Answer B. Starbucks introduction of music download for customers is basically a differentiation strategy. The company wants to differentiate its products and Services from competitors like Dunkin’ Donuts and Krispy Kane. The ultimate goal of this strategy is to increase demand for the company’s products by offering customers a lot of choice. Customers are always attracted to new and innovative packages offered by the companies. The strategy will help Starbucks increase their customer base and earn more profits which will eventually increase their market demand and they can act as a major player in the industry.

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Initially the firms were enjoying supernormal profits as shown by the green shaded area, but as new firms entered the market taking the advantage of supernormal profits, the market supply curve shifted downwards to s2, the market price shifted down along with the equilibrium price set by the firms. The additional firms increase production, which increases quantity and so turn the supernormal profits into normal one

Answer: The market for Microsoft stocks is perfectly competitive because a large number of buyers and sellers exist in the market for these stocks. Complete information is available to all the buyers and sellers in the market and the entry in this market is free. All these factors completely complement the perfectly competitive market.

Answer: Microsoft’s stock faces a horizontal demand curve because the market for its stock is perfectly competitive, which means that P=MC =MR. Microsoft can sell all the units in the market at the market price to all of its buyers because of the extreme competition that prevails in the market.

Answer: According to the data given in the case, the only thing that hindered the demand for hearing aids was the effect of its price on the customer’s budgeted income not covered by insurance. This factor contributed an elastic demand in the market for hearing aids. However if the legislation regarding the insurance coverage is passed then the demand for hearing aids will increase considerably in the market. On the other hand the firms will increase the prices of hearing aid in the market to take advantage of inelastic demand prevailing in the market.

People below the age of 65 will find the market situation very unfavorable. This is because their costs will not be covered by Medicare public insurance and they will have to buy the hearing aids at full prices. On the other hand few companies operating in the hearing aid market will increase prices in retaliation to the medical public insurance coverage for citizens exceeding 65 years of age. This factor will multiply the impact of the medical law on the citizens below the age of 65, because their demand will become more elastic.

Answer: the individiual firms and consumers cannot impact the market price in the competitive market, therefore both are known as price takers in the competitive market. Both the consumers and the firms accept the market prices as they are, and their actions will have no effect on the market price. The firms in this market face a perfectly elastic demand curve becuase no one is willing to pay more than the market price for the firm’s output. Similarly the consumers face a perfectly elastic supply curve. This is because firms are not willing to sell less than the market price to any consumer.

Macro economic influences include global economic conditions, Inflation, technological change, interest rate fluctuations and domestic business cycle fluctuations. Example 1. A recession in japan caused demand for products in the economy to fall. Which means that consumers will now buy less products due to deterioration in their economic conditions. Example 2. An increase in inflation has pakistan has decreased the amount of spending in the economy. This is becuase the purchasing power of a consumer is negatively affected by rising proces for products in the economy.Example 3. An increase in the interest rates has caused a decrease in spending in the US economy. Which means that the citizens are now interested in saving money becuase borrowing money from banks will now be costly as the interest rates have increased.

Answer: X is a normal good becuase the quantitiy demanded of x is positively associated with the income factor. Therefore an increase in income will cause an increase in the quantity demanded of X. It is not an inferior good becuase in case of an inferior good the quantity demanded and income move in opposite directions, which means that an increase in come will have a negative effect on the quantitiy demanded.

X and Y are Substitutes. This is becuase the quantity demanded for product X is positvely related to the price of Product Y. Which depicts that an increase in price of product Y will cause an increase in the quantity demanded for X.

Y and Z are Substitutes.This is becuase X and Y are substitues and X and Z are complementary goods. As Z and X are complementary goods so a competitor for X will also be a competitor for Z. Hence proved that Y and Z are possible substitutes

Answer C: Steel and cars are complementary goods which means that an increase in demand of one will cause a simultaneous increase in the demand for other. In the given case the price of steel is expected to fall, falling prices will cause an increase in the demand for steel. On the other hand a decrease in the steel prices will cause a decrease in the prices of cars, and the decreasing car prices will cause the demand for cars to increase in the automobile market.

Answer: Price elasticity of demand measures the responsiveness of the quantitiy demanded to the various factors that influence demand such as the price of the product, price of substiute and complementary products, and the income of the consumers. Price elesticity of demand helps the managers to determine the impact of price changes on the revenues of the business. This decision is important becuase it helps the managers get a conscise view about the true elasticity of their product and aid them in making the decisions accordingly.

Answer b: An increase in the price of fresh juice and Shawerma is not a sufficient indicator to determine whether the revenues will increase or not. Other factors like substiutes available, income of the consumers and the price elasticity of demand needs to be determined in order to get a clear view of the market for the restaurant. An increase in prices will only be profitable if the demand for freash juice and shawerma offered by the Lebanese restaurant is ineleastic. Therefore i disagree with the advice given to my friend.

Answer: Total Revenue = P x Q = 50000 x 0.1 = $5000

Total Cost = Fixed cost + Variable cost

= (1000+120) + (1200+2500+3000) = 1120 + 6700 = 7820

Profit = Total revenue – Total cost = 5000 – 7820 = (2820) Loss

Variable cost > Total Revenue (6700 > 5000).

Looking at the calculations above it is quite evident that the business is prone to make a loss in the coming months, but the point to be noted here is that business is not even able to cover its variable costs in the short run. Assuming that the market for photoshop is perfectly competitive which means a firm can operate as long as it covers the variable costs. And as the photocopy store is unable to cover the variable costs so it is not advisable for Ahmed to open his business.

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Answer: The firms average total cost takes into account both the average fixed cost and the average variable cost, and is basically the sum of both average fixed costs and average variable costs. (ATC=AFC+AVC). Therefore a change in the costs ireespective of the fact that the AFC does not change will cause a shift in the Average total cost curve. This is becase fixed costs are a part of total cost of production.Whereas in the case of marginal cost curve which is the cost of adding one more unit of output takes into account the variable factors of production such as labor. The fixed costs for adding any additional unit remain zero, this is becasue they are fixed whether a firm produces additional units or not. Therefore, the fixed costs will have no impact on the marginal cost curve.

Answer: Marginal productivity of labor is the additional output produced by employing an additional unit of labor. An increase in marginal productivity of labor by an improvement in technology will help the firm achieve economies of scale in the longrun. This means that the improvement in technology will cause Long Run Average Cost curve to shift downwards. On the other hand the marginal product curve will shift upwards. The increase in the gap between marginal product and marginal cost will increase the revenues generated by the business in the long run.

. Answer. Fixed costs are indirectly related to the cost of goods manufactured and have to be paid whether the firm is making a profit or not. Higer fixed costs can prove to be highly risky for automobile companies if they are not making sufficient revenues to cope with the total costs. High fixed costs mean that the business will have to sell more products in order to break even at the point where MC=MR or Marginal cost = Marginal revenure

Answer: The decisions will be made acording to the cost of factors in both the countries. A capital intensive method of production will be used in case of England. In capital intensive method of production a large amount of capital equipment is used relative to other inputs for production. This is because the capital is relatively cheaper to use in England as compared to labor. In case of India where labor is relatively cheap and the capital is relatively expensive a labor intensive system of production will be implemented. In labor intensive method of production large amount of labor is used relative to other factors of production. This system will be beneficial in india because labor is relatively cheaper as compared to capital.

. Answer: The Minimum Efficient Scale is the point where the long run average cost curves stop to decline, and any futhur increase in production will cause an increase in marginal cost of production. It is important for each individual firm because it can aid them in determining the optimum level of production and will also help them indefining their limits. After the MES the economies of scale is exhausted and diseconomies of scale occurs.


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