Managerial_Economics (11).pdf

© 2017 Ali Jili,ow, Course: Managerial Economics, Course Facilitator: Mr. A/Karim M. Dalel Page 1
Student ID : CGSSO00019731
Student Name : Ali Ibrahim Jili'ow
Course Code : BMME5103
Course Name : Managerial Economics
Program : MBA
Semester : Five
Assignment : January, 2017
Facilitator : Mr. Abdulkarim Mohamed Dalel
Date due : April 30, 2017
Submission Date : 27th
April, 2017
OPEN UNIVERSITY
MALAYSIA

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
PART ONE: EVALUATING PROJECTS AND THEIR LEVEL OF RISK..................................4
Q1. EVALUATING PROJECT A & PROJECT B, WHICH ONE HAS A HIGHER RISK...........4
Q2. ESTIMATE THE ARC PRICE ELASTICITY OF DEMAND.................................................4
Q3. CALCULATING ARC INCOME ELASTICITY......................................................................5
PART TWO: FITTING REGRATION EQUATION USING GDD, LABOUR & CAPITAL........6
Q1. FITTING A REGRESSION EQUATION USING GDP, LABOUR AND CAPITAL.............6
Q2. FITTING A REGRESSION EQUATION USING GDP/LABOUR........................................7
Q3.DETERMINE IF PRODUCTION FUNCTION EXHIBITS IRTS, DRTS & CRTS..............11
PART 3: EVALUATING FIRM'S LEVELS OF COMPETITIVENESS.....................................12
WHAT IS A STRATEGY.............................................................................................................12
WHAT ARE THE PORTER'S FIVE FORCE MODEL STRATEGIES......................................12
RIVALRY AMONG COMPETING FIRMS................................................................................13
POTENTIAL ENTRY OF NEW COMPETITORS......................................................................13
POTENTIAL DEVELOPMENT OF SUBSTITUTE PRODUCTS..............................................13
BARGAINING POWER OF SUPPLIERS...................................................................................14
BARGAINING POWER OF CONSUMERS................................................................................14
PORTER’S FIVE FORCES STRATEGIC FRAMEWORK..........................................................15
Q1. DETERMINING MAXIMIZE PROFITS & OPTIMAL SELLING PRICE FOR ALCHEM.16
PART FOUR: FORMING A GLOBAL CARTEL TO INCREASE PROFITS...........................19
Q1a. DETERMINE THE OPTIMAL OUTPUT AND PRICE.....................................................21
Q2.b. OPTIMAL OUTPUT; MARKET SHARE & TOTAL PROFITAFTER CARTEL............23
REFFERENCES............................................................................................................................26

INTRODUCTION
Economics is a major discipline that effects not only for major organizations but our everyday
lives as well; it's how people strive to satisfy their desired wants by using scarce resources. The
history of economics dates back many centuries, the first writings on the subject of economics
begun as early as Greek times, but 1776 there was great change about this field, as Adam Smith,
British economist wrote his popular book named The wealth of Nations, Adam Smith is believed
to be the father of modern economics, so his contribution to the field is very remarkable.
According to Robbins (1984), Economics is the science which studies human behavior
and the relationship between ends and consumption. Categorically economics can be divided into
two major category, Micro economics and Macro economics. Microeconomics: The study of the
choices that individuals and businesses make and the way these choices interact and are
influenced by governments. Macroeconomics: The study of the aggregate (or total) effects on the
national economy and the global economy of the choices that individuals, businesses, and
governments make. In other words Micro economics focuses on individual /organizational
economics while Macro economics focuses on the whole economics of the entire country.
Managerial economics focuses on micro economic reasoning on real world problems as
pricing decisions, selecting best strategy from different competitive environment. Managers
make decisions about firm's business activities and these decisions of course should enhance the
profits of the enterprise and will ultimately increases shareholder's wealth. However, this
assignment contains three parts, part one examines how to select best projects from different
projects having different expected returns and standard deviations, estimating and calculating
price and income elasticity of demand, estimating and forecasting sells.
Part two highlights understanding production function, cost minimizing and profit maximizing,
fitting regression equation, determining whether production function increases or decreases. Part
three discusses Porter's developed framework for identifying competitive advantage, Alchemy's
marginal cost, aggregate marginal cost and final part contains market theories in assessing
current events in competitive real world.

YEAR AIRCRAFT SALES
(UNITS)
AVERAGE PRICE
($ MILLIONS)
DISPOSIBLE PERSONAL INCOME (IN
CONSTANT 2013 IN $ BILLIONS)
2013 8,000 100 650
2014 10,000 89.50 610
2015 8,000 109.5 590
PART ONE: EVALUATING PROJECTS AND THEIR LEVEL OF RISK
Q1. Two investments have the following expected returns (net present values) and standard
deviation of returns, project A and project B respectively.
Which one has a higher risk? Justify your answer.
SOLUTION
We use this formula to calculate the level of risk that each project has V =
σ
r
Project A: $40,000/$50,000 = 0.8
Project B: $ 125,000/$250,000 = 0.5.
Intuition shows us that Investment B is less risky because its relative variation is less significant.
As the coefficient of variation increases, so does the relative risk of the decision alternative.
Therefore investment for Project B is less risk compared to investment for project A, because it
is actually smaller variation. in conclusion Project A has higher risk.
Q2. The AIROD Aircraft Company manufacturers' small, pleasure–use aircraft, Based on past
Experience, sales volume appears to be affected by changes in the price of the planes and by the
state of the economy as measured by consumers’ disposal personal income. The following data
pertaining to AIROD Aircraft Company sales, selling prices and consumers’ personal income
were collected:
a. Estimate the arc price elasticity of demand using the 2013 and 2014 data.
SOLUTIONS
a. Q1= 8,000
Q2 =10,000
P1 =$100
P2 =$ 89.50
PROJECT EXPECTED RETURNS STANDARD DEVIATION
A $50,000 $40,000
B $250,000 $125,000

ED2004 = DQ/ [(Q1 + Q2)/2]
DP/ [(P1 + P2)/2]
(10,000-8,000)/(8,000+10,000) 200/18000 = -2
(89.50-100)/ (100+89.50) -10.5/189.5
The arc price elasticity of demand using the 2013 and 2014 data is -2; the negative number here
indicates that quantity is inversely related to the price. A1% increase in price reduces the quantity
demand by -2%. The arc price elasticity of demand using the 2013 and 2014 is data is -2 which is
elastic, put absolute value = 2
b. Estimate the arc income elasticity of demand using the 2013 and 2014 data.
EY2014= DQ/ [(Q1 + Q2)/2]
DY/ [(Y1 + Y2)/2]
Q1 8,000, Q2 10,000 (10,000-8,000)/ (8,000+10,000) 2/18,000 = -3.5
Y1 $650, Y2 $610 (610-650)/ (650+610) -40/1260
According to this outcome of income elasticity of demand using the 2013 and 2014 data shows
that an increase in disposable personal income in AIROD Aircraft from 610 to 650 is associated
with an increase in ticket sales or fares. With 1% increase in Income, Tickets sales increases by -
3.5% .When incomes did not change from 2013 to 2014; it is not possible to estimate income
elasticity. However, it is possible to estimate the income elasticity between 2014 and 2015, and
remember that tickets are luxury goods
c. Assuming that these estimates are expected to remain stable during 2015.Forecast 2015 levels
for AIROD Aircraft Company assuming that its aircraft prices remain constant at 2014 level and
that disposable personal income will increase by $40 billion. Also assume that arc income
elasticity computed in (b) above is the best available estimate of income elasticity.
Solution
To find Q2 we will use this forecasting formula to determine the value of Q2, sales for 2013 and
2014 was 8,000 and 10,000 respectively, so what will be sales forecast for 2015?
Yt+1 = Tt+(Yt-Yt-1)10,000+(10,000-8,000) =12,000, therefore Q2= 12,000.
Yt+1 = Tt+(Yt-Yt-1)8,000+(8,000-10,000) = 6,000
EY2015= [(Q2 - Q1)/ (Q1+Q2)2] (12,000-10,000)/(10,000+12,000)/2
[(Y2 - Y1)/(Y1+Y2)2] (630-610)/(610+630)/2

(2,000/22000)/2 = 5.63, Therefore EY2015 = 5.63
(20/1240)/2
If income raises $40B in 2014 instead of $20B, using the arc formula the prediction of sales
would be: EY = 5.63
The forecasted demand for next year is 5.63 tickets assuming that other factors that influence
demand, such as advertising and competitors’ prices, remain unchanged and remain stable.
d. Forecast 2015 sales for AIROD Aircraft Company given that its aircraft prices will increase
by $20 from 2014 levels and that disposable personal income will increase by $40 billion.
Assume that the price and income affects are independent and additive and that the arc income
and price elasticities computed in parts (a) and (b) are the best available estimates of these
elasticities to be used in making the forecast.
Solution
Q1= 10,000, Q2= 12,000, Y189.50, Y2= 129.5
EY2015 [(Q2 - Q1)/ (Q1+Q2)2] (12,000-10,000)/(10,000+12,000)/2
[(P2 - P1)/(P1+P2)2] (129.5-89.50)/(89.50+129.5
(2,000/22000)/2 = 0.4980.5
(40/219/2
PART TWO: FITTING REGRATION EQUATION USING GDD, LABOUR & CAPITAL
1.Data on GDP ,Labour & Real Capital for Mexico from 1955-1974 is shown in Table 1 below:
YEAR
GPD ( MILLION
OF 1960 PERSO)
LABOUR (THOUSANDS OF
PEOPLE)
CAPITAL (MILLION
OF 1960 PERS)
1955 114043 8310 182113
1956 120410 8529 193749
1957 129187 8738 205192
1958 134705 8952 215130
1959 139960 9171 225021
1960 150511 9569 237026
1961 157897 9527 248897
1962 165286 9662 260661
1963 178491 10334 275466
1964 199457 10981 295378
1965 212323 11746 315715
1966 226977 11521 337642
1967 241194 11540 363599
1968 260881 12066 391847
1969 277498 12297 422382
1970 296530 12955 455049

1. Fit a regression equation using GDP as the dependent variable and Labour & Capital as the
independent variables. (Use logarithm for all variables)
2. Fit a regression equation using GDP/Labour as the dependent variable and GDP/Capital as the
independent variable. (Use logarithm for all variables)
3. Determine whether this production function exhibits increasing, decreasing or constant returns
to scale and show with suitable diagram.
SOLUTION
1. Fitting a regression equation using GDP as the dependent variable labour & Capital as the Independent
variables. We used logarithm for all variables by changing all variables in to logarithms form, as shown in
table below.
YEAR
LNGPD ( MILLION OF
1960 PERSO)
LN LABOUR (THOUSANDS
OF PEOPLE)
LN CAPITAL
(MILLION OF
1960 PERS)
1955 11.644331 9.025214888 12.11238265
1956 11.698658 9.0512274 12.17431879
1957 11.769016 9.07543661 12.23170141
1958 11.810842 9.09963225 12.27899778
1959 11.849112 9.123801611 12.32394901
1960 11.921791 9.166283986 12.37592512
1961 11.969698 9.161885152 12.42479444
1962 12.015433 9.175955945 12.47097599
1963 12.092293 9.243194709 12.52621949
1964 12.203354 9.303921786 12.59601117
1965 12.265864 9.371268036 12.66259519
1966 12.332604 9.351926736 12.72974144
1967 12.393357 9.35357454 12.80380689
1968 12.47182 9.398146859 12.87862674
1969 12.533569 9.417110609 12.9536654
1970 12.599904 9.469237093 13.02816038
1971 12.633664 9.498372383 13.09123797
1972 12.703904 9.527920995 13.16264699
1973 12.777213 9.675582684 13.23842226
1974 12.83462 9.557752549 13.32092731
1971 306712 13338 484677
1972 329030 13738 520553
1973 354057 15924 561531
1974 374977 14154 609825

MODEL SUMMARY
Model R R Square Adjusted R Square Std. Error of the Estimate
1 .998a
.995 .995 .02829
a. Predictors: (Constant), Logarithms of Capital, Logarithms of Labor
ANOVA
Model Sum of Squares DF Mean Square F Sig.
1
Regression 2.752 2 1.376 1719.231 .000b
Residual .014 17 .001
Total 2.765 19
a. Dependent Variable: Logarithms of GDP
b. Predictors: (Constant), Ln of Capital, Ln of Labor
a. Dependent Variable Ln of GDP
Coefficients
Intercept is: -1.65
X1 variable (Labour) 0.34
X2 variable (Capital) 0.85
Therefore, the estimated regression equation becomes as below
� = −1.65 + 0.34 + 0.85x
The two t − statistics are: LnL = .168 and LnC = .832
The coefficient of determination (R2) is equal to 0.995 indicating that this model explains
about 99.5 % of the observed variance in transit ridership.
2
= 99.5%

2. Fit a regression equation using GDP/Labour as the dependent variable and capital /labour as
the independent variable. (Use logarithm for all variables)
Solution
GDP/L C/L Ln(GDP/L) Ln(C/L)
13.72359 21.91492 2.619116 3.087168
14.11772 22.7165 2.64743 3.123091
14.7845 23.48272 2.69358 3.156265
15.04748 24.0315 2.71121 3.179366
15.26115 24.53615 2.72531 3.200147
15.72902 24.7702 2.755507 3.209641
16.57363 26.12543 2.807813 3.262909
17.10681 26.97795 2.839477 3.29502
17.27221 26.65628 2.849099 3.283025
18.16383 26.89901 2.899432 3.292089
18.0762 26.87851 2.894596 3.291327
19.70115 29.30666 2.980677 3.377815
20.90069 31.50771 3.039782 3.450232
21.62117 32.4753 3.073673 3.48048
22.56632 34.34838 3.116458 3.536555
22.88923 35.12536 3.130667 3.558923
22.99535 36.33806 3.135292 3.592866
Coefficients
Model Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
B Std. Error Beta
1
(Constant) -1.652 .606 -2.726 .014
Logarithms of Labor .340 .186 .168 1.830 .085
Logarithms of Capital .846 .093 .832 9.062 .000

23.95036 37.89147 3.175983 3.634726
22.23417 35.26319 3.101631 3.56284
26.49265 43.08499 3.276867 3.763175
EXCEL OUTPUT
Regression Statistics
Multiple R 0.988798
R Square 0.977721
Adjusted R
Square 0.976483
Standard
Error 0.030395
Observations 20
ANOVA
df SS MS F
Significance
F
Regression 1 0.729755 0.729755 789.9271 2.53E-16
Residual 18 0.016629 0.000924
Total 19 0.746384
Coefficients
Standard
Error t Stat P-value Lower 95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept -0.49472 0.121816 -4.06117 0.000733 -0.75065 -0.23879 -0.75065 -0.23879
X Variable 1 1.015301 0.036124 28.10564 2.53E-16 0.939406 1.091195 0.939406 1.091195
a. Dependent variable: Ln GDP Ln Cpital
b. Predictors ( Constant): Ln Capital/Ln Labour
Coefficients
Intercept is = -0.49472
X variable 1= 1.0153
Y=-0.49472+1.0153x
� = log α + β1 log L + β2 log K
Y=-0.49472+1.0153x

Summary
The coefficient of determination (R2) is equal to 0.9777indicating that this model explains about
98 % of the observed variance in transit ridership.
The F-statistic = 789.9271 is highly significant, which means that all the coefficients, taken
together are significantly different from 0. Hence the equation is good and can be used for further
analysis.
Sum of the two coefficients LnL and LnC is greater than one (0.340+0.846) 1.186, Therefore
production function shows increase return to scale
3. Determine whether this production function exhibits increasing, decreasing or constant returns
to scale and show with suitable diagram.
SOLUTION
To determine whether this production function exhibits increasing, decreasing or constant returns
to scale we need to add the elasticities of LnK and LnL, so it becomes as follows: Elasticity of
LnK+LnL (0.846+0.340 = 1.186).
As shown in figure below the production function was translated into logarithms convert into a straight
line and it shows increase return to scale ( IRTS) as elasticity is greater than 1.

PART 3: EVALUATING LEVELS OF COMPETITIVENESS IN VARIOUS MARKET
STRUCTURES & STRATEGIES IN ORDER TO OBTAIN COMPETITIVE EDGE
Micheal Porter developed a conceptual framework for identifying the competitive advantage from
FIVE (5) forces of competition in a relevant market. Using a suitable diagram, critically explain
the Porter’s Five Forces Strategic Framework, we shall discuss the above concepts in detail
Introduction
1. In this digital age business has became a very dynamic and competitive, and to maintain the
market business requires strategies to deal with the daily challenges that business faces,
However, in this section highlights very briefly what is a strategy is all about, concepts and
definitions, what is porter's five force model strategies and finally it presents diagram for Porter’s
five forces strategic framework.
Business strategy has been concern for many managers and investors, in order for any business
to be successful in its missions and vision, organization should establish and implementing the
best strategy that can conform to all organization's corporate and business levels. As famous
scholar has already said ''business without strategy is like a ship without compass.
What is a Strategy?
According to Grant, (19950, Strategy is the overall plan for deploying resources to establish a
favorable position. According to Czepiel & Kerin, ( 2009),Competitive marketing strategies are
strongest either when they position a firm's strengths against competitors' weaknesses or choose
positions that pose no threat to competitors.
What are the Porter's five force model strategies?
Porter’s Five-Forces Model of competitive analysis is a widely used approach for developing
strategies in many industries. The intensity of competition among firms varies widely across
industries (David, 2009).
Porter’s five forces model pays particular concentration to five forces that influence any industry,
threat of new entrants, intensity of rivalry, threat of substitutes, bargaining power of buyers and
bargaining power of suppliers. Porter’s model (1985) is grounded on microeconomic and has to
date shaped strategic management practice in the corporate world. It is built upon the assumption
that the external environment is a significant influence in strategy development (Ogutu, 2015).
According to Porter (1985), the nature of competitiveness in a given industry can be viewed as a
composite of five forces: Rivalry among competing firms, Potential entry of new competitors,

Potential development of substitute products, bargaining power of suppliers, bargaining power of
consumers.
1) Rivalry among Competing Firms
Rivalry among competing firms is typically the most powerful of the five competitive forces.
The strategies pursued by one firm can be successful merely to the extent that they offer
competitive advantage over the strategies pursued by rival firms. Changes in strategy by one firm
may be met with retaliatory countermoves, such as lowering prices, enhancing quality, adding
features, providing services, extending warranties, and increasing advertising.
The intensity of rivalry among competing firms tends to increase as the number of competitors
increases, as competitors become more equal in size and capability, as demand for the industry’s
products declines, and as price cutting becomes common (David, Strategic management:
concepts and cases, 2011). Rivalry among competitors can be brought about by price
discounting, new product introduction, advertising campaigns and service improvements (Porter,
2008).
2) Potential Entry of New Competitors
Every time new firms can easily enter a exacting industry, the intensity of competitiveness
among firms raises. Barriers to entry, nonetheless, can include the need to gain economies of
scale quickly, the need to gain technology and specialized know-how, the lack of experience,
strong customer loyalty, strong brand preferences, large capital requirements, lack of adequate
distribution channels, government regulatory policies, tariffs, lack of access to raw materials,
possession of patents, undesirable locations, counterattack by entrenched firms, and potential
saturation of the market (David, 2009).
Porter (2008) describes the threat of new entrants as directly related to the barrier to entry for
that particular industry and argues that it is not necessarily the actual entry of new competitors
but the threat of new entrants to the industry that drives competition and impacts the industry’s
profitability. The threat of new entrants will depend on whether or not the industry presents high
or low barriers of entry (Ogutu, Porter’s five competitive forces framework and other factors that
influence the choice of responsestrategies adopted by public universities in Kenya:, 2015)
3. Potential Development of Substitute Products
In many businesses, firms are in close competition with producers of substitute products in other
industries. The existence of substitute goods puts a maximum on the price that can be charged

before consumers will switch to the substitute product. Price ceilings equate to profit ceilings and
more intense competition among rivals (David, Strategic management: concepts and cases, 2011)
A substitute performs the same or a similar function by a different means (Porter, 2008). The
threat of substitute is high if the substitute provides a cost-effective trade-off compared to the
original product.
According to Martinez and Wolverton (2009a,b), the threat of substitutes is defined by three
attributes: time, convenience and application, with time being the most important factor driving
students to seek substitute products (Ogutu, Porter’s five competitive forces framework and other
factors that influence the choice of response strategies adopted by public universities in Kenya:,
2015).
4. Bargaining Power of Suppliers
The bargaining power of suppliers is high when suppliers of particular product are less or
monopoly. The bargaining power of suppliers affects the intensity of competition in an industry,
especially when there is a small number of suppliers, when there are only a few good substitute
raw materials, or when the cost of switching raw materials is especially costly (David, 2009). In
industry analysis, suppliers are defined as those organizations or individuals that provide the
materials, information or knowledge to allow an organization produce its goods and/or services
(Martinez and Wolverton, 2009).
Firms may pursue a backward integration strategy to gain control or ownership of suppliers. This
strategy is especially effective when suppliers are unreliable, too costly, or not capable of
meeting a firm’s needs on a consistent basis.
5. Bargaining Power of Consumers
When customers are concentrated or large or buy in volume, their bargaining power represents a
major force affecting the intensity of competition in an industry. Rival firms may offer extended
warranties or special services to gain customer loyalty whenever the bargaining power of
consumers is substantial (David, Strategic management: concepts and cases, 2011) Bargaining
power of consumers also is higher when the products being purchased are standard or
undifferentiated Consumers gain increasing bargaining power under the following
Circumstances:
 If they can inexpensively switch to competing brands or substitutes
 If they are particularly important to the seller

 If sellers are struggling in the face of falling consumer demand
 If they are informed about sellers’ products, prices, and costs
 If they have discretion in whether and when they purchase the product
Porter’s Five Forces Strategic Framework
2. Alchem (L) is a price leader in the polyglue market. All 10 other manufacturers (follower [F]
firms) sell polyglue at the same price as Alchem. Alchem allows the other firms to sell as much as
they wish at the established price and supplies the remainder of the demand itself. Total demand
for polyglue is given by the following function ( QT = QL + QF): P = 10,000 – 10QT.
Alchem’s marginal cost function for manufacturing and selling polyglue is: MCL = 100 + 3QL,
the aggregate marginal cost function for the other manufacturers of polyglue is:
Bargaining
Power of
Suppliers
Potential Development of
Substitute Products
Potential Entry of New
Competitors
Bargaining
Power of
Consumers
Rivalry among Competing Firms

∑MCF= 50 + 2QF
a) To maximize profits, how much polyglue should Alchem produce and what price should it
charge?
b) What is the total market demand for polyglue at the price established by Alchem in Part (a)?
How much of total demand do the follower firms supply?
SOLUTIONS
Let us begun by determining the output for Alchem and the follower firms and the selling price
for the component given that the firms are interested in maximizing profits.
P=10,000-10QT Where QL=QT+QF
Alchem’s marginal cost function equals
MCL=100+3QF
The aggregate marginal cost function for other six producers of the component is
MCF=50+2QF
Alchem’s profit maximizing output is found at the point .where
MRL=MCL
Total revenue function of Alchem’s TRL with respect QL
TRL=P. QL
Is obtained from equation QT = QL+QF
QL = QT − QF
Using equation P=10, 000-10QT can we solve for
P=10,000-10QT
-10QT=P-10,000
QT=-0.50P+1000
QT=1,000-0.10P , To find QF the follower firms are faced with a horizontal demand
function. Hence MRF= P and to maximize profits, the follower firms will operate Where � =
MCF, Substituting equation � = and MCF=50+2QF into equation
MRF= MCF
MCF=50+2QF, and we know P=MCF

=50+2QF And to solve this as �
2QF=P-50→
2QF
2
=
P
2
-
50
2
= QF=0.50P-25
Substitution equation QT=1000-0.10P for QT and QF=0.50P-25 for QF in equation
MCF=50+2QF gives us as follows:
QT=1000-0.10P , � = 0.50 − 25
QL=QT-QF
QL= 1000-0.10P - 0.50P-25
QL=1000-0.10P-0.50P+25
QL=1025-0.60P
Solving equation QL= (1,000-0.10P)-(0.5P-25)-1,025-0.60P12 for P, we get:
= 1025 − 0.60
-0.60P=QL-1025
−0.60
−0.60
=
−0.60
−
1025
−0.60
=-1.666QL+1708.3333
P=1708.3333-1.666QL
Substituting this expression for P in defining total revenue yields TRL = PQL
Where = 1708.3333-1.666QL
= 1708.3333—1.666QL QL
TRL=1708.3333QL-1.666QL
2
and to get MRL we differentiate TRL with respect to QL .
MRL =
∂(TRL)
∂(QL)
== 1708.3333 − 3.3334 , After that we compare MRL and MCL
MRL=MCL
1708.3333-3.3334QL=100+3QL* Solve for QL*

3QL*+3.3334QL*=1708.3333-100
6.3334QL*=1608.3333
6.3334QL*
6.3334
=
1608.3333
6.3334
QL*=253.945 Units
The optimal output for Alchem's is 253.945 units therefore, the maximum profit will be
P=1,708.3333-1.6667(253.945)
= $1,285.083
so next we are going to find the value for the optimal selling price ( ∗
),to get value of ∗
P*
=1708.3333-1.6667QL* And we know that
QL*=253.945 Units
P*
=1708.3333-1.6667 253.945
P*
=1708.3333-432.2501315
P*
=$1285.083
The optimal selling price ofP*
=$1285.083, the optimal output for the follower firms is found
by substituting this value of P in to �∗ = 0.50P-25, then get this
�∗ = 0.50 1285.083 − 25
QF*=642,5415-25
QF*=617.542 Units
And optimal output of the follower firm ( �∗) = 617.542 Units
Putting it all to gather !
The optimal output for Alchem knows as ( QL) = 253.945 Units
An optimal output of the follower firm ( �∗) = 617.542 ��
The optimal selling price = $1285.083

Total output for both firms= 871.487 units (253.945 + 617.542)
MRL= MCL
= 1708.3333 − 3.3334 , MCL=100+3QL , QL and QF we calculated QL earlier
1708.3333-3.3334(253.945) = 100+3 (253.945) 1708.3333-846.500266=100+761.835
=861.833037= 861.835 861.83=861.83. Alchem should sell its components above this
level.

PART FOUR: DRAM CHIPMAKERS PAY ENORMOUS FINES FOR FORMING A
GLOBAL CARTEL
The world’s top for manufacturers on inexpensive random access memory chips, a key
component of all consumer electronic devices, agreed to fines and jail terms for several
executive because of 1999-2002 price fixing. The criminal conspiracy raised prices 400 per cent
in a six-month period from US$1 to US$4 per 100 megabits and then orchestrated maintaining
the price at US$3. DRAM chips are generic and easily substitutable between suppliers.
As a result, a CARTEL agreement to limit production is necessary to maintain price above
competitive levels. SAMSUNG and HYNIX, two KOREA firms that produce the majority of the
chips, paid US$300 million and US$185 million fines, respectively. Infineon Technologies or
Germany paid a US$160 million fine, and four executives went to jail for several months and
paid individual fines of US$250,000. Micron Technology of Boise, Idaho, received immunity for
cooperating with the prosecutors and complainants DELL and HP in making the case.
Please read the article above and answer the following questions:
1. Use a suitable diagram to explain the price-output determination for a TWO (2) -firm Cartel
Profit maximization and the allocation of restricted output respectively
2. Suppose TWO (2) KOREA electronics companies, SAMSUNG (firm S) and HYNIX (firm T),
jointly hold a patent in a component used on DRAM. Demand for the component is given by the
following function:
P = 1,000 – QS – QT
Where QS and QT are the quantities sold by the respective firms and P is the (market) selling
price. The total cost functions of manufacturing and selling the component for the respective firms
are:
TCs = 70,000 + 5QS+ 0.252S
TCT = 110,000 + 5QT = 0.152T
i. . Suppose that the TWO (2) firms act independently, determine the optimal output and price
with each firm seeking to maximize its own total profit from the sale of the components.
ii. Suppose that the TWO (2) firms decide to form a CARTEL and act as a monopolist to
maximize total profits from the production and sales of the components. Determine the
optimal output, market share and company total profit when the CARTEL is occurs.

1. SOLUTIONS
First of all before we calculate, let us see the diagram showing output for the two firms, However
Figure 1.2 shows Price-output Determination for a Two-Firm Cartel.
Sources: (James R. McGuigan, 2011)
2. Suppose TWO (2) KOREA electronics companies, SAMSUNG (firm S) and HYNIX (firm
T), jointly hold a patent in a component used on DRAM. Demand for the component is given by
the following function:
P = 1,000 – QS – QT, Where QS and QT are the quantities sold by the respective firms and P is
the (market) selling price. The total cost functions of manufacturing and selling the component
for the respective firms are as follows:
TCs = 70,000 + 5QS+ 0.252S
TCT= 110,000 + 5QT = 0.152T
i. Suppose that the two firms act independently, determine the optimal output and price with
each firm seeking to maximize its own total profit from the sale of the components.
SOLUTIONS
TC1=70,000+5QS+0.25s
2
TCT = 110,000+5QT+0.152
ST
SUMSUM'S total profit equals to:
πS=PQS-TCS, =(1000-QS-QT)Q
S
-(70,000+5QS+0.25Q2
S)
=-70,000+955QS-QTQS-1.25Q2
S

πs= (1000Qs-Q2
s-QSQT)-(70,000-5QS+0.25QS
2
)
πs=1,000QS-QS
2
-QSQT-70,000-5QS-0.25QS
2
πs= -70,000+995QS-QSQT-1.25QS
2
∂ πs/ Qs = 995-QT-2.50QS ( Equation one).
ΠT = PQT-TCT
πT = (1,000-QT-QS) QT-(110,000+5QT+0.15QS
2
)
=1000QT-QT
2
-QSQT-110,000-5QT-0.15QT
2
=-110,000+995QT-QSQT-1.15QT
2
∂ πt/ QT = 995-QS-2.30QT ( Equation two)
At this point we are comparing equation 1 and 2
995-QT-2.50QS  yields to 2.50Qs+QT = 995 (a)
995-QS-2.30QT  yields to Qs+2.30QT =995 (b)
2.50Qs+QT = 995 (a)
2.50Qs=995-QT
2.50Qs/2.50 = 995-QT/250
QS =995QT/2.50, therefore Substitute Qs into its equation
QS+2.30QT =995
995-QT/2.50+2.30QT=995
2.50(995-QT) + 2.50(2.30QT) = 2.50*995
2.50
995-QT+5.75QT=2487.5
995+4.75QT= 2487.5
4.75QT=2487.5-995
4.75QT=1492.5
4.75QT/4.75=1492.5/4.75
QT =314.21 Units
QS=995-QT/2.50=995-314.21/2.50
QS= 680.79/2.50 = 272.32
πs = -70,000+995Qs-QTQs-1.25Qs2
= -70,000+995(272.32)-(314.21)(272.32)-1.25(272.32)2
= -70,000+270,958.4-85,565.6672-92697.728

πs = 22,695.00
πT = -110,000+995QT-QsQT-1.15QT
2
= -110,000+995(314.21)-(272.32)(314.21)-1.15(314.21)2
= -110,000+312,638.95-85,565.6672-113,537.112715
πT = 3536.17
ii. Suppose that the two firms decide to form a CARTEL and act as a monopolist to maximize
total profits from the production and sales of the components. Determine the optimal output,
market share and company total profit when the CARTEL is occurs.
SOLUTION
Total industry profits (πTotal ) are equal to the sum of Siemens’s and Thomson’s profits and are
given by the following expression: πTotal = πS + πT
PQS − TCS + PQT − TCS
Subtracting Equations into this expression yields
πTotal = 1000-QS-QT QS-70000+5QS+0.25Q2
S)+ 1000-QS-QT -(110,000+5QT+0.15Q2
T)
= 1000QS-Q2
S-QSQT-70000-5QS-0.25Q2
S+1000QT-QSQT-Q2
T-110000-5QT-0.15Q2
T
=-180000+995QS-1.25Q2
S
+995QT
-1.15Q2
T-2QSQT
To make best use of πTotal take the partial derivative of Equation with respect to QS and QT
∂πS
∂QS
=995-2.50QS-2QT
∂πT
∂QT
=995-2.30QT-2QS, Setting these Equation equal to zero yields
2.50QS+2QT-995=0
2.30QT+2QS-995=0
Let's solve these equations simultaneously becomes as follows
2(995-2QT)/2.5 +2.30QT=9951,990-4QT/2.5+2.30QT=995
2.5(1990-4QT) +2.5*2.30QT=2.5*995=19904QT+5.75QT=2,487.5
2.5
1.75QT=2,487.5-19901.75QT/1.75=497.5/1.75
QT*=284.29 Units

Qs= 995-2QT/2.5= 995-2(284.29)/2.5
Q
S= 995-568.58/2.5 QS=426.42/2.5
Q
S= 170.57 Units, Therefore optimal output for Q
S= 170.57 Units
Total= 180,000+995QS-1.25QS2
+995QT-1.15QT2
-2QSQT
=180,000+995(170.57)-1.25(170.57)2
+995(284.29)-1.15(284.29)2
-2(170.57)(284.29)
=180,000+(69,717.15)-36,367.656125+282,868.55-92,943.924715-96,982.6906
Total = $406,291.43
The optimal selling price and total profit for the cartel of P
gives us $545.14 per unit and

Total = $ 46,291.43.
Total = PQS-TCsPQT-TCTPQs+PQT = Total+TCS+TCT
TCS = 70,000+5QS+0.25QS
2
=70,000+5(170.57)+0.25(170.57)2
=70,000+852.85+7273.531225=78,126.381225. Therefore
TCs = 78,126.381225
TCT = 110,000+5QT+0.15QT 110,000+5(284.29) +0.15(284.29)2
=110,000+1421.45+12123.120615 = 123,544.70615.
Therefore TCT = 123,544.70615
The marginal costs of the two firms at the optimal output level are equal to
C∗
S =
�( CS )
�QS
, As we have already seen TCS= 70,000+5QS+25QS
2
MC
S
= �( CS )
�QS
= 5+0.50QS, remember that we calculate QS as 170.57units
MC
S = 5+0.50(170.57) 5+85.285 = 90.29

MC
S = 90.29
MC
T =
�( CT)
�QT
= TCT = 110,000+5QT+0.15QT2
MC
T =
�( CT)
�QT
= 5+0.30QT. Remember QT was 284.29 units
MCT = 5+0.30(284.29) 5+85.287
MC
T = 90.29
Total profit for Qs = $ 46,291.43. Total industry profit is $ 46,291.43*2= $92,582.86.
QS's market share = Total sales for Qs/industry total sales
Qs Sales P*Q= $545.14*284.29 = 15, 4977.86, Total industry sales= 247,962.389
Therefore Sumsum's market share = 15, 4977.86/247,962.389= 0.62*100= 62%
The most favorable market share for each firm in the cartel occurs where the marginal costs of
the two firms are equal. Total industry output is lower and selling price is higher when the firms
collude. Also, total industry profits are higher when the firms set prices and output jointly than
when they act independently.

REFERENCES
David, F. R. (2009). Strategic management: concepts and cases (13, Edition ed.). New Jersy:
Prentice Hall.
David, F. R. (2011). Strategic management: concepts and cases. New Jersy: Prence Hall
Publishers.
David, F. R. (2011). Strategic management: concepts and cases (13, Edition ed.). New Jersy,
United States of America: Pearson Education.
David, F. R. (2011). Strategic management: concepts and cases (Thirteen Edition ed.). New
jersey, USA: Pearson Education, Inc., publishing as Prentice Hall, One Lake Street.
James R. McGuigan, R. C. (2011). Managerial Economics: Applications, Strategy, and Tactics,
(12th Edition ed.). Mason, United States of America: South-Western Cengage Learning Cengage
Learning.
McGuigan, J. R. (2005). Managerial economics: Applications, strategy and tactics (10th ed.).
Mason, Ohio: South-Western.
Ogutu, F. M. (2015). Porter’s five competitive forces framework and other factors that influence
the choice of response. International Journal of Educational Management .
the choice of response strategies adopted by public universities in Kenya:. International Journal
of Educational Management .
the choice of responsestrategies adopted by public universities in Kenya:. International Journal
of Educational Management , N/A.

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