Economics Coursework Assignment 2 question and Answer

Question 1: How does price elasticity affect the demand for Truffles and other products in competitive market conditions?

1. A.

The individual demand curve for Truffles always varies from the market demand curve of Truffle. Because the individual demand curve of Truffle represents the quantity demand of Truffles for single consumers at various prices (Turvey, 2022). On the other hand, the market demand curve for Truffle represents the aggregate demand for Truffles at different price levels.

The individual demand curve is considered more likely as price elastic. Because the individual consumers of Truffles can be easily adjusted concerning any changes in market price.

The responsiveness of changes in quantity demand of Truffles plays an important role because it helps to determine the price of Truffles in competitive marketing situations. When the price of Truffle is increased in the market, it will decrease the Truffle's demand vis-a-vis.

1. B.

In the given situation, Unique has an increasing demand for Truffles. The current price for demand situation, the price elasticity for cranberry, blueberry and ginger = -2, in the short run.

The price elasticity for lemon and orange is = -1.

1. B. i.

Now, the price of Unique wants to increase the price of products by 10%. Then the quantity demand for both products will also fall (Feng et al. 2022). The quantity demand for both products will be decreased by proportionately by 10%.

1.B. ii

No, it is not possible to generate a comparison of revenue for available products due to a lack of sales volume data, cost structure data, etc.

1. c

The marketing campaign for Wild Cherry and Unique has begun. In this situation, the price level and the quantity volume of both products will tend to increase. The market campaign also develops the market expenses.

Question 2: How does a decrease in the real interest rate impact consumer borrowing and investment, and how is the nominal interest rate calculated based on expected inflation and risk premium?

2. A.

The decrease in real interest rate directly has an impact on the borrowing power of a consumer (Chu et al. 2022). Therefore, when the real interest level decreases it will increase Consumer spending, level of investment, investment in asset price, and borrowing cost, etc. Therefore, the domestic consumption level will be increased.

2. B.

Given, the “real interest rate” ( r ) = 3%

Expected inflation rate (π) = 8%

The nominal interest rate (i) of UK’s Tresurey securities will be,

Or, i = (3%+8%) = 11%.

Therefore, the annual “nominal interest rate” will be 11%.

2. C

Now, the nominal interest rate ( i ) = 11%

Expected inflation (π) = 3%

The risk premium = 4%

Approximate real interest rate ( r ) = (11% - 3%) = 8%.

Question 3: How do short-run and long-run cost concepts, implicit and explicit costs, break-even analysis, and the degree of operating leverage impact firms like Unique and Infuse.com in the confectionery industry?

3. A.

In economic terms, the term “short run” implies a period where one of the input amounts is considered fixed and the other quantity amount is considered as the variable. Similarly, the long-run implies the period of situation where all quantities and inputs varied over time.

3. B.

The implicit and the explicit costs both played an important role in determining economic profit levels. The implicit cost often refers to the opportunity cost. This cost also refers to the resource cost (Wilkes et al. 2021). In other words, to produce some products how much cost one has to give is considered as the opportunity cost. Therefore, the economist considered the implicit cost.

On the other hand, explicit costs are the type of costs which have a direct impact on the profitability of an organization. Hence, the Unique payment of financial advisor fixed amount = 40000 is considered as the explicit amount cost. Because it does not have any impact on the profitability of an advisor. In this situation, the fixed amount is considered as the financial transaction which is given instead of financial advice. This type of cost is also measurable.

3. C

The TFC = £100

TVC = £10

It is known that,

Table 1: Cost-table

(Source: Self-created)

3.d.

Two firms, Infuse.com and Unique, operate in the confectionery industry.

Given price (P) = £ 20/ unit

TFC of the industry Unique is = £40

AVC of the industry Unique is = £10.

Similarly, the TFC of Infuse.com is = £90

AVC of the industry of Infuse.com is = £5

3d.i

The breakeven output indicates that point where the total costs are equal to revenue. This implies both the industries of Unique and Infuse.com make neither losses nor profits (Xu et al. 2021). However, the output level at the break-even point implies the requirement of total products needed to sell for reaching to break-even point.

Now, to calculate the break-even output of Unique = £40 / (£20-£10) = 4 units.

Similarly, to calculate the break-even output of Infuse.com = £90 / (£20-£5)= £90/ £15 = 6 Units.

Hence, it is clear that the break-even output of Infuse.com is 6 Units which is higher than Unique. Infuse.com requires higher break-even output to reach the break-even point because the “Total Fixed Cost (TFC)” of Infuse.com is higher.

3d.ii

The “Degree of operating leverage (DOL)” measures how the entire operating income changes concerning sales.

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Therefore, the “Degree of operating leverage (DOL)”

DOL for Unique at Q = 7 will be,

= [7*(20-10)]/ [7*(20-10)]-40

= 0.7 / (0.7 -40)

= 0.7 / -39.3

= -0.017

Similarly, DOL for Unique at Q = 8 will be,

= [8*(20-10)]/ [8*(20-10)]-40

= 0.8 / (0.8 -40)

= 0.8 / -39.2

= -0.020

DOL for Infusie.com at Q = 7 will be,

= [7*(20-5)]/ [7*(20-5)]-90

= 0.47 / (0.47 -40)

= 0.47 / -39.53

= -0.0119

Similarly, DOL for Infusie.com at Q = 8 will be,

= [8*(20-5)]/ [8*(20-5)]-90

= 0.53 / (0.53 -40)

= 0.53 / -39.47

= -0.0134

Now, the DOL is greater for Infuse.com than Unique because the TFC for Infuse.com is higher. TFC of Infuse.com = £90 > TFC of Unique = £40. Therefore, the DOL is greater for the industry Infuse.com. than Unique.

Similarly, the the DOL is greater at Q=7 than Q =8, because the DOL often depends upon the “Total Fixed Cost (TFC)”. There the DOL is greater at Q =7 than at Q = 8.

Reference list

Book

• Turvey, R. (2022). Demand and supply. Routledge. Retrieve from : https://books.google.com/books?hl=en&lr=&id=UZVeEAAAQBAJ&oi=fnd&pg=PT4&dq=Turvey,+R.+(2022).+Demand+and+supply.+Routledge.+&ots=voQytAkmM6&sig=sObD0G9LW4ReSOh-XW63o-c82pY [Retrieve on: 25.11.23]

Journals

• Chu, K. H., Lim, J., Mang, J. S., & Hwang, M. H. (2022). Evaluation of strategic directions for supply and demand of green hydrogen in South Korea. International Journal of Hydrogen Energy, 47(3), 1409-1424.Retrieve from : https://www.researchgate.net/profile/Jihun-Lim-5/publication/356052784_Evaluation_of_strategic_directions_for_supply_and_demand_of_green_hydrogen_in_South_Korea/links/633d0c4bff870c55cefe7e76/Evaluation-of-strategic-directions-for-supply-and-demand-of-green-hydrogen-in-South-Korea.pdf [Retrieve on: 25.11.23]
• Wilkes, G., Engelhardt, R., Briem, L., Dandl, F., Vortisch, P., Bogenberger, K., & Kagerbauer, M. (2021). Self-regulating demand and supply equilibrium in joint simulation of travel demand and a ride-pooling service. Transportation Research Record, 2675(8), 226-239.Retrieve from : https://journals.sagepub.com/doi/pdf/10.1177/0361198121997140 [Retrieve on: 25.11.23]
• Xu, J., Zhang, J., & Guo, J. (2021). Contribution to the field of traffic assignment: A boundedly rational user equilibrium model with uncertain supply and demand. Socio-Economic Planning Sciences, 74, 100949.Retrieve from: https://www.sciencedirect.com/science/article/pii/S0038012120307862 [Retrieve on: 25.11.23]

Article

• Feng, P., Zhou, X., Zhang, D., Chen, Z., & Wang, S. (2022). The impact of trade policy on global supply chain network equilibrium: A new perspective of product-market chain competition. Omega, 109, 102612. Retrieve from: https://www.sciencedirect.com/science/article/pii/S0305048322000214 [Retrieve on: 25.11.23]

Website

• Ieeexplore.ieee.org, (2019),Retrieve from : https://ieeexplore.ieee.org/abstract/document/10272628/ [Retrieve on: 25.11.23]