Mastering the Art of Business Strategy

The 3D television will have a higher price elasticity of demand compared to prescription. 3D television is a secondary need which someone can do without. However, for prescription the changes in price have no effect on demand (basic need). Once an individual has been diagnosed of a medical condition, they must purchase the prescribe medicine regardless of the price.

2. Coffee sold in a café will have high price elasticity of supply because there are several suppliers of coffee therefore a change in price will result into significant change in quantity supplied. For electricity, there are few suppliers and it takes several years before a new plant is set up. Therefore, increase in price have little effect on quantity supplied.

3. Cross-price elasticity of demand (XED) =

Change in quantity demanded of tires =  

Change in price of cars =

XED =

The negative sign imply that cars and tires are complimentary goods. However, the coefficient is less than one indicating that the two products are not particularly complementary.

Task 3: Costs of Production

1. The license fee will affect the fixed cost of television companies. Regardless of the number of subscribers a television network command the license fee will be constant for a period of one years.

2. The deal will affect the variable cost because the number of power boards need for production increases with increase in the production.

3. In the long run, the company should search for the production technology allowing it to produce the desired level of output at the lowest cost. Therefore, the company should use Dreamliner when the demand is low in the long-run. In the case the number of passengers is not enough to fill an A380, then the company should use Dreamline which will reduce cost. The cost of operating a smaller airline is less than using a bigger airline A380. However, in the long-run the company should use A380 since the number of planes will be less hence reducing the long-run average total cost.

Task 4: Market Power

1. The figure below shows the market situation if Adidas is the only seller of exercise running shoes in Australia.

If adidas is the only seller then, it operates under monopoly market structure. The price Pm is determined at the point where MC meets MR extended to the demand curve at point E. The firm will be marking supernormal profits since the average total cost will be less than the average revenue.

However, if the firm is perfectly competitive market (if other companies join the industry). Then the supernormal profits will fall to normal profits as presented in the figure below.

The figure show the firms in the industry making zero profit in the long run which will force other firms to exit the industry thus pushing the normal back to normal levels.

2. The cattle farmers are price-taker, because consumers dictate the price they are willing to pay. The product has numerous substitutes and the cost of switching to another product offering similar ingredients offered by cattle meat. Therefore, the cattle farm faces a perfectly elastic demand where a slight change in price results into zero demand for the cattle farm.  However, for McDonalds the restaurants offer products which have substitutes but the cost of switching is relatively high for consumers because the companies have created customer loyalty. Also, restaurants are located far from each other so if a customer wants McDonalds product they have to pay for the additional transport cost.  If the McDonalds are located next to each other then, the companies will face perfectly elastic demand. Implying the customers will bear zero cost when moving from one McDonald to the other. Unless they charge same price and offer exact match which is not possible since it is a service industry.  

Task 5: Business Strategy

1. It is a strategy in which the actions of another player in the market does not eliminate the profit of the company employing the strategy. Hence, a strategy is dominant if it is always better than any other strategy, for any profile of other players’ actions.

2. Jim’s coffee has a dominant strategy because if they enter the coffee market Star and Coffee will have two moves to choose. One – to retain the high prices or lower the prices. If S and C maintain the high price Jim’s will make two million profit but if the if S and C decide to lower the prices Jim’s will make a profit of one million. Therefore, the strategy of joining the market is dominant.

3. Star and Coffee have a dominant strategy because if they decided to lower the prices and Jim’s enter the coffee market then they will earn one million and two million if Jim’s does not join the market. However, if they maintain the high price and Jim’s enter the market they will still make a profit of three million or seven million if the Jim’s does not join the market. Therefore, the strategy is dominant.

4. Nash equilibrium is a set of strategies one for each player such that no player has incentive to change his or her strategy given what the other players are doing. The Nash equilibrium for this market occurs when Jim’s coffee enters the market and Star and Coffee decided to lower the prices. At this point any move by either company will result in reduction of price for the company that makes the move. For example, if Jim’s try to lower the price below the point set by S and C, then the S and C will be forced to engage in the price war which will continue until all the companies start marking zero profits. In this case the coffee market will in a disequilibrium state. Therefore, the two firms will face the consequence of affecting the Nash equilibrium.

5. Based on the strategy matrix presented above the threat does not have an effect on the move. Jim’s company will make profit regardless of the actions taken by Star and Coffee. If Jim’s does not join the market they will make zero profits but if they join and S and C lowers the price they will still make profit. Provided they do not break even or make losses following the strategy of S and C, then the entry move is a viable option for Jim’s.