Case Study-1

Should the professor go or stay?

Professor Martin is considering leaving the university and opening a consulting business. For her
services as a consultant she would be paid$150000 a year. To open this business, Professor Martin
must use a house from which she collects rent of $10000 per year as an office and hire a secretary
at a salary of $ 30000 per year. Also, she must withdraw $40000 from savings for miscellaneous
expenses and forego earning 5 percent interest per year on these savings. The university pays
Professor Martin $ 110000 a year. Based only on economic decision-making, do you predict the
professor will leave the university to start a new business?

Case Study-2
Mr. Ali runs a grocery shop from a house that he owns in Lahore. Recently, the shipping company
that he used to work for earlier for Rs.95, 000 per year, made him an offer for employment. Mr.
Ali’s annual income statement is as follows.
Revenue Rs. 6,25,000
Cost of good sold Rs 3,25,000
Wages (for assistants) Rs 75,000
Taxes Rs 30,000
Interest Rs 5,000
Other Expenses Rs 15,000
Profit Rs 1,75,000
The market value of the shop is Rs 350.000. That is, if he wishes, he could sell the shop for this
amount. He could also rent out the building for Rs 50,000 per year. If he sells the business, he can
invest and earn an annual return of 9 %. Should Mr. Ali continue in his business or should he
join the shipping company?
Case Study-3
NEAR-EMPTY RESTAURANTS ANDOFF-SEASON MINIATURE GOLF
Have you ever walked into a restaurant for lunch and found it almost empty? Why, you might
have asked, does the restaurant even bother to stay open? It might seem that the revenue from the
few customers could not possibly cover the cost of running the restaurant.
An operator of a miniature-golf course in a summer resort community faces a similar decision.
Because revenue varies substantially from season to season, the firm must decide when to open
and when to close. Why these near empty restaurants and off season miniature golf course
remain open with so much low attendance?
 Case Study-4
Analyzing Managerial Decisions
Should We Continue to Make Autos from Steel?
In recent years, automakers have begun to substitute synthetic materials for steel.
Engineers at the Materials Systems Laboratory of the Massachusetts Institute of
Technology have made careful studies of the costs of producing an automobile fender.
Assuming that the annual production volume of the fender is 100,000, the average cost of
a fender is as shown below if sheet steel or four alternative plastics fabrication
technologies (injection moulding, compression moulding, reaction injection moulding
and the thermoplastic sheet stamping) are used to make the fender.
Cost Sheet Steel Injection Compression Reaction Thermoplastic
Moulding Moulding Injection Sheet
Moulding
Materials $ 4.25 $8.50 $4.84 $4.89 $5.75
Labour 0.24 0.42 0.63 0.83 0.52
Capital 0.66 2.62 1.57 1.40 2.18
Tooling 2.57 0.86 0.71 0.57 0.71
Total $7.71 $12.39 $7.75 $7.70 $9.17
If the annual production volume is 200,000 rather than 100,000, the cost per fender, if
sheet metal is used in its production, is less than $7 and less than the cost if any one the
plastic fabrication technologies are used at this production volume:
a. If 100,000 fenders are made per year, does the cost per fender differ significantly
if sheet steel is used from the cost if reaction injection moulding ( or compression
moulding) is used?
b. Compared with reaction injection moulding (or compression moulding), sheet
steel uses less (or less costly) materials, labour, and capital. Why then doesn’t it have
lower average total costs?
c. If sheet steel is used, are there economies of scale in fender production?
d. Steel is commonly thought to be the most advantageous material for high volume
production of auto fenders. Does this seem to be true?
 Case Study
Analyzing Managerial Decisions
The Effects of Output on the Cost of Producing Aircraft
The National Research Council made a study of the US aircraft industry that stressed the
importance to airplane manufacturers of serving the entire world market. As evidence the
council presented the graph below
a. As indicated in this graph, the cost per airplane of producing 525 aircraft of a
particular type is about 10% higher than the cost per airplane of producing 700 aircraft of
this type. Assuming that this graph pertains to the short run, by what percentage does
average fixed cost increases if 525 rather than 700 aircraft are produced.
b. If average fixed cost is 30% of average total cost if 700 aircraft are produced and
36% of average total if 525 aircraft are produced, is it true that average total cost is about
10% higher if 525 rather than 700 aircraft are produced?
c. According to the council, “if a foreign government elected to incur a cost penalty
in order to establish a domestic (aircraft) industry that serves 25% of the world market,
the effect would be to dramatically change the pricing and thus the profit prospects for a
privately funded U.S. manufacturer” what sorts of changes in pricing and profit prospects
would occur? Why?
d. The council goes on to say “with the opportunity for profit reduced or destroyed
due to a split market, the US firm might well choose not to enter, and the foreign
competitor would then have the total market available”, why?

Case Study-4
Cane harvesting Costs
At a meeting in Ingham in North Queensland in October 2000, John Powell , the executive officer
of Cane harvesters, explained to managers of banks and other institutions that lend to the sugar
cane harvesting industry that the industry was experiencing a crisis of profitability. this crisis had
been brought about by lighter crops (less cane per hectare), higher fuel prices and increased
capital requirements. Here is some of what he had to say when addressing these issued:
In terms of fuel, the average operator uses roughly 10000 liters a day, and prices have increased by more
than 40c a litre. That is an increase in cost of more than $400 a day over the past year. with light crops,
harvesters are scratching to average 30 tonnes cut per hour but they are using the same amount of fuel as
they would if they were cutting 60 tonnes. Effectively the cost of harvesting a tonne of cane has doubled.
Capital repayments are being spread over half the tones , which effectively doubles capital costs. The low
productivity also impacts on labour costs and the costs of maintaining the machinery doesn’t change either
Herbert River Express, 3 October,2000, p2
Which of the costs being discussed by Mr. Powell are fixed costs and which are variable?
Clue: In analyzing this issue, Mr Powell is making the assumption that output of the cane
harvesting industry is measured in tones of harvested cane rather than hectares of the cane
harvested. It will be easier to determine which costs are fixed and which are variable by treating
hectares of harvested cane as the output. Do you think harvesting contractors are paid by tonne or
the hectare?
 Case Study
Analyzing Managerial Decisions
Should We Continue to Make Autos from Steel?
In recent years, automakers have begun to substitute synthetic materials for steel.
Engineers at the Materials Systems Laboratory of the Massachusetts Institute of
Technology have made careful studies of the costs of producing an automobile fender.
Assuming that the annual production volume of the fender is 100,000, the average cost of
a fender is as shown below if sheet steel or four alternative plastics fabrication
technologies ( injection moulding , compression moulding ,reaction injection moulding
and the thermoplastic sheet stamping) are used to make the fender.
Cost Sheet Steel Injection Compression Reaction Thermoplastic
Moulding Moulding Injection Sheet
Moulding
Materials $ 4.25 $8.50 $4.84 $4.89 $5.75
Labour 0.24 0.42 0.63 0.83 0.52
Capital 0.66 2.62 1.57 1.40 2.18
Tooling 2.57 0.86 0.71 0.57 0.71
Total $7.71 $12.39 $7.75 $7.70 $9.17
If the annual production volume is 200,000 rather than 100,000, the cost per fender, if
sheet metal is used in its production, is less than $7 and less than the cost if any one the
plastic fabrication technologies are used at this production volume:
a. If 100,000 fenders are made per year , does the cost per fender differ significantly
if sheet steel is used from the cost if reaction injection moulding ( or compression
moulding) is used?
b. Compared with reaction injection moulding (or compression moulding), sheet
steel uses less (or less costly) materials, labour, and capital. Why then doesn’t it have
lower average total costs?
c. If sheet steel is used, are there economies of scale in fender production?
d. Steel is commonly thought to be the most advantageous material for high volume
production of auto fenders. Does this seem to be true?

Q.#1 A college in USA raises its annual tutuion from $2,000/- to $2,500/-, and its
student enrollment falls from 4,877 to 4,705. Compute the price elasticity of demand. Is
demand more elastic or less elastic?

Q#2 Suppose the current price of gasoline at the pump is $1 per gallon and that one
million gallons (10,00,000) are sold per month. A politician proposes to add a 10 cent tax
to the price of a gallon of gasoline. The politician says the tax will generate $100.000 tax
revenue per month. She says tax will generate $ 100,000 tax revenues per month (i.e.=
10.00.000 * 0.1 = 100,000). What assumption is he making regarding elasticity of
demand?

Q.# 3 The price elasticity of demand for imported automobile is estimated to be -.20
over a wide interval of prices. The federal government decides to raise the import tariff
(tax) on foreign automobiles causing its price to rise by 20%. Will sales of automobile
rise or fall and by what percentage amount?
Q.# 1 In an article about the financial problems of USA Today(news paper). Newsweek
reported that the paper was losing about $20 million a year. A Wall Street analyst said that
the paper should raise its price from 50 cents to 75 cents, which he estimated would bring
in an additional $65 million a year. The paper publisher rejected the idea, saying that
circulation could drop sharply after a price increase, citing The Wall Street Journal’s
experience after it increased its price to 75 cents. What implicit assumptions are the
publisher and analyst making about demand elasticity?

Q.#2 The Dallas Morning News reported the findings of a study by the Department of
Transportation that examined the effect on average airfares when new, low priced carriers
such as Southwest Airlines or Vanguard Airlines, entered one of three city pare markets:
Baltimore-Cleveland, Kansas City- San Francisco, or Baltimore-Providence. Use the
following excerpts from the newspaper article to calculate the arc elasticity of demand for
each of the three city pairs. How do the three computed elasticities compare? Based on
the computed elasticities, describe travelers’ responsiveness to the reductions in airfares
a. “(In) Baltimore and Cleveland, for example,……. Just 12,790 people flew
between those cities in the last three months of 1992, at an average fare of $233.Then
Dallas based Southwest Airlines entered the market. In the last three months of 1996,
115,040 people flew between the cities at an average fare of $66”
b. “(On) the Kansas City-San Francisco connection…… (during the last
quarter of 1994 some 35,690 people made the trip at an average fare of $ 165. the Two
years later the arrival of Vanguard Airlines , fares had dropped to an average of $107 and
traffic had nearly doubled to 68,100”
c. On the Baltimore-Providence, R.I route, Where the average fare fell from
$196 to $57……. The number of passenger carried jumped from 11,960 to 94,116.