Today, the modern global automobile industry encompasses the principal manufacturers, General Motors, Ford, Toyota, Honda, Volkswagen, and DaimlerChrylser, all of which operate in a global competitive marketplace. The global automobile industry has seen significant consolidation over the last few decades. Many of the industry giants have found it beneficial to join hands with some of their former rivals. The mergers between Daimler-Benz and Chrysler and between Hyundai and Kia, the association between Renault and Nissan and the takeover of Mazda, Jaguar and Volvo by Ford are but a few examples of this consolidation. Due to limited number of manufacturers, there is price interdependence among them. The automakers understand that price-based competition does not necessarily lead to increases in size of the marketplace so they are also involved in different ways of non-price competition to lure their customers. The industry has significant entry and exit barriers which makes it difficult for new players to enter the market.
Keeping in mind the characteristics of four market structures discussed in lectures, you are required to identify in which market structure automobile industry is operating out of four market structures. Also discuss the different ways of non- price competition used by automakers in order to attract their customers.
SEMESTER FALL 2019
PRINCIPLES OF MICROECONOMICS (ECO302)
DUE DATE: 27TH NOVEMBER, 2019 MARKS: 10
Case # 01:
Vegetable prices in Pakistan are skyrocketing. Tomato prices in local markets have shot up to Rs. 220-250 per kg while prices of other vegetables have also increased considerably. According to official rates, the price of tomatoes was Rs180 per kg but its price has touched Rs. 300 in retail markets which led to a lower quantity demanded of this vegetable. The given table describes what happened to prices and the quantities of tomatoes demanded.
200 800 300 750
A. Calculate price elasticity of demand for tomatoes when price is between Rs. 200 and Rs. 300 by using arc elasticity method.
B. After calculation, interpret your result whether demand for tomatoes is elastic or inelastic.
(Marks = 4+1)
Case # 02:
The cross price elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good changes. The table given below lists the cross-price elasticities of demand
Quantity Demanded (Kilograms)
for several goods, where the percent quantity change is measured for the first good of the pair, and the percent price change is measured for the second good.
Coke and Pepsi Butter and Margarine
Car and Petrol
Printer and Printer ink
McDonald’s burgers and KFC burgers
Cross Price Elasticity of Demand
-0.28 -0.34 +0.82
From the above information, you are required to explain the sign of each of the cross-price elasticities of demand. What does it imply about the relationship between the two goods in question?
(Marks = 5 (1 mark for each pair of goods)
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