ECO701 - Economics and the Business Environment Coursework

Assignment Task

Question 1

In this question assume the role of a consultant who has been hired to advise a relatively new company that makes puzzle games/apps for smartphones and tablets. The app/games is free to download and play. The company makes most of its revenue from in app purchase and adverts that are played when using the app. Therefore, demand/usage of the app is very important for the company. Using your knowledge of Demand address the following questions. All answers provided must be justified. Be sure to utilise relevant graphs and wider reading to support your answers. (Note only consideration of the demand curve is required for these questions).

a) The Owners of the company noticed some recent changes in the market. For each of the noted changes explain the likely effect on the demand of their puzzle games/apps.

1. Increases in the prices of data usage needed to play apps/games on smartphones and tablets

2. Increases in marketing by a rival company that also makes similar apps and games

3. A shift in consumers wanting to play games on consoles, PCs or laptops

4. A news report is released stating that playing puzzle games increases the brain’s problem solving and concentration abilities

b) The Owners share data they have gathered regarding their attempts to change prices and prices changes of potentially related products. The Owners are looking to change the prices of their in-app purchases to see if they can make more money. Using your knowledge of Elasticity, identify/solve relative elasticities, interpret the answer and provide any applicable advice to the company. (Please give numerical answers to 2 decimal places)

1. When the Owners changed the price for getting more lives/attempts to complete the puzzle from £0.99 for 5 additional lives/attempts in Quarter 1 to £1.99 for 5 additional lives/attempts in Quarter 2, sales changed from 10500 in Quarter 1to 10000 in Quarter 2. Calculate the price elasticity of demand between Quarter 1 and Quarter 2. What suggestions would you make to the Owners regarding changing their prices given your answer?

2. When the Owners changed the fee for their boosters (in app/game items that help to solve the puzzles) £5.99 for a package of boosters Quarter 1 to £6.99 for the same package of boosters Quarter 2, sales changed from 12000 in Quarter 1 to 9000 in Quarter 2. Calculate the price elasticity of demand between Quarter 1 and Quarter 2. What suggestions would you make to the Owners regarding changing their prices given your answer?

3. The Owners allow consumers to agree a monthly rate for a special package of boosters. Consumers can choose to come off the monthly rate at any time for the special package of boosters. The average income of consumers that agree the special package of boosters decreased from £2500.00 per month to £2200.00 per month. The sales of the monthly special package decrease from 9000 to 6500 during this time period. Calculate the income elasticity of demand and identify whether the protection software is a necessity or a luxury good.

Question 2

Answer the following short questions:

1. George bought a case of six wine bottles from the Booze-R-Us shop. He paid £150 for it and received consumer surplus of £30. What was George's willingness to pay for the case?

2. When the price elasticity of demand is -0.13, what is the percentage change in revenue if Netflix increases the subscription fee by 5%?

3. The price of good Y decreases by 12% and the quantity of good X sold increases by 6%. What is the cross-price elasticity of demand for good X with respect to good Y? How are good X and good Y related?

Question 3

A market analyst asks for your help to forecast changes in different markets. The market analyst would like you to look at the following markets;

a) Traditional action figures (toys),

b) Tools for potting and caring for plants,

c) Exotic fruits,

d) Camping equipment.

When conducting research related to the relevant markets the following articles appear to given strong indication of relevant market changes: Children are playing less with traditional toys and more on electronic devices; Tending to plants became a popular hobby for many during national lockdowns, a hobby that people have continued; There are numerous reports and articles citing excellent health benefits for exotic fruits; There is a disruption to the supply chains for supermarkets particularly with imported fruits and vegetables; There is an increase in popularity for camping as alternative to expensive holidays. There are increases in the number of providers of camping equipment.

Given the above noted articles, consider how they may affect the market price and quantity of the markets that you are reviewing. Ensure that you use supply and demand diagrams to support your answers.

Question 4

State whether the following statements are correct or not and briefly explain why

1. Diseconomies of scale justify horizontal expansion of firms into unrelated fields.

2. Economies of scale lead to a downward sloping marginal cost curve

3. Elasticity of demand remains constant throughout the product cycle.

Question 5

The supply and demand for hazelnuts are given by QD = 9000 – 15P and QS = 10P, where P is price per bag (in pence) and Q measures bags per day. (It would be useful to illustrate the factors noted in a demand and supply diagram to make aspects clearer to see). Please also abstract from the question the government potential funding of the price floor.

1. What is the equilibrium price and quantity?

2. Calculate consumer and producer surplus

3. Suppose the government imposes a price floor of 400p per bag. Is there a shortage or surplus of peanuts and, if so, what is the size?

4. Calculate consumer and producer surplus with the price floor.

5. What is the size of the deadweight loss?

Question 6

Conduct an analysis of market structures:

Are perfectly competitive markets and their outcomes more preferred than monopolies? Compare the market structures and perfect competition and monopolies, and then analyse the advantages and disadvantages of these market structures from the perspective of consumers, producers and a welfare maximising government.

Question 7 

Using the relevant demand-supply-market equilibrium graph explain why the party who pays a tax by law is not necessarily the same as the party who bears the larger burden of a tax.

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