ECO404 Assignment Idea Sol 2019

Case 1:

Competition is a subject always open to debate in health care, and pharmaceuticals are no exception. Price competition in the pharmaceuticals supplies industry is growing rapidly in the increasingly price-conscious new millennium. Ferozsons is one of the leading companies in Pakistan maintaining exclusive agreements with a number of international partners for distribution, selling and co-manufacturing of surgical products. During the past year, Ferozsons sold 7 million (700, 000, 0) units of surgical products at a price of $13.50, for total revenues of $85 million. During the current year, sale of units of surgical products have fallen from 7 million (700, 000, 0) units to 4.6 million (460, 000, 0) units following a competitor price cut from $12.95 to $10.50 per unit.

Requirement:

a. Calculate the arc cross price elasticity of demand for surgical products of Ferozesons.

b. Marketing Director of surgical system in Ferozsons, projects that unit sale will recover from 4.6 million (460, 000, 0) units to 5.8 million (580, 000, 0) units if Surgical Systems reduces its own price from $13.50 to $12.50 per unit. Calculate Surgical Systems’ implied arc price elasticity of demand. (Marks: 4+4)

Case 2:

PEL prides itself on innovative home appliances geared towards the modern consumer. With the start of winter season PEL has announced 2% discount off the average price of refrigerators sold during the month of October in an effort to reduce excess end-of-themodel-year inventory. Customer response was wildly enthusiastic, with unit sales rising by 20% over the previous month’s level.

Requirement:

a. Calculate the point price elasticity of demand for PEL refrigerators sold during the month of August.

b. Calculate the profit-maximizing price per unit if PEL has Rs.30, 600 marginal selling costs. (Marks: 3+4)

Answer (A)

Arc Price elasticity of demand (responsiveness of demand) formula is

% ∆Q/%∆Price = ((Q2-Q1/average quantity)*100)/(p2-p1/average price)*100

Competitive price cut Surgical products of Ferozson,s quantity demand

$ 12.95 70,00,000

$10.50 46,00,000

Arc elasticity of demand = (4600000-7000000/5800000)*100 = -2400000/5800000 = -41.37

(10.50-12.95/11.72)*100 = -2.45/11.72 = -20.90

Arc elasticity of demand = -41.37/ -20.90

= 1.97

Note: If price of surgical products of competitive company decreases by 1% then quantity demand of surgical products of Ferozsons will be decrease by 1.97%

(B)

Price changes in ferozsons quantity demand changes

P1 13.50 Q1 4600,000

P2 12.50 Q2 5800,000

Arc price elasticity= ( 5800,000-4600,000/5200000)*100 = 23.07%

= (12.50-13.50/13) * 100 = -7.69%

Arc price elasticity= 23.07/-7.69

= -3 absolute value is 3

Note: If ferozsons decreases price by 1 % , quantity demand increases by 3 % . If ferozsons decreases price by 10% ,quantity demand will increase by 30%.

Case : 2

(A)

Pel refrigerators:

%∆Q = 20%

%∆P= -2%

Point Price elasticity of demand = ((Q2-Q1/Q1)*100)/(p2-p1/P1)*100

= .20/-.02

Ped = -10 absolute value is 10

(B)

έ= elasticity

Marginal cost = 30600

έ = -10

Profit maximizing price = Mc (έ/ έ+1) = Mc/ (1+1/ έ)

= 30600 (-10/-10+1

=306001.111111

P = 34000