Name: Mostafa Hassan Abdel Nabi Farrag

Group Lecture Day: Tuesday

Course: Managerial Economics

Group Code:

Date of submission:

Question 1:
1. Read the following statement and answer the question that follows. "Cell phones
have quickly become taken as much for granted as electricity or water supply. They have
had a major impact on our lives and the way that we perform everyday tasks. Many of
these changes are apparent, while others we may not even be aware of. People
nowadays really don’t remember quite well how life was before cell phones existed!"
Use the demand-supply model to illustrate the changes in the market for cell phones
over the last twenty years. Try as much as possible to relate the demand-side factors
and the supply-side factors we studied in class to the market under study. Although
drawing graphs is not necessarily required, yet it could help you to illustrate your
answer. Support your answer with relevant real-life data.

Solution of Question 1:
Supply and Demand factors of Smartphones 

The smartphone market is very large and has been growing since the creation of the
very first marketed smartphone, the Simon Personal Communicator. However, the
market didn't explode until a Japanese firm, NTT DoCoMo, released smartphones that
quickly spread in Japan.
 
Demand Factors for Smartphones 

• # of Buyers 
 
• # of buyers decreasing overall 
 
- due to smartphones lasting longer & more 
 
people owning smartphones 
 
- demand decreasing overall 
 
• # Related goods 
 
- Substitute goods 
 
- many smartphone brands 
 
 - if one has a big price demand for others may increase if at lower price 
 
 
- Complement goods 
 
- Products that go along with smartphones 
 
(ie: VR sets, cases) 
 
” can increase demand for phones if they become popular “

Demand Factors for Smartphones 

- Income 
 
Smartphones becoming cheaper and better:

• low to medium end smartphones more affordable options 

 
• low income --> demand increases for these phones

• high income --> demand increases for high-end 

 

- Tastes 
 
• Trends influence market 
 
• i.e.; camera quality, screen quality, speed, reviews 
 
• Trends include taking pictures, social media, recording videos, etc. (common answer
on survey) 
 
• better quality on these features increases demand 

Demand Factors for Smartphones

 
• Expectations 
 
• Release day --> people expect smartphone to sell out --> demand increase on release
day/ 
 
week 
 
• Future sale --> people wait for sale to buy --> demand decreases until sale 
 

Smartphone Market Share and Sales graphs

 
 Supply Factors for Smartphones
 
• Technology 
 
• most smartphone companies receive parts from other manufacturers 
 
• technology typically affects quality of product rather than production efficiency 
 
• Input goods 
 
• mentioned above, smartphone companies receive parts from manufacturers 
 
• pricing of each part can influence price of smartphone --> decrease in supply if price is
too high • (ie; Snapdragon processors becoming priceyer) 
 Supply Factors for Smartphones

 
• Expectations 
 
• sellers expect highest price on release of phone --> increase supply on release date 
 
• as time progresses in technological world, phone becomes 'older" --> decrease in
supply as sellers expect 
 
less demand 
 
ie: Galaxy S5 not in demand compared to S6 & S7 --> 
 
less supply of S5 
 
• # of Sellers 
 
• beginning of smartphone "explosion" few companies 
 
were in market --> low supply • i.e.: Nokia, Blackberry. Windows 
 
• today, over 100 smartphones companies--> supply 
 
increases 

Surveying

 
• Asked family people on campus why they chose their phone. Discovered demand
related factors: 
 
. "Phone was on sale. phone was not expensive" • Income - low price + low income
more demand 
 
cheaper phones 
 
• Expectations - expected sale on phone --> less demand until sale 
 
"Last phone not working, slow, not as expected" • Substitute goods - last phone wasn't
good --> demand 
 
for other smartphone brand increases 
 
"Liked the camera, good reviews, friends liked it”. Tastes - camera follows trends,
reviews positive, peer influence --> increase in demand for that smartphone 
 
Sources
 
"Gartner Says Five of Top 10 Worldwide Mobile Phone Vendors Increased Sales in
Second Quarter of 2016 Gartner Says Five of Top 10 Worldwide Mobile Phone Vendors
Increased Sales in Second Quarter of 2016. N p. 19 Aug 2016 Web 05 Dec. 2 
 
Alba. Davey. "It's Official: The Smartphone Market Has Gone Flat Wired Conde Nast. 27
Apr. 2016. Web. 04 Dec 2016.

Rahim, Aziea "Factors Influencing Purchasing Intention of Smartphone among University

Students Factors Influencing Purchasing Intention of Smartphone among University
Students 
 N.p. 16 Apr 2016. Web 04 Dec 2016 
 
Stone, lan. "Smartphones and the Battle of the Supply Chain IT Pro Portal ITProPortal, 26
May 
 2016. Web. 05 Dec 2016. 
 
Williams, Rihannon. "Smartphone Demand Falls for First Time in History" The
Telegraph. 
 
Telegraph Media Group. 28 Apr. 2016. Web. 05 Dec 2016) 

Question 3:
With an estimated market share of 37%, Atlas is the dominant company and the price
leader in an oligopolistic steel industry. The remaining market share is distributed
equally between seven companies. Suppose that one of those Eight companies, Norton,
attempts to gain market share by undercutting the price set by Atlas. Calculate the “Four
Firm Ratio” and Herfindahl-Hirschman Index “HHI” in the above-described market and
interpret your answer. What model can best resemble this market? Briefly explain this
model. In your opinion, what will be the effect of Norton’s attempt described above on
Atlas’s market share: will it increase, decrease, or not affected at all? Justify your
answer.

Solution of Question 3:
1 – The four-firm concentration ratio is calculated by adding the market shares of the four
largest firms: in this case,

100% - Atlas share (37%) = 63% divided by seven companies equally = 9%

So, the for firm ratio is 37% + 9% + 9% + 9% = 64%

Conclusion:

This concentration ratio would be considered high, because the largest four firms have
more than half the market.

2 - the HHI is calculated by squaring the market share of each firm competing in the
market and then summing the resulting numbers.
(37^2 + 9^2+ 9^2+9^2+9^2+9^2+9^2+9^2) = 1936

Conclusion:

The HHI takes into account the relative size distribution of the firms in a market. The
agencies generally consider markets in which the HHI is between 1,500 and 2,500 points
to be moderately concentrated.  
See U.S. Department of Justice & FTC, Horizontal Merger Guidelines § 5.3 (2010). 

3 – What model explain this market?

In this market the best market model describe is (oligopoly)
There are 4 basic market models: Perfect competition, monopolistic competition,
oligopoly, and monopoly
an oligopoly market has a small number of firms, the firms are interdependent and face a
temptation to cooperate

Two Traditional Oligopoly Models

- The Kinked Demand Curve Model
 In the kinked demand curve model of oligopoly, each firm believes that if it raises its
price, its competitors will not follow, but if it lowers its price all of its competitors will
follow.

- Dominant Firm Oligopoly

In a dominant firm oligopoly, there is one large firm that has a significant cost
advantage over many other, smaller competing firms. The large firm operates as a
monopoly, setting its price and output to maximize its profit. The small firms act as
perfect competitors, taking as given the market price set by the dominant firm

4–
In my opinion if Norton undercutting the price set by Atlas. Seeking to gain market share
this will not affect Atlas and market share not increased.
Conclusion:
If one firm in a market lowers its prices on goods and services, attaining optimal sales
growth, firms in direct competition usually follow suit, often creating a price war.
Oligopoly companies generally do not enter such price wars and, instead, tend to funnel
more money into research to improve their goods and services and into advertising that
highlights the superiority of what they offer

Question 7 :
Apex is a perfectly competitive firm. It has total fixed costs of $300/day and a daily
variable cost schedule in the table below. Apex’s product sells for $200 per unit.

Answer the following questions:

a. What is the profit-maximizing level of output? Calculate Apex’s profit.
b. If the market price dropped to $80, what is the profit-maximizing level of output?
What is Apex’s profit (or loss) in this case?
c. If the market price dropped further to $40, what is the profit-maximizing level of
output? What is Apex’s profit (or loss) in this case?
d. Comment on your answers to parts (2) and (3).

Solution Question 7:

a:
Quantity Variable Fixed Total Marginal Price Total Profit
Cost Cost Cost Cost Revenue
0 0 300 300 0 0 0 0
1 100 300 400 100 200 200 -200
2 180 300 480 80 200 400 -80
3 220 300 520 40 200 600 80
4 300 300 600 80 200 800 200
5 390 300 690 90 200 1000 310
6 500 300 800 110 200 1200 400
7 640 300 940 140 200 1400 460
8 800 300 1100 160 200 1600 500
9 1000 300 1300 200 200 1800 500
10 1250 300 1550 250 200 2000 450

Calculation in the above table as follow:

Variable cost: given
Fixed cost: given
Total cost = fixed cost + (total variable cost)
Marginal cost = (future cost - past cost) / (future production – past production)
Price: given
So, the maximizing level of production is 8 units
Apex profit = total revenue – total cost
= 1600$ – 1100$ = 500$

b:
if the price dropped to 80$ there is no profit as shown in table of calculations below
but the least level of loses is 3 units of outputs
that’s because total cost in the least level of production is 400$ and total revenue
become 80$ whick make lost as all level of productions below :

Quantity Variable Fixed Total Marginal Price Total Profit/Loses

Cost Cost Cost Cost Revenue
0 0 300 300 0 0 0 0
1 100 300 400 100 80 80 -320
2 180 300 480 80 80 160 -320
3 220 300 520 40 80 240 -280
4 300 300 600 80 80 320 -280
5 390 300 690 90 80 400 -290
6 500 300 800 110 80 480 -320
7 640 300 940 140 80 560 -380
8 800 300 1100 160 80 640 -460
9 1000 300 1300 200 80 720 -580
10 1250 300 1550 250 80 800 -750

c:
if the price dropped to 40$ there is no profit as shown in table of calculations below
that’s because we have fixed cost 300$ minimum units to cover is 8 units also variable
cost for 8 units production is 800 but in this selling price total revenue become
40*8=320$ which make loses of 940$

Quantity Variable Fixed Total Marginal Price Total Profit/Loses

Cost Cost Cost Cost Revenue
0 0 300 300 0 0 0 0
1 100 300 400 100 40 40 -360
2 180 300 480 80 40 80 -400
3 220 300 520 40 40 120 -400
4 300 300 600 80 40 160 -440
5 390 300 690 90 40 200 -490
6 500 300 800 110 40 240 -560
7 640 300 940 140 40 280 -660
 8 800 300 1100 160 40 320 -780
9 1000 300 1300 200 40 360 -940
10 1250 300 1550 250 40 400 -1150

d: Comments mentioned above each part calculations

Question 8:
The transition from short-run to long-run equilibrium in a monopolistically competitive
industry is rather analogous to that in a perfectly competitive one. What factor(s) might
drive profits to zero in a perfectly competitive firm in the long run? Would your answer
to the previous question differ if we consider a monopolistically competitive firm rather
than a perfectly competitive firm? Finally, why would a firm choose to operate at a loss
in the short run? When would it decide to shut down production temporarily?

Solution of Question 8:

1 - What factor(s) might drive profits to zero in a perfectly competitive firm in the long
run?
The factors might drive economic profit to zero in a perfectly competitive firm in the
long run is:
- New firms enter to the industry
- Existing firms leave the industry
- Changing the plant size
Conclusion:
Economic profits and losses play a crucial role in the model of perfect competition. The
existence of economic profits in a particular industry attracts new firms to the industry
in the long run. As new firms enter, the supply curve shifts to the right, price falls, and
profits fall. Firms continue to enter the industry until economic profits fall to zero. If
firms in an industry are experiencing economic losses, some will leave. The supply curve
shifts to the left, increasing price and reducing losses. Firms continue to leave until the
remaining firms are no longer suffering losses—until economic profits are zero.
2 -Would your answer to the previous question differ if we consider a monopolistically
competitive firm rather than a perfectly competitive firm?
Yes, it will differ because in the monopolistically competitive firm this market model not
get the same effect by exit & entry of new firms to the market because the price maker
always maximizes the economic profit & will not drive to zero economic profit
But there is another factor drive economic profit in monopolistically competitive firm
To zero as follow:
In the long run, economic profit induces entry. And entry continues as long as firms in
the industry earn an economic profit—as long as (P > ATC). In the long run, a firm in
monopolistic competition maximizes its profit by producing the quantity at which its
marginal revenue equals its marginal cost, MR = MC.
As firms enter the industry, each existing firm loses some of its market share. The
demand for its product decreases and the demand curve for its product shifts leftward.
The decrease in demand decreases the quantity at which MR = MC and lowers the
maximum price that the firm can charge to sell this quantity. Price and quantity fall with
firm entry until P = ATC and firms earn zero economic profit.

3 - Why would a firm choose to operate at a loss in the short run?

A firm might operate at a loss in the short-run because it expects to earn a profit in the
future as the price increases or the costs of production fall. In fact, a firm has two
choices in the short-run. It can produce some output or it can shut down production
temporarily.
4 - When would it decide to shut down production temporarily?

If price is less than the minimum average variable cost, the firm shuts down temporarily
and incurs a loss equal to total fixed cost. This loss is the largest that the firm must bear.
If the firm were to produce just 1 unit of output at price below average variable cost, it
would incur an additional (and avoidable) loss.
The shutdown point is the output and price at which the firm just covers its total
variable cost. This point is where average variable cost is at its minimum. It is also the
point at which the marginal cost curve crosses the average variable cost curve. At the
shutdown point, the firm is indifferent between producing and shutting down
temporarily. It incurs a loss equal to total fixed cost from either action.
If the price exceeds minimum average variable cost, the firm produces the quantity at
which marginal cost equals price. Price exceeds average variable cost, and the firm
covers all its variable cost and at least part of its fixed cost.
Question 9:
“In the short run, a company has to operate as efficient as possible to accomplish the
profit maximization goal”.
Answer the following questions:
a. If achieving efficiency is not attainable in the short run, what long-run decisions
should the company do? Explain your answer highlighting the pros and cons(risks) of
long-run decisions.
b. How do you perceive the term “Normal Profit”? Support your answer with numeric
example.
c. By means of the excel file we discussed in class, use any suitable data set to describe
how to calculate the most efficient level of production.

Solution of Question 9:
A:
The long run is a period of time in which all factors of production and costs are variable.
In the long run, firms are able to adjust all costs, whereas in the short run firms are only
able to influence prices through adjustments made to production levels.
in Monopolistic Competition:
In the long run, economic profit induces entry. And entry continues as long as firms in
the industry earn an economic profit—as long as (P > ATC). In the long run, a firm in
monopolistic competition maximizes its profit by producing the quantity at which its
marginal revenue equals its marginal cost, MR = MC.
As firms enter the industry, each existing firm loses some of its market share. The
demand for its product decreases and the demand curve for its product shifts leftward.
The decrease in demand decreases the quantity at which MR = MC and lowers the
maximum price that the firm can charge to sell this quantity. Price and quantity fall with
firm entry until P = ATC and firms earn zero economic profit.
Innovation and Product Development
We’ve looked at a firm’s profit maximizing output decision in the short run and the long
run of a given product and with given marketing effort. To keep earning an economic
profit, a firm in monopolistic competition must be in a state of continuous product
development. New product development allows a firm to gain a competitive edge, if
only temporarily, before competitors imitate the innovation.

Innovation is costly, but it increases total revenue. Firms pursue product development
until the marginal revenue from innovation equals the marginal cost of innovation.
Production development may benefit the consumer by providing an improved product,
or it may only the appearance of a change in product quality. Regardless of whether a
product improvement is real or imagined, its value to the consumer is its marginal
benefit, which is the amount the consumer is willing to pay for it.

highlighting the pros and cons(risks) of long-run decisions.

In the long run, the firm may:
- Enter or exit an industry
- Change its plant size
Entry and Exit New firms enter an industry in which existing firms earn an economic
profit. Firms exit an industry in which they incur an economic loss.
Changes in Plant Size Firms change their plant size whenever doing so is profitable. If
average total cost exceeds the minimum long-run average cost, firms change their plant
size to lower costs and increase profits.
Long-Run Equilibrium Long-run equilibrium occurs in a competitive industry when:
- Economic profit is zero, so firms neither enter nor exit the industry.
- Long-run average cost is at its minimum, so firms don’t change their plant size.

B:
Normal profit is a profit metric that takes into consideration both explicit and implicit
costs. It may be viewed in conjunction with economic profit. Normal profit occurs when
the difference between a company's total revenue and combined explicit and implicit
costs are equal to zero.
Example:
If the company's total revenue is equal to its total costs, that means its economic profit
is equal to zero, and the company is in a state of normal profit. For example, if a
company spends $200,000 every year on expenses, it needs to make $200,000 in
revenue to return a normal profit

C:
L Q=TP AP=Q/L MP=D TP/D L TFC TVC=L*wage rate TC=TFC+TVC AFC=TFC/QAVC=TVC/QAC=AFC+AVCAC=TC/QMC=D TC/D TPM C=D TVC/D TP P TR=P*Q π
0 0 0 0 0 0 0
10 300 30 30 100000 10000 110000 333.3 33.3 366.7 366.7 366.7 33.3 100.0 30000 -80000
20 800 40 50 100000 20000 120000 125.0 25.0 150.0 150.0 20.0 20.0 100.0 80000 -40000
30 1500 50 70 100000 30000 130000 66.7 20.0 86.7 86.7 14.3 14.3 100.0 150000 20000
40 2400 60 90 100000 40000 140000 41.7 16.7 58.3 58.3 11.1 11.1 100.0 240000 100000
50 3200 64 80 100000 50000 150000 31.3 15.6 46.9 46.9 12.5 12.5 100.0 320000 170000
60 3900 65 70 100000 60000 160000 25.6 15.4 41.0 41.0 14.3 14.3 100.0 390000 230000
70 4500 64 60 100000 70000 170000 22.2 15.6 37.8 37.8 16.7 16.7 100.0 450000 280000
80 5000 63 50 100000 80000 180000 20.0 16.0 36.0 36.0 20.0 20.0 100.0 500000 320000
90 5400 60 40 100000 90000 190000 18.5 16.7 35.2 35.2 25.0 25.0 100.0 540000 350000
100 5700 57 30 100000 100000 200000 17.5 17.5 35.1 35.1 33.3 33.3 100.0 570000 370000
110 5900 54 20 100000 110000 210000 16.9 18.6 35.6 35.6 50.0 50.0 100.0 590000 380000
120 6000 50 10 100000 120000 220000 16.7 20.0 36.7 36.7 100.0 100.0 100.0 600000 380000

Calculation in the above table as follow:

Variable cost: given
Fixed cost: given
Total cost = fixed cost + (total variable cost)
Marginal cost = (future cost - past cost) / (future production – past production)
Price: given
So, the maximizing level of production is 100 units
Apex profit = total revenue – total cost