Term Paper Managerial

8/12/2019 Term Paper Managerial

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QUESTION ONE

Product description

Chanika pavers started the production pavement blocks in 2003. The company produces Paver

Blocks of different shapes and colours. The shapes include Colorado, Tri- e!, " #hape, Cross

$ine Tiles and %uphrates. Colours available include &reen, &rey, red and black. Thickness of

pavers are of '0 mm suitable for footpath, premises and li&ht traffic, car parks and the 30 mm

suitable in compounds, &arden, path(ays, &ara&e etc. Pavers block are used in various places

such as #hoppin& )alls, *ardens, #(immin& Pools, Commercial Comple!es, #hoppin& )alls,

ousin& Colonies, *ardens, #ports #tadiums, eavy +uty oads, Container ards, Ports, Petrol

Pumps, #(immin& Pools etc. to provide a beautiful landscape in those areas.

The ra( materials used in the manufacturin& of the pavers blocks include, cement, sand and

(ater. The company has three machines (hich are capable of producin& hi&h uality Pavers

Block. There is also a mi!in& machine (here concrete in&redient are mi!ed in order to maintain

(ater, sand and cement ratio so as to achieve a uniform uality and stren&th.

QUESTION TWO

Production function

Production function sho(s the relationship bet(een inputs and the ma!imum amount that can be

produced (ithin a &iven period of time (ith a &iven level of technolo&y. "t can be e!pressed

in al&ebraically form as/

1 f , $4

5here

6 uantity produced

6 Capital

$ 6 $abour

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This means that uantity of the product can be produced by the &iven uantities of labor and

capital. Capital includes ra( materials and machines that are all used in the production of paver

blocks. The ra( materials used in the production include Cement, (ater and sand. $abour

includes security &uards and those involved directly in the production.

17$8 9

5here/

1 total production :utput produced in a year4

$ 1 $abor input the total number of person (orked in a year4

1 Capital input the real value of all machinery and materials4.

7 1 total factor productivity

7nd 9 and 8 are the output elasticities of capital and labour, respectively.

Year Output (Q) Labour (L) Capital in Tss (!) Sellin" price in Tss (P)

#$$% ;0<00 2 3,000,000 2<0

#$$& ;<<00 < <,000,000 2<0

#$$' <==00 > ?,000,000 2<0#$$ <>=00 ? =0,000,000 2<0

#$$ '?<00 =0 =2,000,000 300

#$$* >?<00 =2 =<,000,000 300

#$$+ ?@=00 =3 20,000,000 300

#$,$ @3'00 =; 2<,000,000 300

#$,, @@<<0 =< 30,000,000 3<0

#$,# @@<00 =; 32,000,000 3<0

#$,% =0=<00 => 3<,000,000 3<0

QUESTION T-.EE

Specif/ te cost function

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The lon& run cost function (ill be used because all the inputs are variable costs. "n other (ords

there are no fi!ed costs because all costs have chan&ed in the lon&-run. 7s indicated in the table

both capital and labour have been adAusted year by year from 2003 to 20=3. Total cost TC4 1

ariable costs C4. Therefore the firms total cost function is calculated by the total

e!penditure on labour and the total e!penditure on capital.

C 0 1L 2 r!

5here

C 1 Total cost

( 1 the total e!penditure on labour

r 1 total e!penditure on capital

YE3. L34OU. C3PIT3L TC

#$$% =,@>2,<00 <,;@2,000 >,;';,<00

#$$& 2,0@>,<00 ?,=3>,=00 =0,23;,'00

#$$' 2,;@3,000 ?,<@',000 ==,0?@,000

#$$ 2,'>3,000 ==,2??,000 =3,@'=,000

#$$ 3,0=<,000 =3,@<?,;00 =',@>3,;00#$$* ;,=;0,000 =;,;@2,000 =?,'32,000

#$$+ ;,<';,000 =>,=3>,=00 2=,>0=,=00

#$,$ ;,>;;,000 =>,>@',000 22,<;0,000

#$,, <,@>>,<00 =?,'??,000 2;,''<,<00

#$,# ',=><,000 20,=<?,;00 2',333,;00

#$,% ',2><,000 22,=;>,000 2?,;22,000

QUESTION 5OU.

Specif/ te re6enue function

evenue 4 1 Price per unit P4 ! Dumber of units produced 4

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4 1 P !

Year Output (Q) Price (P) .e6enue (.)

#$$% ;0,<00 2<0 =0,=2<,000

#$$& ;<,<00 2<0 ==,3><,000

#$$' <=,=00 2<0 =2,>><,000#$$ <>,=00 2<0 =;,2><,000

#$$ '?,<00 300 20,<<0,000

#$$* >?,<00 300 23,<<0,000

#$$+ ?@,=00 300 2',>30,000

#$,$ @3,'00 300 2?,0?0,000

#$,, @@,<<0 3<0 3;,?;2,<00

#$,# @@,<00 3<0 3;,?2<,000

#$,% =0=,<00 3<0 3<,<2<,000

QUESTION 5I7E

Esti8ate te production function of te fir89

By Considerin& the Cobb-+ou&las production function that e!presses :utput 4 as a function of

capital 4 and labour $4/

17$8 9

ln 4 1 ln 7 E 8 ln $ E 9 ln

Table tat as to be used for esti8ation:

Year Output (Q) Labour (L) Capital in Tss (!)

#$$% ;0<00 2 3,000,000

#$$& ;<<00 < <,000,000#$$' <==00 > ?,000,000

#$$ <>=00 ? =0,000,000

#$$ '?<00 =0 =2,000,000

#$$* >?<00 =2 =<,000,000

#$$+ ?@=00 =3 20,000,000

#$,$ @3'00 =; 2<,000,000

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#$,, @@<<0 =< 30,000,000

#$,# @@<00 =; 32,000,000

#$,% =0=<00 => 3<,000,000

SPSS OUTPUT

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5ro8 te table of coefficients abo6e te production function is;

$n 1 3.;<= 6 0.0?; $n $4 E 0.;?= ln 4

But "ntercept 1 ln 7 1 3.;<=

Therefore, 7 1 e3.;<= 1 3=.<3=@

Thus, the estimated production function isF

Q 1 3=.< $ 6 0.0?; 0.;?=

QUESTION SI<

Sta"es of production

The firms operational is lon& run, therefore in the lon& runF a firm had enou&h time to chan&e

the amount of capital and labour. The lon& run production process is described by the concept of

returns to scale. eturns to scale are the resultin& increase in total output as all inputs increase.

eturns to scale describe the chan&e in output (hen all inputs are increased by the same

proportion and e!plain production activities over the lon& run. "n the lon& run a firm can increase

all inputs by eual or uneual proportion. eturns to scale is based on the assumption that over

the lon& run all inputs of production are increased by eual proportion.

5hen both capital and labour are increased proportionately, output may increases more than

proportionately or less than proportionately. "f it increases more than the percenta&e increase in

inputs, it is called increasin& returns to scale "T#4, if output increases by less than the

percenta&e increase in inputs it is called decreasin& returns to scale +T#4 and if output

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increase by eual proportion to the increase in inputs, it is called constant returns to scale

CT#4.

Cobb-+ou&las function

17$8 9

"f 9 E 8 G =, "T#

"f 9 E 8 1 =, CT#

"f 9 E 8 H =, +T#

5ro8 te production function esti8ated abo6e

Q 1 3=.< $ 6 0.0?; 0.;?=

8 E 9 1 6 0.0?; E 0.;?= 1 0.3@>

The firm e!hibit decreasin& returns to scale because 8 E 9 H =. +ecreasin& returns to scale

imply that proportionate increases in inputs lead to the same less than proportionate increases in

output. +oublin& both labor and capital (ill increase output by 0.3@.> I.

QUESTION SE7EN

Interpret te elasticities of te production function

1 3=.< $ 6 0.0?; 0.;?= 2 1 0.@>2

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-suared is a statistical measure of ho( close the data are to the fitted re&ression line. -

suared is al(ays bet(een 0 and =00I/ 0I indicates that the model e!plains none of the

variability of the response data around its mean. =00I indicates that the model e!plains all the

variability of the response data around its mean. The -suared for this problem is 0.@>2. This

means that @>I of the variation in ln 4 is e!plained by the combined variation in ln 4 and ln

$4.

The euation above indicates that the avera&e &ro(th rate for technolo&y is 3=.<3=@ per year.

%lasticity represents the ratio of percenta&e chan&es in the variables. The elasticity for capital

4 is 9 1 0.;?= (hich means that a =I increase in capital induces a 0.;?=I increase in output.

The elasticity for labour $4 is 8 1 6 0.0?; (hich means that a =I increase in labour induces a 6

0.0?;I decrease in output.

QUESTION EI=-T

Suppl/ cain of te fir8 and in6ol6ed transaction costs

#upply Chain is a linka&e of the firm from the primary producer to final consumer (ith the aim

of reducin& the transaction cost incurred (ithin. Chanika pavers supply chain consists of

suppliers of ra( materials i.e. cement and sand, manufacturer and the customers. The company

sells directly to its customers.

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SUPPLIERS OF

INPUTS

FIRM CONSUMERS



In6ol6ed transaction costs

Transaction costs are cost incurred in makin& an economic e!chan&e or the cost of participatin&

in a market. There three types of transaction costsF bar&ainin& costs, Policin& and enforcement

costs and information costs. Bar&ainin& costs are the costs reuired to come to an acceptable

a&reement (ith the other party to the transaction. Policin& and enforcement costs are the costs of

makin& sure the other party sticks to the terms of the contract, and takin& appropriate le&al action

if this turns out not to be the case. "nformation costs are costs incurred in determinin& that the

reuired &ood is available on the market, (hich &ood has the lo(est price. 5illiamson =@>@4

identified three principal factors i.e. 7sset specificity, uncertainty and freuency all (hich cause

transaction costs to arise. Jncertainty The firm faces unforeseen chan&es in the environment

such as varyin& prices of inputs as the firm is unable to anticipate or predict chan&es a volatile

environment.

The firm operates in Te&eta but &ets sand from Ba&amoyo. Therefore there is a &eo&raphical

dispersion of inputs and production of pavement blocks. The costs involved here are

transportation costs and the prices of sand. There are many supplier of sand at different prices

dependin& on the uality of sand and the distance covered to transport the sand to a production

unit. Pavement block need blocks need hi&h uality sand (hich is very e!pensive and costly in

transportin& the sand from Ba&amoyo. Therefore the firm incurs costs in findin& suppliers of

sand at lo(er prices.

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http://en.wikipedia.org/wiki/Cost

http://en.wikipedia.org/wiki/Cost



QUESTION NINE

Te 1a/s in 1ic te fir8 can reduce costs

Chan&e #uppliers of inputs.

The firm should ne&otiate lo(er prices (ith its suppliers of inputs such as sand and

cement. #ince the firm is a re&ular customer to the suppliers. 7lso the firm should try to find

another supplier thats offerin& lo(er prices, and then ask its current partner to match other

suppliers. "f the firms supplier of the ra( materials e.&. sand and cement is not (illin& to

consider price reductions and canKt offer less e!pensive alternatives, the firm should e!plore

sourcin& from different suppliers that offer the best value in terms of meetin& the uality of ra(

materials and at a lo( price.

Chan&e shapes or desi&n of paver blocks.

7n effective strate&y for reducin& production costs is to redesi&n the product. The firm should

identify the key characteristics of the product that are responsible for its success in the

marketplace. The company produces paver blocks of different shapes (hich include Colorado,

Tri- e!, " #hape, Cross $ine Tiles and %uphrates. #ome of these shapes may be consumin&

much of the inputs (hich increases costs but add little value for customers. The firm can chan&e

the shapes of the product to reduce costs by eliminatin& unimportant shapes (hile retainin& thecharacteristics that customers value.

educe transportation costs.

To reduce the transportation cost the company should purchase its o(n truck that (ill be used in

the transportation of ra( materials to the production site. The truck can also be used in the

transportation of finished &oods to the potential customers. This (ill earn the firm (ith more

revenue since the transportation costs of the pavement blocks to the construction sites is bein&

bone by the customers.

.E5E.ENCES

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=. Thomas, C L )aurice, #. 20=34. )ana&erial %conomics/ Moundations of Business

7nalysis and #trate&y. The )c&ra(-ill.

2. )undlak, . =@@'4. Production function estimation/ revivin& the primal. %conometrica/

Nournal of the %conometric #ociety, ;3=-;3?

3. 5illiamson, :. %. =@?=4. The economics of or&aniOation/ the transaction cost approach.

7merican Aournal of sociolo&y, <;?-<>>.

;. *oldber&er, 7. #. =@'?4. The interpretation and estimation of Cobb-+ou&las

functions. Econometrica: Journal of the Econometric Society, ;';-;>2.

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Term Paper Managerial