This article discusses the factors that determine demand for energy bars and the impact of tariff on energy bar demand. It also explains the benefits of free trade agreement between countries. The article provides expert guidance on economic principles and decision making.
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Running head: ECONOMIC PRINCIPLES AND DECISION MAKING Economic Priniples and Decision Making Name of the Student Name of the University Course ID
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1ECONOMIC PRINCIPLES AND DECISION MAKING Table of Contents Problem A........................................................................................................................................2 Problem B........................................................................................................................................4 Problem C........................................................................................................................................5 References list..................................................................................................................................7
2ECONOMIC PRINCIPLES AND DECISION MAKING Problem A Demand of a good refers desire of consumers supported by the willingness of consumers. Several factors determine demand for the product (Baumol & Blinder, 2015). In case of demand for energy bars, three factors are taken into consideration. These are average income, tariff rate on energy import and number of stores where energy bars are offered. In order to analyze the specific relationship between demand for energy bars and the three chosen factors a linear regression is conducted. The demand equation to be estimated is given as Demand=a+(b×averageincome)+(c×tariffrate)+(d×numberofstores) The result of the regression is produced below Regression Statistics Multiple R0.96 R Square0.91 Adjusted R Square0.90 Standard Error7.82 Observations21 ANOVA dfSSMSFSignificanceF Regression311019.2103673.07060.0770.000 Residual171039.36161.139 Total2012058.571
3ECONOMIC PRINCIPLES AND DECISION MAKING Coefficient sStandardErrortStatP-valueLower95%Upper95% Intercept-12.160211.3076-1.07540.2972-36.017211.6968 Average income per person0.00480.00182.66520.01630.00100.0087 Tariff rate on imports of energy bars-6.45701.0416-6.19900.0000-8.6546-4.2594 Number of stores where energy bars are offered4.07241.89782.14590.04660.06848.0765 From the regression result, the estimate demand equation for energy bar can be obtained as Demand=−12.1602+(0.0048×averageincome)−(6.4570×tariffrate)+(4.0724×numberofstores) The adjusted R square from the regression is obtained as 0.90. This implies average income, tariff rate and number of stores together explain 90 percent variation in energy bar demand (Fox, 2015). The estimated coefficient for average income is 0.0048. The positive coefficient implies that average income has a positive impact on energy bar demand. This means with increase in average income demand for energy bar increases. The p value of the coefficient is 0.016, which is lower than the significance level of 0.05. Income thus is a positive significant determinant of demand. For tariff, the coefficient is -6.4570. Tariff thus has a negative effect on demand. The p value of the coefficient is 0.000. Hence, tariff is also a significant determinant of energy bar demand (Darlington & Hayes, 2016). The particular interest of Board is to determine the potential impact of offering their product at another store. The regression coefficient of number of stores is 4.0724. The positive regression coefficient indicates number of stores has a positive influence on energy bar demand. More specifically for unit increase number of stores, demand of energy bar increases by almost 4 percent. P value of the corresponding coefficient is 0.046. As the p value is lower than the significance level of 0.050, the coefficient is statistically
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4ECONOMIC PRINCIPLES AND DECISION MAKING significant. The company thus can be benefitted from offering their product to an additional store. When energy bars are available to more number of stores people increases their demand (Jain & Ohri, 2015). This increases sales of energy bars leading to an increase in revenue and profit of the company. Problem B In the analysis of energy bar demand, one significant demand determinant factor is rate of import tariff. Tariff is the tax imposed on goods imported to a nation. Because of tariff, price of imported goods increases (Beshkar, Bond & Rho, 2015). This lowers the demand of imported goods in the domestic market. The regression result supports the theoretical notion of impact of tariff. The estimated regression coefficient for import tariff is – 6.4570. The value of the coefficient is negative and greater than 1 implying demand is relatively elastic with respect to tariff. That is demand changes more compared to tariff. Particularly demand of energy bar falls by 6.45 unit with unit change in tariff rate. The figure below explain potential impact of tariff on energy bar
5ECONOMIC PRINCIPLES AND DECISION MAKING Figure 1: Effect of tariff on energy bar DD and SS give the domestic demand and supply of energy bar respectively. The world price is set at Pw. At this price, demand of energy bar is equivalent is QD1.The domestic supply however is only up to QS1.The imported quantity of energy bar thus equal to (QD1– QS1). Now, a tariff of ‘t’ increases the price of energy bar to Ptariff. At the higher price, demand of energy bar reduces to QD2while domestic supply increases to QS2. The imported quantity thus reduces to (QD2– QS2). The imposed tariff therefore reduces demand for company’s product in Atolia (Leamer & Stern, 2017). The tariff also does no better off to national welfare of Atolia. The consumer surplus reduces by the area B + D + E +G. Producer surplus increases only by area B. There is a social welfare loss of D + G, which is called deadweight loss. Problem C
6ECONOMIC PRINCIPLES AND DECISION MAKING Free trade is a situation that allows free movement of goods and services across nations. Free trade is a mutually beneficial process of exchange (Feenstra, 2015). Under free trade, when countries produce goods in line of their relative specialization, goods are produced at a lower cost and hence, people can consume goods at a relatively lower price. Both exporting and importing countries are benefitted from free trade. The similar argument holds exchange of energy bars between Atolia and Industria. If free exchanged are allowed, then people in Atolia could enjoy the energy bar of Schmeckt Gut at a relatively lower price. This is also helpful for the company to extend its business in Atolia. The imposed tariff on energy bar rises price of the Schmeckt Gut’s energy bar in the domestic market of Atolia. People in Industria then would look for some cheaper alternatives or increase their demand for domestically available energy bars. This would cause a loss in market share of the company in Atolia. The tariff thus harms exporters of energy bars in Industria. This in turn reduces economic welfare of both the nations (Viner, 2016). As obtained from the regression, the imposed tariff on energy bars has an adverse effect on demand for energy bars. A free trade agreement between Industria and Atolia therefore is beneficial for both the economy.
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7ECONOMIC PRINCIPLES AND DECISION MAKING References list Baumol, W. J., & Blinder, A. S. (2015).Microeconomics: Principles and policy. Nelson Education. Beshkar, M., Bond, E. W., & Rho, Y. (2015). Tariff binding and overhang: theory and evidence.Journal of International Economics,97(1), 1-13. Darlington, R. B., & Hayes, A. F. (2016).Regression analysis and linear models: Concepts, applications, and implementation. Guilford Publications. Feenstra, R. C. (2015).Advanced international trade: theory and evidence. Princeton university press. Fox, J. (2015).Applied regression analysis and generalized linear models. Sage Publications. Jain, T. R., & Ohri, V. K. (2015).Principal of Microeconomics. FK Publications. Leamer, E. E., & Stern, R. M. (2017).Quantitative international economics. Routledge. Viner, J. (2016).Studies in the theory of international trade. Routledge.