ASSIGNMENT

MAY 2023 SEMESTER

SUBJECT CODE : MEC 604

SUBJECT TITLE : MANAGERIAL ECONOMICS

LEVEL : MASTERS

STUDENT’S NAME : LUMANTI TAMRAKAR

MATRIC NO. : M60109220221

PROGRAMME : MBA

ACADEMIC FACILITATOR : Prakash Khadka

LEARNING CENTRE : VIRINCHI COLLEGE

INSTRUCTIONS TO STUDENTS

1) This assignment consists of Two (2) Parts. Answer ALL questions.

2) Plagiarism in all forms is forbidden. Students who submit plagiarised assignment will be
penalised.
3) This assignment carries a 60% weightage toward final grade.
4) The submission date for this assignment is BEFORE OR ON July 31, 2023.
5) Please submit your assignment answer via myAeU PLS.

THERE ARE 2 PAGES OF QUESTIONS, EXCLUDING THIS PAGE

DECLARATION BY STUDENT

I certify that this assignment is my own work and is in my own words. All sources have been acknowledged
and the content has not been previously submitted for assessment to Asia e University or elsewhere. I also
confirm that I have kept a copy of this assignment.

Signed: __________Lumanti Tamrakar__________________

INSTRUCTION: Answer ALL questions given.
PART A: (60 marks)

QUESTION 1
Mr. John is planning to pursue MBA studies. Initial inquiry shows that he will have to pay $20,000
as tuition fee, buy books for $ 2,000, pay for transport $ 500. The MBA study programme will
extend over 18 months. Mr John is working now with a salary of $ 2,500 per month. Being a full
time student, he will have to forego the income from his present job for the period of study.

Work out the (a) Financial cost, and (b) the Economic Cost of doing MBA
(Hint: Identify implicit costs and explicit costs)
[10 marks]

Solution:

To calculate the financial cost and economic costs of pursuing an MBA, we need to

consider both explicit costs (direct monetary expenses) and implicit costs (opportunity costs).

a. Financial cost

The financial cost includes the explicit costs associated with pursuing the MBA
program. In

this case, the explicit costs are as follows:

• Tuition fee: $20,000
• Books: $2,000
• Transport: $500
Total financial cost = Tuition fee + Books + Transport
= $20,000 + $2,000 + $500
= $22,500

b. Economic Cost:

The economic cost considers both the explicit costs and the implicit costs. In this case,
the implicit cost is the opportunity cost of foregone income during the 18 months of study.

Opportunity cost = Monthly salary * Number of months of study

= $2,500 * 18

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 1

 = $45,000
Total economic cost = Financial cost + Opportunity cost
= $22,500 + $45,000
= $67,500
Therefore, the economic cost of pursuing the MBA program is $67,500.
Hence, from the above evaluations, we find out that Financial Cost is $22500 and the Total
Economic cost is $67500

Therefore, the financial cost of pursuing the MBA program is $22,500.

QUESTION 2
A firm has the following revenue and cost functions.
TR = 60 Q – Q2
1
TC = Q2 +30 Q + 30
2
Determine the quantity level at which the firm maximizes its total profit.
(Hint: use marginal revenue = marginal cost rule)
[15 Marks]

Solution:

TR = 60 Q – Q2
1
TC = Q2 +30 Q + 30
2

Using MC and MR approach:

Taking 1st order differentiation of TR w.r.t. Q.

𝑑𝑇𝑅
Marginal Revenue (MR) =
𝑑𝑄

= 60 – 2Q
Taking 1st order differentiation of TC w.r.t. Q.

𝑑𝑇𝐶
Marginal Cost (MC) =
𝑑𝑄

= Q+30

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 2

Profits (π) are maximum when MR = MC
60 – 2Q = Q + 30
or, 30 = 3Q
or, Q = 10

Therefore, the Profits are maximum when Q = 10.

QUESTION 3
Explain the term price elasticity of demand? How is it measured? What factors influence market
demand for products? If the price elasticity is -3 and $ 200 is the marginal cost of product X, what
should be the optimal sale price?
(Hint: apply the mark-up rule)
[10 Marks]

Solution:

The percentage change in the quantity purchased or the change in demand with a 1% change
in price is referred to as the price elasticity of demand, which is a dimensionless concept
(Andreyeva, Long & Brownell,2010). Price elasticity of demand is a measurement of the
change in the consumption of a product in relation to a change in its price. Expressed
mathematically, it is:

Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage

Change in Price

There are basically four methods we may use to determine the price elasticity of demand, and
they are as follows:

a. Percentage Method or Proportionate Method

One of the most widely used methods for calculating demand price elasticities is the
percentage method, which calculates price elasticity as the ratio of the percentage
change in quantity demanded to the percentage change in price.

% change in quantity demanded

PED =
% change in price

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 3

 𝑁𝑒𝑤 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (𝑄2) – 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (𝑄1)𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
Change in quantity demanded = ∗ 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (𝑃1) 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒

𝑁𝑒𝑤 𝑃𝑟𝑖𝑐𝑒 (𝑃2) – 𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑃𝑟𝑖𝑐𝑒 (𝑃1)

Change in price = ∗ 100
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝑃𝑟𝑖𝑐𝑒 (𝑃1)

b. Total Outlay Method or Total Revenue Method:

Professor Alfred Marshall developed the entire expenditure methodology, sometimes
known as the overall cost method, to calculate price demand elasticity. This approach
allows one to determine the price elasticity of demand by comparing the total spending
on the commodity before and after the price modification.
When comparing the expenditure, we can obtain one of three conclusions.

Those are If (Ep > 1), the Request Elasticity would be bigger than unity. The PED has
a value greater than 1 if total expenditure increases with a fall in price and lowers with
an increase in price. In this case, prices increase but overall expenditure or outlays
change for the worse.

Demand will have an elasticity of one (Ep = 1). The value of the PED would be equal
to 1 if, in reaction to an increase in the price of the product, the overall expenditure on
the commodity stays the same.

Demand elasticity will be smaller than one (Ep 1). If overall spending falls by a certain
amount, PED would be worth less than 1.

∆𝑄% 𝑄2−𝑄1 𝑃2−𝑃1

PED or 𝑒𝑝= where ∆𝑄% =( ) *100 and ∆𝑃% = ( )*100
∆𝑃% 𝑄1 𝑃1

c. Point Method:
The point method, a geometric approach to calculating price elasticity of demand, was
developed by Professor Alfred Marshall. The price elasticity of demand at any single
point along the demand curve can be ascertained using this method. As a result, it is
accepted that the point method is the approach for figuring out elasticity at a finite
(particular) point on a demand curve.

𝐿𝑜𝑤𝑒𝑟 𝑆𝑒𝑔𝑚𝑒𝑛𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑑𝑒𝑚𝑎𝑛𝑑 𝑐𝑢𝑟𝑣𝑒

Ep =
𝑈𝑝𝑝𝑒𝑟 𝑆𝑒𝑔𝑚𝑒𝑛𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑑𝑒𝑚𝑎𝑛𝑑 𝑐𝑢𝑟𝑣𝑒

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 4

 d. Arc Method:
The point method of calculating price elasticity of demand is erroneous because it
lacks information on really minute changes in price and quantity sought after in the
market.

Because of this, the point technique is inappropriate for figuring out price elasticity
when there has been a considerable change in both quantity and price, or when the
change has happened gradually. To get around these drawbacks, an alternative way
for figuring out price elasticity is called the arc approach.

In this application, an ARC is the portion of a demand curve that lies between two
points. The arc technique averages the price and quantity starting and ending values
to determine the elasticity coefficient.

∆𝑄
𝑄𝑎𝑣𝑔
Arc Elasticity = PED or 𝑒𝑝 = ∆𝑃 where ∆𝑄 = 𝑄2 − 𝑄1 and ∆𝑃 = 𝑃2 − 𝑃1
𝑃𝑎𝑣𝑔

Factors that influence the market demand for product are:

a. Price of the Product

b. The Consumer’s Income

c. Price of Related Goods

d. Tastes and preference of Consumers

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 5

e. Consumer’s Expectations

f. Number of Consumers on the Market

Numerical
Solution,
Price Elasticity of demand (PED), 𝑒𝑝 = -3
Marginal Cost of the product X (MC) = $200
Optimal Sale Price =?
We know
1
Optimal Sale Price = Marginal Cost *(1+ )
|𝑃𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑|
1
= $200*(1+ )
|−3|
4
= $200*
3

= $150
Therefore, the optimal sale price for product X, using the markup rule, should be
approximately $150.

QUESTION 4

Explain the concept of price discrimination and discuss the conditions necessary for its
effectiveness. Provide examples from the airline industry to illustrate your answer.

[15 Marks]
Solution:

The practice of charging customers different prices for the same commodity or service
depends on the vendor's perception of the customer's willingness to pay, and is known as
price discrimination. A business that practices pure price discrimination will charge each
customer the maximum price they will accept. In more common forms of price discrimination,
the provider creates groups of customers based on specific traits and assigns a different price
to each group. Price discrimination aims to optimize profits by establishing prices in
accordance with how much each market segment is willing to spend. By charging more to
consumers who are willing to pay more and less to customers, businesses can extract more
value from their product or service.

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 6

Price discrimination comes in three degrees: first-degree, also referred to as perfect price
discrimination; second-degree; and third-degree. Personalized pricing is the first level of price
discrimination, followed by product versioning or menu pricing for the second level, and group
pricing for the third which is more price-sensitive consumers.

a. First Degree Price Discrimination

When a business charges the highest price per unit of consumption, this is referred to
as first-degree discrimination, also known as perfect price discrimination. Since prices
vary between units, the corporation captures all conceivable consumer surplus for
either itself or the economy. In firms that provide customer services, first-degree price
discrimination—where a company charges a different price for each good or service
sold—is a frequent practice.

b. Second Degree Price Discrimination

Second-degree pricing discrimination occurs when a business charges different prices
for different quantities consumed, for as through quantity discounts on large
purchases.

c. Third Degree Price Discrimination

Third-degree price discrimination occurs when a company charges different prices to
various customer groups. For instance, a cinema might charge elderly, adults, and kids
separate prices for the same movie. This is the discrimination that occurs most
frequently.

Price discrimination needs to meet a few requirements in order to be profitable.

a. Market Segmentation:
The market must be segmented into separate groups, and the seller must be able to
identify and target these segments based on their characteristics, preferences, or
purchase trends.

b. Price Discrimination Detection Barriers:

Customers should find it difficult to resell the product to one another for less money
from different market groups. If they can, they should use pricing discrimination as little
as possible.

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 c. Price Elasticity Variation
Across various market categories, demand price elasticity should differ. Some market
segments should be more sensitive to price, while others should be less sensitive and
willing to pay more.

d. Cost Considerations
The business must be able to produce and sell the product at a cost that allows for
price fluctuations amongst market groups without significantly harming overall
profitability.

There are several types of pricing discrimination, some of which are explained here, using the
airline sector as an example.

a. Seat Classes:
Airlines regularly establish varying pricing for various seat classes. First class,
business class, and premium economy are just a few of the different ticket options they
provide. Each class provides a different standard of comfort, convenience, and
adaptability, allowing the airline to charge more to customers who desire more luxuries.
Budget-conscious tourists should take economy; business travelers or those with a
higher willingness to pay should select first class.

b. Regional Pricing:
Depending on the point of departure or the destination, airlines may also apply regional
pricing. Flights departing from less affluent locales may have cheaper fares than flights
arriving from locations with higher average incomes or higher demand.

c. Dynamic Pricing:
Airlines routinely adjust ticket prices based on demand, the time of booking, and other
factors by using dynamic pricing algorithms. For instance, when ordering tickets in
advance for a popular destination during the peak travel time, the price is often higher.
Airlines may, however, lower prices to entice more travelers as the departure date
approaches or if there are still seats available.

d. Advance Purchase Discounts:

Airlines frequently provide discounted costs for tickets purchased in advance by
customers. Companies assure early reservations and revenue in this way, pushing

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 8

 customers to purchase tickets in advance. Last-minute bookings, which are commonly
made by business travelers or those with urgent travel needs, typically come at a
higher price.

The airline corporation charges a greater price for business class tickets while charging a
lower price for economy class tickets. Obviously, the services offered during the flight may
vary depending on whether you are in business or economy class, but that is a nice example
of pricing discrimination. Similar to this, when two people purchase economy class tickets, one
of them buys two tickets and the other buys twenty, the second person purchasing the twenty
tickets must pay a relatively lower amount of money per unit of the ticket than the first who is
only purchasing two tickets. If the buyer has a close family connection to the heads, the airline
firm engages in yet another kind of price discrimination.

QUESTION 5
In last few years, the price of oil has fallen drastically.
Explain if this is a result of:
a. A drastic reduction in the cost of production (i.e. shift in the supply curve)?

b. A fall in the demand for oil and oil products (i.e. shift in the demand curve?

c. Other factors?

(Hint: Search through the material on oil pricing in the global market) [10 marks]
Solution:

The price of crude oil, or more specifically the price of petroleum products like gasoline and
diesel, is decided on the world market for consumer goods. On the international market, the
cost of crude oil fluctuates every day. Like most other commodities, crude oil also has buyers
and sellers who agree upon a price, and that price is determined by various factors such as
demand, geopolitical situations, etc. Therefore, if the price of crude oil changes on the
international market, this will also have an impact on the pricing of oil in the consumption
market. The laws of supply and demand drive changes in oil prices, just like they do for any
stock, bond, or commodity. The price of the good decreases when supply outpaces demand,
and the reverse is also true when customers' demand outpaces supply. Due to the decreasing
demand for oil as a result of the country's plans to replace fossil fuels, the price of oil in 2014
fell in places like China and Europe (Lioudis, 2018). The price of oil declines as a result of the
producers' excessive supply. The price of oil is mostly determined by the free market's activity,

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 9

which has an impact on oil pricing. A final oil contract is a valid agreement that gives the buyer
the ability to fix the price later while purchasing the barrel of oil. The supplier and buyer of the
oil must complete the payment and the entire transaction within the specified time frames, as
stated in the understanding. In addition to those already mentioned, there are numerous other
variables that contribute to the decline in oil prices.

a. Politics on oil price and Natural Disasters: Political events play a significant role in
how much the price of oil fluctuates on the international market. For illustration When
Hurricane Katrina struck the southern United States in 2005, it reduced the US oil
supply by 19% and increased oil prices by $3 per barrel. The Mississippi River flooding
in May 2011 and the unrest in the Middle East's political situation, which accounts for
a large portion of the world's oil production, both contributed to fluctuations in the price
of oil.

b. Production Cost: As a result of production costs, the price of oil may also fluctuate.
Oil from Canada is more expensive and typically more difficult to filter than oil from the
Middle East. If the primary oil is found in the tar sands, the price may increase when
the supply of little oil is reduced.

PART B: (40 marks)

Question1
How does the macroeconomic environment affect the firm’s decision making? Explain briefly the
important variables influencing business activities.
(10 marks)

Solution:

The phrase "macro environment" refers to the external factors that affect an economy.
Macroenvironmental factors including employment rates, GDP, consumer spending, fiscal
policy, and inflation have a substantial impact on a company's operations. Institutions and
governments formulate their policies in light of these factors. Macroenvironmental factors have
an impact on the development, strategies, and choices made by a company. But the
management has no control over these economic and non-economic factors. With a clear
focus on predicting macro-environmental factors for long-term sustainability. Using macro
analysis, they plan for future risks and opportunities.

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Some of the ways that the macroeconomic environment affects firm’s activities are as follows:

a. Government Policies:

The government can have a big impact on how businesses operate through taxation,
regulations, and fiscal policies, to name a few. Favourable regulations, including those
that provide tax advantages for investments, might encourage enterprises to expand,
but unfavourable regulations may prevent it.

b. Economic Growth:

The rate of economic growth has an effect on overall demand for goods and services.
As consumer demand increases, businesses often grow and make more investments
when the economy is expanding quickly. In contrast, because demand is weaker
during economic downturns, businesses might cut back on investments and hiring.

c. Inflation:

Inflation is the general term used to describe an increase in prices over time. High
inflation may reduce consumers' purchasing power, which will reduce demand for
goods and services. A company's cost structure, pricing strategies, and profitability
may be impacted by this.

d. Interest Rates:

The cost of borrowing money for businesses might alter depending on interest rates.
High interest rates might discourage investment and borrowing, whilst low interest
rates can encourage enterprises to take on debt for capital investment or expansion.

e. Exchange Rates:

Exchange rates are crucial for businesses involved in international trade or those have
operations abroad. Exchange rate fluctuations can have an impact on import costs,
total profitability, and export competitiveness.

f. Technological Advancement:

Innovation and technological progress can be influenced by macroeconomic factors.

Firms may have greater resources at their disposal for R&D during times of economic
expansion.

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In conclusion, the macroeconomic climate has a considerable impact on a firm's decision-
making process. Understanding and responding to these macroeconomic factors can help
businesses develop strategies to deal with a variety of economic situations and enhance their
overall performance and competitiveness.

Question 2
As an MBA student specializing in managerial economics, you have been tasked with analyzing
the impact of foreign exchange on managerial decision-making. Answer the following questions:

a) Explain the concept of foreign exchange and its relevance to managerial economics.
Discuss the factors that influence exchange rates and how they impact the decision-
making process in international business operations.

(15 marks)

Solution:

Trading one currency for values equivalent to another currency is known as foreign exchange,
or forex. Exchanges take place between currency pairs. The market's supply and demand
factors influence the foreign exchange rate, which varies often. The foreign exchange market
serves as the venue for this exchange. In an effort to deal with the effects of significant capital
inflows or terms-of-trade shocks while attempting to maintain monetary policy independence,
many central banks in both advanced economies (AE) and emerging market economies
(EME) over the past decade have engaged in sizable foreign exchange intervention (FXI)
operations (Adler & Mano, 2021). It is essential to the economy because its significance
extends beyond international trade and investment to cover concerns like migration and
tourism. Foreign currency is important because it enables cross-border trade and gives access
to global markets.

The economics discipline known as management economics uses economic theories,

concepts, and analytical methods to support managers in making choices in business
organizations. It is centred on applying economic theory to address real-world business
problems, as well as to enhance resource allocation and operational procedures.

Due to its profound influence on a variety of areas of global corporate operations and decision-
making, foreign exchange is a crucial topic in managerial economics.

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 12

 a. Financial Planning and Budgeting:

Managers should consider foreign exchange rates during the financial planning and
budgeting processes when dealing with international sales, spending, and
investments.

b. Pricing Decision:

The prices of imported and exported goods and services are directly impacted by
exchange rates. Managers must account for currency swings when determining prices
for products sold in foreign markets or sourcing inputs from abroad.

c. Strategic Planning:

Exchange rate changes can have an impact on how businesses choose their markets,
set their prices, and manage their supply chains.

d. Investment Decision:

When making investment decisions involving subsidiaries and foreign assets,

exchange rates have a significant role. The risk of exchange rates needs to be
managed when investing in global markets.

e. Hedging and Risk Management:

To reduce the risks posed by currency fluctuations, managers must implement hedging
strategies. The organization can prevent positive foreign exchange fluctuations by
using efficient risk management.

Foreign exchange is a key element of management economics for companies engaged in

worldwide business, investment, and operations. Managers must be aware of exchange rate
variations, comprehend how they affect various business activities, and implement the proper
policies if they are to manage currency risk efficiently.

Exchange rates are influenced by a variety of factors, and changes in them can significantly
alter the choices people make while doing business abroad. Some of the primary factors
affecting exchange rates are

• Inflation:

Changes in market inflation can have an impact on exchange rates. When a nation
has lower inflation than another, its currency usually increases because prices for
goods and services rise more slowly. In contrast, a nation's currency value will fall if its

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 13

 inflation rate is regularly greater. Higher inflation is generally associated with currency
depreciation and may lead to higher interest rates (Segal, 2023).

• Interest Rates:

High interest rates tend to draw foreign investment, which raises demand for the local
currency and could improve the value of the local currency (Segal, 2023).

• Government Debt:

A country's holdings of public debt, commonly referred to as government debt, could

make it harder to attract foreign investment and could even result in inflation. Foreign
investors may sell government bonds when the market predicts a large level of public
debt, which lowers the value of the national currency.

• Country's Current Account/Balance of Payments:

The currency rate of a nation can be influenced by its current account, which reflects
its trade balance and returns from overseas investments. Currency depreciation could
happen if there is a current account deficit, which occurs when imports exceed exports.
The nation's exchange rate is also impacted by the balance of payments.

• Terms of Trade:

The terms of trade, or the proportion of export prices to import prices, can alter over
time and have an impact on exchange rates. A country's terms of trade are improved
by quicker export price growth than import price growth, which boosts income and
increases demand for the local currency, which leads to currency appreciation (Twin,
2023).

• Political Stability and Performance:

The strength of a nation's currency is greatly influenced by its political stability and
economic growth. Foreign investors prefer investing in nations with fewer political risk,
which boosts investment and increases currency value. On the other hand, politically
unstable countries can see their currencies decline.

Exchange rate changes have an impact on a variety of decisions, including price, competitive
pricing in global markets, profit margins, cash flows, sourcing strategies, supplier selection,
and international investment decisions. To guarantee the company is profitable, managers

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 14

must regularly watch changes in exchange rates when creating their financial planning and
risk management strategies.

b) Evaluate the advantages and disadvantages of a strong or weak domestic currency for a
company operating in the global market. Discuss how managerial decisions, such as
pricing strategies and sourcing of inputs, are influenced by currency fluctuations.
Provide relevant examples.

(15 marks)

[Total :30 marks]

Solution:

The following are some advantages of a strong economy:

• Greater Purchasing Power: Companies can buy goods and services from other
markets at more advantageous exchange rates when their currency is strong, which
may encourage them to look into new international markets for sourcing inputs or
buying assets.

• Foreign Acquisitions: A strong domestic currency can result in lower costs for
businesses to buy abroad, allowing them to get access to new technologies, expand
their market share, and diversify their operations (Hayes, 2023).

Listed below are some disadvantages of a strong economy:

• Exporters Suffer: When the domestic currency gains, export prices for foreign
customers rise, potentially resulting in a fall in export sales and less competitiveness
in the global market. Due of this, the nation can experience a loss of jobs.

• Businesses That Conduct Business Abroad are Hurt: Businesses that conduct a
sizable portion of their business abroad will be impacted, as will investors in these
companies. This is because the value of income from international sales will decrease
on their income statements (Pettinger & Joyeuse, 2020).

• Pricing Pressure: Businesses could have to reduce their prices to compete in foreign
markets as a result of a stronger native currency, which will have an effect on their
overall financial performance and profit margins (Hayes, 2023).

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 15

The following advantages of a weak economy are listed:

• Positive Effect on Exporters: Exports are more accessible to international

consumers when the home currency is weak. This will boost the company's export
sales and boost its competitiveness on the global market.

• Increased Revenue from International Operations: Businesses with foreign

subsidiaries or branches can boost their revenues by remitting earnings at a favourable
currency rate to their home country.

• Attracting overseas Investment: A more affordable currency can increase a nation's

appeal to overseas investors, which could result in potential commercial partnerships
and expansion.

The following are some drawbacks of a weak economy:

• Import Cost: When the local currency depreciates, businesses that depend on
imports for their manufacturing operations may incur greater expenses since more
foreign currency units are needed to buy the same number of commodities.

• Inflationary pressure: In countries that significantly rely on imports, a weaker

domestic currency may result in inflationary pressures. Increased import expenses
may result in higher consumer prices and decreased buying power.

• Financing and Debt Repayment: Businesses with significant external debt may have
trouble repaying it as the cost of servicing such debt rises when the value of the local
currency declines.

Currency fluctuation can have a substantial impact on managerial decisions, particularly in the
areas of pricing strategy and input sourcing. Exchange rate volatility can create challenges
and opportunities for businesses engaged in international trade.

Let's investigate how these managerial decisions are impacted by currency changes using
relevant examples:

Pricing Strategies:

Consider the example of a US exporter selling widgets to a European customer while

discussing pricing strategies. Initially, when the value of the dollar is declining, the exchange
rate is €1 = $1.25, which means that each widget, which was initially priced at $10 each, costs

ASSIGNMENT_MANAGERIAL ECONOMICS_0523 Page 16

€8 to a European customer. The exchange rate changes to €1 = $1.35 as the value of the
dollar continues to decline. The buyer uses the opportunity to haggle for a lower price. The
cost in dollars is $10.13 even if the new price is set at €7.50 per widget, which from the buyer's
perspective represents a 6.25% discount. This illustration shows how a weak US dollar might
help the export industry by enabling it to keep its competitiveness in global markets.

Sourcing of Inputs:
• Import Sourcing: An Indian textile manufacturer purchases cotton from the US. The
price of imported cotton will decrease in rupee terms if the Indian rupee increases
versus the US dollar, lowering the manufacturer's input costs. In contrast, a falling
rupee will result in a rise in the cost of imported cotton, raising the manufacturer's input
costs.

• Supplier Choice: A South Korean or Japanese supplier of electronic components is an

alternative for an Australian electronics company. If the Australian dollar is strong
against the Japanese yen but weak against the Korean won, the company might pick
Korean suppliers in order to take advantage of the favourable currency rate.

In conclusion, changes in currency value can have a major impact on managerial choices
regarding the sourcing of inputs and pricing methods. Companies must actively track changes
in currency rates, take into consideration risk management strategies, and analyze other
economic factors to be competitive and profitable in a global corporate environment.

END OF QUESTION

REFERENCES:

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measurement. Journal of Macroeconomics, 67, 103045.

Andreyeva, T., Long, M. W., & Brownell, K. D. (2010). The impact of food prices on
consumption: a systematic review of research on the price elasticity of demand for
food. American journal of public health, 100(2), 216-222.

Hayes, A. (2023). Retrieved from

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https://www.investopedia.com/articles/forex/051415/pros-cons-strong-
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Lioudis, N. K. (2018, April 20). What causes oil prices to fluctuate? Retrieved July 19, 2019,
from https://www.investopedia.com/ask/answers/012715/what-causes-oil-prices-
fluctuate.asp

Pettinger, T., & Joyeuse. (2020). Retrieved from

https://www.economicshelp.org/blog/1299/economics/advantages-and-disadvantagesof-
devaluation/

Price Elasticity of Demand Meaning, Types, and Factors That Impact It. (2023, May 9).
Investopedia. https://www.investopedia.com/terms/p/priceelasticity.asp

Segal, T. (2023, 19 juin). Currency fluctuations: How they affect the economy.
Investopedia. Investopedia. Repéré à
https://www.investopedia.com/articles/forex/080613/effects-currency-
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returns%20in%20U.S.%20dollar%20terms

Twin, A. (2023, 28 juillet). 6 factors that influence exchange rates. Investopedia.

Investopedia. Repéré à https://www.investopedia.com/trading/factors-
influenceexchange-rates/

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