Reference no: EM132302263

Economics for Decision Makers - Case Study Report

Learning Outcomes :

• Demonstrate how as a problem solving approach the rational economic approach can be used to assist in firm decision-making
• Demonstrate an understanding of pricing decision making in the conventional economics model of choice, and apply the model in a real world business context
• Demonstrate the influence of strategic decision making and uncertainty on the pricing and investment behaviour of firms

Overview

This assignment gives you background information on Fonterra (case study) and asks you to demonstrate the knowledge acquired from the paper with respect to learning outcome 2, 3 and 4 (outlined in page 1, for your reference).

You are required to follow the case study report format as indicated above. Read the case study provided and address all questions in the body of your report, structuring the body section with subsections, according to the number of each question/sub-question. If you feel you need to attach some other interesting material not included in the background information of your case to support your answers, please add this as an appendix. Then in your text close to where you discuss this, you should add in brackets (please refer Appendix
1) - for example.

After you have completed answering all questions that comprise the body of your report, write the abstract, introduction and conclusion. Use these sections to give the reader an overview of what your report is about, to introduce your report or summarize your findings with respect to the relevant content that you covered in the body of the report, respecting the nature or each of these sections. In this process, reflect upon how your case study analysis may have helped you to achieve the desired learning outcomes by commenting on how the principles and models that you have learned from the lectures and course materials relate to the case study context.

Except from question 7, your case study answers should be written in narrative form (i.e. sentences must be used, avoid bullet points) and should be 2000 words, plus or minus a 10% margin (only), including abstract, introduction and conclusion.

Your case study report should be referenced throughout and include a List of References at the end. of referencing and quote the relevant text chapters and specified readings to support your answers. Answers in the narrative sections of your case unsupported by readings will be regarded as guesswork and generalisations and will not pass the case assessment (refer to the marking rubric at the end of the assignment). Use a minimum of 5 references to support your answers.

Background Information 1

Today Fonterra announces its FY18 annual results, the plan to improve its business performance and the outlook for FY19.

Background Information 2

Fonterra set for milk price lift this week after strong GDT sales

Question 1 Theories of the firm

The background information provided in the case study indicates that short-run profit maximization may not be the only objective pursued by a company.

Explain the profit maximization assumption found in the conventional economics model and how using this assumption has allowed economists to develop a set of rules to be used as a problem solving approach to guide decision making at the firm.

b. Discuss conditions under which the model may not hold from both theoretical and empirical perspectives.

Question 2 Consumer behaviour

a. Explain the concept of indifference curves and how they represent consumer preferences. Then explain how indifference curve analysis can be used by decision makers at Fonterra to anticipate the effects of a fall in the price of milk, from a consumer's perspective.

b. Behaviour economics theory provides an alternative approach to understanding consumer behaviour. Discuss how this theory differs from the mainstream approach in question 2.a and give one example where behaviour economics can be used to explain the consumer behaviour for Fonterra's products.

Question 3 Production and scarcity

Migration has a capital importance for the New Zealand economy. It is often said that international migration benefits the communities that take these migrants, yet more people living in a given geographical area normally means that some resources and some goods and services become scarcer. Analyze the potential impacts of greater levels of migration on the provision of goods and services and list examples of resources and some goods and services that are likely to have become scarcer as a result of migration. What is the likely effect on competition and prices for Fonterra's products.

Question 4 Income elasticity of demand

Suppose the income elasticity of demand for smartphones in New Zealand is 2 and the income elasticity of demand for milk in the country is 0.8. Compare the impact on the demand for smartphones and milk of a recession that reduces consumer income by 5%.

Question 5 Cost

Explain why the average total cost and the average variable cost move closer together as output expands.

Question 6 Decision making under uncertainty

As the case study makes clear, fluctuations in the price of diary have impacted Forterra's results severely and were not correctly anticipated by the company.

a. Discuss two sources of uncertainty that may influence business decision making.

b. Define the concept of expected value and explain how corporate planners and decision makers can use it at firms to make better price and investment decisions under conditions of risk and uncertainty.

Question 7 Pricing under perfect competition

Suppose the all firms operating in the milk market in New Zealand are identical with identical cost curves. Furthermore, suppose that a representative firm's total cost is given by the equation TC = 100 + q2 + q where q is the quantity of output produced by the firm. The market demand for this product is given by the equation P = 1000 - 2Q where Q is the market quantity and the market supply curve is given by the equation P = 100 + Q. Using the perfect competitive model, address the following questions:

a. What is the equilibrium quantity and price in this market given the above information?

b. The firm's MC equation is based upon its TC equation and MC = 2q +1 Given this information and your answer in part (a), what is the firm's profit maximizing level of production, total revenue, total cost and profit at this market equilibrium? Is this a short-run or long-run equilibrium? Explain your answer.

c. Given your answer in part (b), what do you anticipate will happen in this market in the long- run?

d. In this market, what is the Long run equilibrium price and what is the quantity for a representative firm long-run equilibrium to produce? Explain your answer.

e. Given the long-run equilibrium price you calculated in part (d), how many units of this good are produced in this market?

Attachment:- Case Study Report.rar