ECO701 Economics and the Business Environment Coursework Answer

Question 1

The figure is as follows:-

Figure 1 show that a firm's marginal cost and average total cost are the same as its market price in the long run when people can come and go as they please. So that it can make the most money possible, the company decides how much to sell so that the price equals the extra cost. The cost of a good will fall to its lowest point on the average-total-cost curve when more people enter or leave the market.

The monopoly is not viable because it will suffer a loss of CMBAPM. As the company has a monopoly, it does not have to worry about being undercut by competitors, therefore there is no incentive for it to either enhance its services or lower its costs. If there is no significant rivalry, the company does not need to make significant investments in research and development or innovation since it can simply continue to retain its dominating position and bring in profits. Without this competition, the company may have little reason to do so. If a service is difficult to create or very costly to provide, a private company that has monopolistic power may be less interested in delivering that service. If the firm's manufacturing costs are high, there is a possibility that it will not be able to create a sufficient return to warrant the investment.

If the company has to make a substantial investment in the infrastructure or the technology in order to provide the service, they may be hesitant to take on the risk. If there is no other company offering the service to compete with it, the company may not see enough value in promoting it via marketing and advertising, and it may not be able to earn sufficient income to make the service profitable. It is possible that regulatory roadblocks might hinder a monopolistic company from offering a certain service in certain circumstances. It may be difficult or even impossible for a private company to join a market because the government may have stringent licensing requirements or restrictions. In general, a private monopolistic company may not be interested in offering a service if it does not see a clear route to profitability or if there are considerable hurdles to entry.

Question 2

a) The rewards in the table are an exact representation of the circumstances described in the inquiry. The Nash equilibrium is highlighted in yellow.

For instance, if R.J. chooses not to advertise and Phillip chooses to broadcast television advertisements, R.J. will earn $25 million while Phillip would receive $55 million in compensation for their respective decisions. The outcomes flip from positive to negative when Phillip does not engage in advertising and R.J. does. After subtracting the cost of advertising from each company's total, they will each be left with a sum equal to fifty million dollars if they each spend one hundred million dollars on advertising. Hence, the profit for each one is thirty million dollars million. If none of the corporations choose to participate in advertising, there would be a fifty-million-dollar split between them.

b) In order to achieve the Nash equilibrium, it is necessary for both businesses to spend $30 million on advertising. The conclusion of the equilibrium is not ideal since both businesses might potentially increase their income by not advertising.

c) Both of the companies profited from the limitation since it allowed them to increase their sales without having to spend more money on marketing and promotion. It is quite clear that cigarette businesses like Big Tobacco were not being honest in their concerns.

Question 3

PepsiCo, a rival of Coca-Cola, was caught aback when the former surprised the latter by signing Michael Jackson, the most successful musical artist of the day, to a record-breaking $5 million deal to sell its brand. Pepsi was the first Western product to be legally promoted in the Soviet Union in 1974, when the CEO of the business blasted a shot of Pepsi's bubbly capitalism into the Soviet Union, becoming the soft drink the first Western product to be lawfully marketed behind the iron curtain. The max price will be Pepsi Max price is £0.12 /100ml and the Diet Coke price is £0.11 / 100 ml.

Mr. Kendall, the CEO of Pepsi, was known for combining innovative marketing strategies, ethical business practices, and strategic vision in his approach to leadership. When he took over the company two years later, one of his first moves was to make a strategic purchase of Frito-Lay, the market leader in the snack food business. This gave PepsiCo an advantage over its competitors by diversifying its product line.

Question 4

a) FALSE- Research and development has more power as the success of the firms depend on it.

b) FALSE- The term "maximum profits" pertains to the profits that remain after deducting the average cost of production, representing a surplus. It refers to an additional income stream that exceeds the individual's regular profits.

c) TRUE:- Barriers to entry refer to the various factors that impede the ability of a nascent firm to penetrate a given market. Collectively, they constitute a quintessential determinant of competitive intensity within an industry, known as one of the five forces.

d) FALSE- Fined cannot be considered as a worry

Question 5

A) Option b “generate monopoly profits” is correct.

The most current disruptive technology brings about greater production and product quality in addition to increasing revenues, which in turn brings about monopoly profits for the corporation that invented the technology. It is feasible that the company that manages to acquire and maintain possession of the technology will be in a position to increase its earnings while simultaneously reducing its costs. In case of option of undermine consumer choice, it is not correct.

B) There are benefits and drawbacks to using mobile applications to buy and sell pre-owned clothing. Some of the market effects of mobile app use are as follows:

a) Generates new trade: Electronic apps make it easier for sellers and buyers to connect with each other, increasing the volume of trade in the second-hand clothes market. The use of apps allows sellers to reach a wider audience, while buyers can browse and purchase items more easily.. The ability to choose from a wider variety of commodities is perhaps most probably the most significant benefit of commerce (say refrigerators). This illustrates the existence of substantial intra-industry trading, whereby the comparative advantages model does not account for. For instance, nations that export residential refrigerators might purchase commercial coolers.

b) Generates externalities: While the increased trade may be positive, there are also negative externalities associated with the use of electronic apps in the second-hand clothes market. For example, the production and disposal of electronic devices have negative environmental impacts, such as contributing to e-waste. Additionally, the increased use of electronic devices may lead to increased energy consumption and carbon emissions. Due to the fact that certain substances, like water or oxygen, can always be clearly allocated to a certain agent, it might not be a feasible alternative. Taxes can be levied by the governments on products or services which cause externalities. The tariffs would deter actions that burden unaffiliated parties with expenses.

c) Encourages people to buy junk: Another negative impact of the use of electronic apps in the second-hand clothes market is that it may encourage people to buy more items than they need. The convenience of browsing and purchasing items online can lead to impulse buying and may encourage people to buy items that they do not really need or want. This can contribute to the problem of fast fashion and the overconsumption of resources.

Question 6

a) YES:- The prohibition of antibiotic usage by farmers is necessary due to the negative externality issue it creates.

b) YES: The excessive utilisation of antibiotics in the agricultural sector is believed to be a significant contributor to the escalation of antibiotic-resistant bacterial infections in human populations.

c) NO: Antibiotics are frequently administered through animal feed as a preventative measure against infections or illnesses caused by stress.

d) YES: Food animals have the potential to harbour pathogenic microorganisms, such as Salmonella and Campylobacter, which have the ability to cause illness in humans. The administration of antibiotics to animals can result in the proliferation and persistence of antibiotic-resistant bacteria in their gastrointestinal tract.

e) NO: Antibiotics are administered in livestock to mitigate, manage and prevent bacterial infections. Similar to human beings, animals are susceptible to acquiring infections, including pneumonia. Antibiotics are employed for the purpose of treating and preventing diseases in a humane and cost-effective manner.

Question 7

Question 8

1. YES- It is true as population increases.
2. YES- Labor intensity increases size.
3. NO- Claims does not increase size
4. YES- Spending increases size.
5. YES- Regulation also increases size
6. NO- Ideological conviction does not increase size
7. YES- Taxes also increases size
8. YES- Taxes increases size

Government engagement in the economy is often quantified by looking at the percentage of GDP that goes toward government expenditures. There are a number of reasons why this proportion may not necessarily be indicative of the extent to which the government is involved in the economy.

Firstly, government spending includes transfer payments such as social security and welfare, which do not directly contribute to the production of goods and services in the economy. These payments are essentially transferring of income from one group of individuals to another and do not represent an increase in economic activity.

Secondly, the ratio of government spending to GDP does not consider government regulations and policies that can significantly affect the economy. For example, regulations such as labour laws, environmental regulations, and zoning laws can all have a significant impact on economic activity, but are not included in the government spending measure.

Question 9

1) TRUE- Compared to GDP, which measures a country's wealth, or GDP per capita, which reveals something about an individual's means but nothing about their life outcomes, GDI paint a more nuanced picture of development.

2) TRUE- There is a small but noticeable difference between GDI and GDP. Earnings, earnings, and taxes are all considered "take in" amounts that contribute to GDI. The Gross Domestic Product measures the monetary worth of all final goods and services created in an economy.

3) FALSE- Covid 19 did not distort the accuracy of GDP accounting. The main reason is that accounting will follow the same method, irrespective of Covid 19.

4) FALSE- Economists frequently use the gross domestic product (GDP) as a proxy for the prosperity of a nation; nevertheless, the GDP does not exist in a vacuum and does have some limitations. The gross domestic product does not account for all of the economic output, such as the squash that your mother grows in the backyard or other non-marketable items. In spite of its widespread use, the GDP is not an ideal indicator of a country's level of wealth because it does not take into consideration intangible factors such as the level of pollution or citizens' level of happiness.

Question 10

The equilibrium level of real GDP is Option C which is £2400. An economy is experiencing a crisis if its real GDP at the moment is lower than the production at full employment. An business has entered a booming if its real GDP at the moment is greater than its production at economic growth. Economists consider that the economy seems to be in long-run balance if the power capacity is equivalent to the production at economic growth. The frequency is not too excessive or inadequate. Whenever the total quantity of production required and provided equals one another, a system seems to be in short-run stability. Identifying the location when AD meets SRAS will allow individuals to determine the short-run equilibria inside the AD-AS model. The balance is made up of the market equilibrium as well as the optimum current price.

Question 11

1. C = £5,000,000 + 0.75 Y

Y = £5,000,000 + 0.75 Y + £60,000,000

Y = £65,000,000/0.25 = £260,000,000

Investment Multiplier = 1/(1-0.75) = 4

2. C = £15,000,000 + 0.75 Y

Y = £15,000,000 + 0.75 Y + £15,000,000

Y = £120,000,000

3. Size of Multiplier = £15,000,000/ £60,000,000 = 0.25

Question 12

Inflation Rate = 6% - 1% = 5%

Question 13

A correct answer is an option (a), the long-run Phillips curve will shift to the left.

Question 14

1. WRONG
2. CORRECT
3. CORRECT
4. CORRECT
5. CORRECT
6. CORRECT
7. WRONG
8. CORRECT
9. WRONG
10. CORRECT

Question 15

a) TRUE

b) TRUE

c) TRUE

Question 16

Equalling the price of a certain basket of goods in one currency with the price of those same goods in another currency using the purchasing power parity formula.

Value in terms of purchasing power: £3.49 / $5.65 = 0.62

To put it another way, you'll get $1 for 0.62 pounds.

In reality, though, one dollar may be purchased with 0.73 pounds.

This demonstrates that PPP is invalid. A trader could think about selling the currencies in issue whereas if PPP value shows that it is overpriced relative to other currencies. Investors could think about adopting a longer market perspective if indeed the PPP rate reveals that the currencies are inexpensive in relation to the USD. While buying power equivalence may not always be the greatest technique for short-term traders, this is vital to keep in mind. The strategy only truly works for longer-term algorithmic trading because they fail to take into consideration short-term instability. This makes it crucial to employ PPP with technical analysis markers as part of a larger foundational analysis method. The PPP shows that the pound is overvalued relative to the dollar since $1 should only need £0.62 but really requires £0.73. PPP may explain how currency values affect bond as well as equity markets, even if it may not always suggest which commodities to concentrate on since it fails to flag under- or overvalued securities like those associated with FX pairings. For instance, any decline in the value of a country's currency through time would reduce the buying ability of that country's currency, indicating that a comparable amount of cash will stop buying share if such an owner wishes to purchase interests inside a multinational enterprise.

References

Besanko, D., & Braeutigam, R. (2020).  Microeconomics . John Wiley & Sons.

Kreps, D. M. (2019).  Microeconomics for managers . Princeton University Press.

Browning, E. K., & Zupan, M. A. (2020).  Microeconomics: Theory and applications . John Wiley & Sons.

Arnold, R. A., Arnold, D. R., & Arnold, D. H. (2022).  Microeconomics . Cengage Learning.

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