Final Economics Take-

Home Exam

By

Haneen Joseph Yeldoka

Economics – [Link] 1Q
Dr. Ahmed Fikry
Date: May 8th, 2020
 Question 1: Demand-Supply Model

“Demand for any currency is supply of another currency”

A fundamental illustration for the changes in Egyptian pound LE against Dollar $ The
changes in value of LE and $ can be illustrated by 2 times frames:
• January 2011 to November 2016
• November 2016 to February 2020
And one of the two major factors on the changes: International Trade, which shows to what
extant Egypt is engaging in both exporting and importing.
January 2011 – November 2016
For Demand-Side Factors For Supply-Side Factors
- High Demand for dollar ↑ in trade because of - High supply of dollars↑ in trade because of
Inputs, which means in order to import essentials exports from Egypt to abroad. In the mentioned
Egypt needs dollars & the demand for LE ↓ which
time period, the supply of dollar↓ due to bad
lowers the value of Egyptian pound.
tourism situation “Revolution” and the low revenues
- Egypt imports essentials such food, petrol, drugs from Suez Canal.
which makes it a Net Importer country. This will make “Low exporting led to low supply of $ and hence low
the demand for dollar always↑ to keep essentials. demand for Egyptian pound LE.

❖ Increase in Demand for Dollars $ while decrease in supply has led to high value of $
hence proving the theory: Every increase in $ decreases the value of LE and vice versa.
-During the time period March 2016 – November 2016: Intervention of Central Bank that has
led to the existence of Black Market
High demand for dollars against the LE because of speculation: as Egyptians expected that
dollar’s value↑, not f necessary purposes, there was liberation on $ when the central bank
announced that 1 dollar = 8.88 LE and the Black MKT. set a price of 10.11 per dollar which led
to lack of dollars in bank then higher value of dollar reached approx. 20 LE.
The intervention was in shape of pricing regulations which resulted in shortage and the Black
MKT. took a place. Shortage↑, price in [Link] ↑, as willingness to pay ↑↑

Second factor that affected the change in value: International Investment in revolution
period, stock market stopped in Egypt which led to low supply of dollars because of lack of
investors “the value of Egyptian pound continued to decrease.

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 November 2016 – February 2020
Time when the value of Egyptian pound LE started to increase as the government increased
the interest on the LE, so the demand for LE↑, as well as, the tourism revenues↑, exporting
natural gases which led to ↑ of dollar supply, and finally the government borrowed dollars.
This concludes that the demand for the dollars is always ↑ but supply is also ↑ with
higher %.
“ Free Market Mechanism”

Shortage

Question 2: Elasticity
a) Calculations of price elasticity for Zdiet, Zataflam, and Zolymox:
Price increases:
Zdiet→ ΔPzdiet = + 25 %, Zataflam→ ΔPzataflam = + 20 %, Zolymox→ ΔPzolymox = + 10 %
Quantity demanded decline:
→ ΔQzdiet = - 35 %, → ΔQzataflam = - 12 %, → ΔQzolymox = -5 %
Zdiet EP = % ΔQzdiet / % ΔPzdiet Since EP > 1
= -35/ 25 = |-1.4|= 1.4 Zdiet is Elastic
Zataflam EP = -12/20 = |-0.6| = 0.6 Since EP < 1
Zataflam is in-elastic
Zolymox EP = -5/10 = |-0.5| = 0.5 Since EP < 1
Zolymox is in-elastic

b) Analyzing effect of increase of price in Revenues of Sales:

1- Zdiet is an elastic product “EP=1.4” → increasing price of this product by 25% decreases
quantity demanded by more than 25% → Low Sales revenues

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 2- Zataflam is in-elastic product “EP=0.6” → increasing price of this product by 20% won’t
decrease quantity demanded by less than 20%→ High Sales revenues
3- Zolymox is in-elastic product “EP=0.5” → increasing price of this product by 10% won’t
decrease quantity demanded by less than 10%→ High Sales revenues

c) “Income Elasticity decrease” we don’t ignore signs here

Zdiet EI = % ΔQzdiet / % ΔIzdiet Since EI > 1, +ve value
= -35/-20 = + 1.75 Zdiet is income elastic
• Its considered normal
product and means its luckgary
Zataflam EP = -12/-20 = + 0.6 Since EI < 1, +ve value
Zataflam is income in-elastic
• Its considered normal
product and necessary.
Zolymox EP = -5/-20 = + 0.25 Since EI < 1, +ve value
Zdiet is income in-elastic
• Its considered normal
product and necessary.

Question 3: Short Run “Production & Costs

Part 1: In any production process, to maximize profit:
Increasing sales revues → By increasing [Link] → By increasing inputs → increasing
expenses.
So, the main key is to produce with least expenses to maximize the profit.
In short Run: one or more inputs remain fixed which gets fixed costs while the other inputs
are variables which get variable costs. For example, an industry has fixed inputs “machines”
and variable inputs “Labor, raw material”
Hence, as a producer, should produce optimal quantity “outputs” by optimal amount of
variable resources to best utilize for fixed resources to avoid the two bad scenarios in short
run:
• Over- utilization: supplying too much variable inputs on few fixed inputs.
• Under- utilization: having large fixed inputs but not supplying enough variable inputs.

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 If none of the above scenarios happen, → reaching maximum profit in a firm.
Part 2: If maximum profit is not attainable in short run as a result of under- utilization or
over-utilization, the firm should take long-run decision, which means having variations on all
inputs “fixed + variable”
▪ If facing under-utilization: should scale down all inputs
▪ If facing over-utilization: should expansion “increase inputs”; instead of one industry
make it two.
In production process, to maximize profit using the law of diminishing returns
For instance, when only having one labor working on four machines producing 3 units of
outputs being paid 100$, instead, making divisions of labors by bringing another typical
labor to get 8 units of outputs to more profit as a result of specialization.
Hence, cost / unit ↓ and productivity ↑

Question 4: Accounting & Economy Profit “Profit Concepts”

In order to decide whether to open her own pharmacy or choose between alternatives, we
should calculate Accounting profit then Economic profit:
Givens:
Explicit “Expenses” Implicit “opportunity costs”
Drugs + Wages Renting revenue + foregone wages
= 350,000 $ + 48,000 $ = 398,000$ = 42,000 + 70,000 =112,000$

❖ Accounting Profit = Total revenue – Total costs “Explicit”

= 500,000 $ - 398,000 $ = 102,000 $
Note: we can’t depend on accounting profit to decide, then should calculate
economic profit.

❖ Economic Profit = Total Revenue – Explicit – Implicit

= 500,000$ - 398,000$ - 112,000$ = - 10,000$ (-ve value)
This means that Accounting profit < Normal Profit “minimum acceptable profit”
Decision → Jessie shall not proceed to open her own pharmacy as she will lose 10,000$ “-ve
profit” instead, she should choose the alternative position.

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 Question 5: Economies of Scale “production & cost”
I do not agree with the mentioned statement. As to achieve the economies of scale, the AcL
“Average cost in long run” should decrease. This will not happen just in case the quantity
produced “output” % more than the total cost %, which means dominator will be greater
than nominator resulting in Lower ACL.
❖ Economies of scale: also called “Mass production” happens in organizations of large
size when their huge production is associated with advanced technology and can’t be
in small organizations.
- It can be achieved by growing the firm and specializing each part of the firm by delegating
for more productivity and efficiency. But while doing the expansion in long run, make sure
that the economies of scale will take place not dis-economies of scale.
- Additionally: Larger the business, smaller its cost / unit.
What leads to dis-economies of scale “what prevent economies of scale”:
• Management issues such as issues related to communication “in-efficiency “when
large scale organization.
• Control in organization with large scale must be high as well as small ones
• Dis-appearance of delegation.

Question 6: Price Taker “Market types”

First part the statement “a firm operating under perfect competition is price taker” means
that this firm is competing large no. of firms and it has no ability to set price of product. It
takes the market price as given and just deal with it as products sold are Identical.
▪ Example: petrol stations have no power or authority to set any prices for petrol,
instead fuel market decides the price.
Second Part: Monopolistic Competition
When same firm operates in monopolistic competitive market, it will compete also large no.
of sellers but each sell differential product (POD).Thus , it has the ability to set price but with
taking in consideration the average price for this type of product which means should know
to whom, where and in what market its selling and shouldn’t not choose very high price or
very low price.
▪ Example: in clothing sales, there are differential products based on location and
brand, hence, its price differentiates such as its different when selling suits in
Carrefour prices than selling suits in Concrete or Zara brands.

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 Question 7: Economic losses
As the company is considered a perfectly competitive and the economic loss is due to the
drop in MKT price, then it might be temporary loss.
• In order to take a decision, we shall calculate the TR & TVC for this company (TFC is
not available)
TR = 50 x 20 = 1000 $/Day TVC = given = 24,000 $ /m TFC = not available
=1000 x 30 = 30,000 / Month Not necessary in taking decision

➢ TR – TVC = 30,000 – 24,000 = 6000 (+ve contribution margin)

Which means by this much the TR contribute to cover the fixed expenses.

Hence, TR > TVC then Jackie Brown’s company continue to operate at loss.

Question 8: Marginal Revenue = Marginal Cost

Rationale behind this principle: in any market types, in order to reach profit maximization, I
have two Decisions to take:
• Decide the quantity I need to produce
• Decide the price of product
In the perfect competition market, I do not set price, hence I only determine the quantity
which the Qmax “the quantity that gives Max. profit.
How to reach Qmax: one of the approaches is reaching and achieving the following “MR=MC”
Which means the extra unit’s revenue is equal to its cost of producing.
➢ To verify the equation:
Q P “Marginal revenue” TR MR MC MarginalProfit TotalProfit
1 5 5 5 3 2 2
2 5 10 5 4 1 3
3 5 15 5 5 0 3
4 5 20 5 6 -1 2
@ quantity of 3, the MR=MC which achieves the maxim. Profit and proceeding the
production process will lead to lowering profit. PS: the important profit is the total not the
marginal.
Another possible cases may happen:
▪ MR>MC not optimal case and means need to increase quantity.
▪ MR<MC not optimal case and means need to decrease quantity

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 Question 9: Production & cost
Profit function = TR – TC
= Output. Price – Output. AC
= Output (Price – AC)
As a result, to maximize profit, think about minimizing the AC “Cost/unit”
In the mentioned scenarios:
Mexico Plant United States Plant

Productivity per worker = 200 units/ hour Productivity per worker = 400 units/ hour
Wage / hour = 5$ Wage / hour = 25$
As we can notice, the productivity in US is double units / hour than the productivity in Mexico
This means that:
• when the output is ↑↑ “such as situation of US”, the Average fixed cost ↓↓ as
assuming the TFC is fixed
• Also, when the output is ↑↑, the Total variable cost is ↑↑ and the average variable
cost will be Low ↓ until specific optimal point where the maximum profit is.
And this situation is required to maximize the profit, which is attainable in US plant
better than Mexico plant. Thus, Galaxy has to minimize the average cost
ΔQ ↑ > ΔTVC ↑
If increase in productivity
• Variable cost influences the short run more due to the productivity

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 Question 10: Market types “Pepsi vs Coke”

❖ Market structure: Oligopoly Market

- Coke and Pepsi do not have the authority of pricing power that a monopoly has, and they
are considered among soft drinks market the largest percentages.
- Regardless that they are on oligopoly market, they have monopolistic competitive features.
- Coke and Pepsi cannot increase or decrease price per can as if one of them did increase for
example, the other competitor without any efforts will sell more as it relatively became
cheaper.
- Advertising is used as a tool to send signals about quality of the brand. Companies do not
need to say that their products are perfect but once the buyer sees the spending of multi-
billion on advertising, will definitely know that this brand is good enough to buy rather than
others who do not advertise.