisions and did not innovate correctly. As a result, it did not become as big a player as it could have. When Web Search concept was still a virgin territory, the pioneering Yahoo, started charging for services like E-Mail and File Sharing while the other competitors were doing it for free and this led to customers shifting to competitors service. Yahoo still managed to grow into huge web portal, good financial and sports news coverage that generated a lot of money but at the same time it drifted into various businesses like job-hunting services, video streaming etc which Yahoo has anyway sold or folded.

Most importantly, Yahoo! Inc. snubbed Microsoft in 2008 for the latters buyout option of US$45 Billion. That surely looks like a huge blunder in todays date.

All these factors and inability to innovate in a dynamic sector led to the downfall of Yahoo! Inc.

The Graph Below shows the Stock Price history of Yahoo! Inc. since its conception.

The graph portrays how the stock prices rose sharply between 1998 2001 and have constantly dipped ever since then. This, clearly shows how lack on innovation and standing still impacts the overall performance and growth of a Company.

Yahoo! Inc. has also taken a huge hit in terms of its ranking in Fortune 500 companies list. Its rank has deteriorated over the past few years and in 2012, it stood at no. 483.

Hewlett-Packard Company(Innovation)

Graph Courtesy: Yahoo Finance

Hewlett-Packard Company (henceforth referred to as HP) is a prime example of how companies that innovate are far ahead of their competition. 1990sBack in the 1990s HP started working on a number of innovations. These innovations ranged from Colour desktop printing to Navigation Technology.1991: Colour desktop printing- For this scientists created fundamental colour (sRGB), compression and half-toning algorithms for the printer DeskJet 500C which dramatically reduced the cost of colour printing which at the time was pretty expensive 1994: 64-Bit architecture (Itanium) Carrying on work that began in in the lab in 1981, the team of researchers with Intel engineers developed what eventually became Intel's next-generation Itanium architecture, which was launched in 2001. 1998: Navigation technology made for a handheld copier which was later licensed for use in cordless mice. The paper-motion sensing technology developed can be seen even in today's printers.2000s:HP had a slight hiccup towards the beginning of 2000s but then caught up again thanks to its innovation which further proves that innovation can lead a company to better fortunes2002: Researchers created the technology to implement the first rewritable DVD system (DVD+RW) which was compatible with standard DVD players.2003: Scientists work using computational fluid dynamics in order to model heat distribution in a data centre led to HP's smart cooling solution, which can dramatically reduce energy use and save millions of dollars every year.2004: An HP Labs image compression algorithm was used to create some spectacular, high-resolution images of Mars transmitted by NASA's Spirit Rover spacecraft. The images helped scientists on earth to closely study the surface of Mars from a mammoth 106 million miles away.2005: Researchers demonstrated that the crossbar latch they had invented could potentially replace the transistor which was the fundamental building block of computers for the past half century -- and lead to a new way to make computers in the near future.

QIb.Investigate the history of any two of todays top 30 firms (year 2012). How quickly did they rise through the top 500 rankings?

Apple Inc. (AAPL)

(Image Source: www.macs4newbies.com)

1976: Apple computers was established by high-school buddies Steve Wozniak and Steve Jobs on April 1st 1976. Their first product was the Apple 1 personal computer.

1983: In January 1983 Apple launched Apple Lisa. This was a desktop computer aimed at businesses but with a graphical user interface. This launch propelled Apple into the Fortune 500 list at #411 after only five years after its existence.

2000: The return of Steve Jobs to Apple in 1998 ushered a new era of growth for Apple. Apple stocks climbed to as high as $34.67 in March 2000. This was caused by the introduction of the iMac and Mac OS X, marking the start of the Modern Apple era. This lead to Apple climbing to the 285th spot on the Fortune 500 list.

September 2000: marked the black Friday for Apple Computers. Its stock fell from $26.75 to $12.88, thanks to the dot com bust. The Apple stock struggled and stayed under the $15 limit until the September 2004. By 2004 Apple fell to the #301 rank on the fortune 500 list.

2004-2008: Apple stock had been on a gradual rise coming into 2004. This was attributed to the IMac and IPod. However it was not until 2007 that it managed to break the $15 barrier and accelerated to the $100 mark. The rise continued as it reached $200 by December 2007, thanks to the IPhone (1st generation) launch in June 2007. By 2007 Apple had claimed the 121st spot on the Fortune 500 list and was fast gaining over the others.

September 2008: Apple stock took a hit and fell down by roughly 50% to $88.74, thanks to the financial crisis of 2008. Yet Apple managed to sustain its rise and climb up 18 spots to the 103rd position on the list.

2009-2012: Riding a wave of successes of IPod touch, the IPhone and the MacBook line the Apple stock soared. The launch of IPad in 2010 and its dominance over the tablet market propelled it towards success. Shares reached an astounding peak of $705.07 in September 2012. By 2012 Apple had occupied the 17th position in the Fortune 500 list.

2012 onwards: In 2013 Apple managed to enter the top 10 in the list by claiming the 6th position. Currently Apple faces tough competition from the android market. Further expansion would prove to be a tough challenge for the software giant. Currently the Apple is placed at the 5th place in the fortune 500 list.

Costco(Cost)

Costco is actually a resultant merger of two companies namely: Price Club and Costco.

Costco Wholesale Corporationis an Americanwarehouse clubthat provides a wide selection of merchandise. As of 2014, Costco is thethird largest retailer in the United States and second largest in the entire World.

Costco was initially founded as Price Club on July 12, 1976. Originally serving only small businesses, the company realized that it could achieve far greater buying power by also serving a selected audience of non-business members. With that change, the growth of the warehouse club industry started booming.

Price Club merged with rivalCostcoin 1993and the merged company was known as PriceCostco. For a brief period of time, both Price Club and Costco continued to operate as two separate stores with members of each chain being able to shop at both stores with their membership cards. In 1997, PriceCostco became Costco Wholesale Corporation and the remaining Price Clubs were rebranded with the Costco brand name.

Both Price Club and its rival Costco were decent players in the field before the merger, however, they havent had made the cut to the Fortune 500 companies yet.

Soon after their merger in 1993, the sales turnover boosted and the stock price shot up. Costco became the first company ever to grow from zero to $3 billion in sales in less than six years. When Costco and Price Club merged in 1993, the combined company, operating under the name PriceCostco, had 206 locations generating $16 billion in annual sales. This not only resulted in Costcos entry into the Fortune 500 list, but also making them directly reach 47th spot in the year 1995.On March 26, 2001, Retalix Ltd. announced the signing of an agreement with the Costco Wholesale Corporation that called for the installation of the company's Store Line Fuel software solutions across 152 Costco retail fuel outlets in the U.S.

Costco has been consistently in the top 30 of the Fortune 500 companies over the last 2 decades.The Graph below shows the Stock price timeline of Costco since 1990. We can clearly see that post 1993, stock prices started to shoot up and today the Costco stock price stands at US$140.

Costco took right decisions at the right time. They capitalized on the perfect market conditions and consumer demand and merged at the right time resulting in amazing results for the merged company. The combined economies of scale and synergies of both the companies merged to form a huge player in the industry that led to humongous growth in really short span of time.

Part III (each question is for 10 marks, answer any one question)

QI.Suppose Carrie decides to lease a photocopier and open up a black-and-white photocopying service in her dorm room for use by faculty and students. Her total cost, as a function of the number of copies she produces per month, is given in the table below:

Fill in the missing numbers in the table, assuming that Carrie can charge 5 cents per black-and-white copy.a. How many copies per month should Carrie sell?

b. If the lease rate on the copier were to increase by $50 per month, how would that impact Carries profit-maximizing level of output? How would this $50 increase in the lease rate affect Carries profit? What will she do when it is time to renew her lease?

AnsI:Number Of Photocopies per MonthTotal CostFixed CostVariable CostTotal RevenueProfit

0$100$100$0$0-$100

1,000$110$100$10$50-$60

2,000$125$100$25$100-$25

3,000$145$100$45$150$5

4,000$175$100$75$200$25

5,000$215$100$115$250$35

6,000$285$100$185$300$15

Ia.How many copies per month should Carrie sell?

As seen from the table Carrie must sell 5000 copies per month in order to maximize the profits. At 5000 copies her profits are maximized to $35.

Ib. If the lease rate on the copier were to increase by $50 per month, how would that impact Carries profit-maximizing level of output? How would this $50 increase in the lease rate affect Carries profit? What will she do when it is time to renew her lease?

If the lease rate of the copier were increased by $50 per month, then this would lead to an increase in the fixed cost from $100 to $150. Since this increase in fixed cost remains constant for all levels of output, there would be no effect on the profit maximizing level of output. The profit-maximizing level of output would still remain 5,000 copies per month. Even at the 5,000 copies per month (the profit maximizing level of output), she would still incur a loss of $15. Hence she must not renew the lease as it would not be a profitable investment.

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