Business Principles and Decision Making

This study material explores the principles of business and decision making. It discusses the factors affecting demand for energy bars, such as income, tariff rates, and number of stores. It also analyzes the impact of tariff rates on energy bar demand and explains the benefits of free trade.

Running head: BUSINESS PRINCIPLES AND DECISION MAKING
Business Principles and Decision Making
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1BUSINESS PRINCIPLES AND DECISION MAKING
Table of Contents
Problem A........................................................................................................................................2
Question 1....................................................................................................................................2
Problem B........................................................................................................................................3
Question 1....................................................................................................................................3
Question 2....................................................................................................................................4
Problem C........................................................................................................................................5
Question 1....................................................................................................................................5
Reference list...................................................................................................................................7

2BUSINESS PRINCIPLES AND DECISION MAKING
Problem A
Question 1
Schmeckt Gut is willing to introduce its energy bar to the Atolia market. Before
introducing energy bar to the new market, it is interesting for the company to determine factor
affecting demand of energy bar. The factors considered for estimating the demand for energy
bars include income, tariff rate and number of stores where energy bars are offered. In order to
evaluate the impact of each of these factor on energy bar demand, the following demand
equation is to be estimated.
Demand=α + ( β∗average income ) + ( γ∗tariff rate ) +(δ∗number of stores)
α: Intercept
β: coefficient for average income
γ: coefficient of tariff rate
γ: coefficient of number of stores
A regression analysis has been conducted using the survey data on Atolia market. Result
of the estimated regression is given below.

3BUSINESS PRINCIPLES AND DECISION MAKING
The estimated demand function for energy bar is
Demand=−12.1602+ ( 0.0048 × average incom ) − ( 6.4570 ×tariff rate ) +(4.0724 ×number ofstores)
The particular interest of the company is to analyze the potential impact of offering energy bar to
an additional store on demand for energy bars. The estimated regression coefficient of number of
stores where energy bars are offered is 4.0724. Positive coefficient of the regression indicates a
positive impact of number of stores on demand for energy bars. That as energy bars are offered
to more stores, demand increases. Associated ‘p’ value for number of stores is 0.0466. The
obtained p value is less than 5% significance level implying rejection of null hypothesis of no
significant relation between demand for energy bar and number of stores where energy bars are
offered (Fox, 2015). Number of stores thus have a positive significant impact on demand for
energy bar demand.
Problem B
Question 1
From the regression result, the coefficient for tariff rate is -6.4570. The negative
coefficient implies that tariff has a negative impact on demand for energy bars. That is with

4BUSINESS PRINCIPLES AND DECISION MAKING
increase in tariff rate demand for energy bar reduces and vice versa. This is because imposition
of tariff increases the effective price of energy bar in the Atolia market. The higher price
discouraged people to buy energy bars lowering its demand. Associated p value for tariff rate is
0.0000. The p value smaller than significance level of 0.05 indicates tariff is a statistically
significant determinant of energy bar demand (Schroeder, Sjoquist & Stephan, 2016). The trade
minister therefore can be informed regarding the negative significant effect of tariff on demand
for energy bar.
Question 2
Figure 1: Effect of tariff on energy bar of Schmeckt Gut
The figure above explains impact of tariff on export of Schmeckt Gut’s energy bar.
World price of energy bar is PW. At this price, the company produces q2 amount of energy bar.

5BUSINESS PRINCIPLES AND DECISION MAKING
The domestic demand for energy bar however is at q2. The difference that is (q2 – q1) is
exported to the Atolia market. After tariff imposition, the company faces a lower effective price
of energy bar. Price now falls to PE (Spearot, 2016). At this price, domestic demand of energy bar
increases to q3 while domestic supply reduces to q4. The volume of energy bar export now
lowers to (q3 – q4). The imposed import tariff on energy bars lowers profitability of the
company in Atolia by lowering its demand for energy bar. The company though experiences an
increase in sales in the domestic market but the effect of lower price offset the positive impact of
increased sales volume domestically (Marjit & Kar, 2018) The loss to the company is shown by
the area e + f + g +h + i.
Problem C
Question 1
Trade is considered as a mutually beneficial exchange between the two participating
nation. Free trade of energy bar between Industria and Atolia benefits consumers and producers
of both nations. This can be understood from the comparative analysis between a situation of free
trade and that with a protectionist measure like tariff.

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Figure 2: Welfare analysis of trade
The domestic demand and supply curve in Industria market is given as Dd and Sd.
Without trade, equilibrium in the Industria market is at E. The consumers earn a surplus given by
the triangle NEP3 and producers earn a surplus of EAP3. Now, as Industria opens up to free trade,
price coincides with the world price at P1. The lower price increase consumer surplus equivalent
to the larger triangle to NP1F. Domestic producers of Industria though suffers a loss, but gain in
consumer surplus exceeds the loss to the producers resulting in an increase in aggregate welfare
(Irwin, 2015).
Now, consider the effect of a tariff on social welfare. Any imposed tariff of T increase
domestic price to P1 + T. As a result of higher price, consumers suffer a loss in surplus given by
the area B + S + T + V + U. Domestic producers now enjoy an additional surplus given by the
area B. Government revenue from the tariff is T + V. Because of tariff, society suffers a net loss
given by the area S + U.

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The tariff thus not have a distortionary effect on energy bar demand of the company, but
also has an overall negative impact on welfare of Industria (Himics & Britz, 2016) The
regression result indicating a negative effect of tariff on energy bar demand thus supports what is
suggested by the standard trade theory.

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Reference list
Fox, J. (2015). Applied regression analysis and generalized linear models. Sage Publications.
Himics, M., & Britz, W. (2016). Flexible and welfare-consistent tariff aggregation over exporter
regions. Economic Modelling, 53, 375-387.
Irwin, D. A. (2015). Free trade under fire. Princeton University Press.
Marjit, S., & Kar, S. (Eds.). (2018). International Trade, Welfare, and the Theory of General
Equilibrium. Cambridge University Press.
Schroeder, L. D., Sjoquist, D. L., & Stephan, P. E. (2016). Understanding regression analysis:
An introductory guide (Vol. 57). Sage Publications.
Spearot, A. (2016). Unpacking the long-run effects of tariff shocks: New structural implications
from firm heterogeneity models. American Economic Journal: Microeconomics, 8(2),
128-67.