Managerial economics assesment
Managerial Economics: Assessment 2
Note: This is individual assignment. Group work is not allowed. In mentioned cases provide a neat diagram to explain your answer. Make sure to label axes properly. Else points will be deducted. The maximum possible points is 50.
1) A local firm in Abu Dhabi is operating under a perfectly competitive environment. If price in market is 4 AED and their total cost is 500 AED (including the fixed cost of 200 AED) for output of 30 units, then should they continue to produce or shut down in short run? Provide your answer with a relevant diagram and explain your answer in few words. (10 points)
2) Recent research has documented the fact that Coke is something different compared to other soft drinks. In fact related literature states that Coke has already attained the monopoly status. If we assume the research is correct and coke is a monopolist, then a) Do you think that coke actively engages itself in price discrimination? B) If so, what type of price discrimination they are engaged in? Discuss your answer with a relevant diagram. (10 points)
3) Etisalat and Du are duopolists. If they form a cartel between themselves, then what will happen to price and output in the market. Discuss your answer with a relevant diagram. (10 points)
4). In a recent conversation a policy maker argued that since DEWA is monopolist, they are charging higher price and lower output is produced. He further mentioned that government should split the entire unit into small pieces so that competition can drive down prices. Do you agree with this statement? Explain your answer in few words. Provide a relevant diagram. (10 points)
5) Consider the following pay-off matrix (Numbers in the matrix reflect their respective profit levels) for two gas stations.
Gas station A
Gas Station B High price Low price
High price 200,000 AED; 200, 000 AED 50,000 AED; 400,000 AED;
Low price 400,000 AED; 50,000 AED 80,000 AED; 80,000 AED;
If each firm follows their dominant strategy, then what will be their respective profit levels? And if they collude then what is their new profit level? (5 points)
6) A cosmetic firm operating in a monopolistically competitive market environment spends a lot of money in advertisement and ends up with super-normal profit even in long run. Is it possible? Explain your answer in few words. (5 points)
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