Economics Assignment: Managerial Decision Making and Economic Analysis

This economics assignment provides a comprehensive analysis of managerial decision-making processes, emphasizing the importance of sound knowledge and proper reasoning in business contexts. It delves into the core elements of decision-making, including problem identification, solution develo...Read More

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Author note

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Table of Contents
Part 1................................................................................................................................................1
Answer 1......................................................................................................................................1
Answer 2......................................................................................................................................4
Part 2................................................................................................................................................5
Answer a......................................................................................................................................5
Answer b......................................................................................................................................7
Part 3................................................................................................................................................9
Answer a......................................................................................................................................9
Answer b....................................................................................................................................12
Part 4..............................................................................................................................................12
Answer a....................................................................................................................................12
Answer b....................................................................................................................................13
Answer c....................................................................................................................................14
Part 5..............................................................................................................................................15
Answer 1....................................................................................................................................15
Answer 2....................................................................................................................................18
Answer 3....................................................................................................................................20
References......................................................................................................................................21

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Part 1
Answer 1
A successful and efficient management decision is directly related to the success of any
business organization. Managerial decision should be based on a sound knowledge base and
proper reasoning. Any decision of taken on the ground of flawed logic or imperfect or
incomplete information can make the organization a complete failure. Every management has to
face a common trade off regarding choices (Schmoldt et al., 2013). The choice of decision is
made depending on the time need. The driving factor of a business’s success is the decision
quality and successful implementation of business plan. The contemporary business analysis
classified major elements of business decision under three broad categories involving stages like
finding problem, figure out suitable solution and implementation.
Elements of decision-making
Decision making process varies from company to company. However, there are three
common contextual level of every decision-making setting. The information can easily be
obtained from market research and hence the cost of decision is prohibited (Goetsch & Davis,
2014).
Identification of problem and setting business goal
In context of limited information and available choices, decision should be taken to the
point of existing and upcoming problems. The problems are identified only after they negatively
influenced the business. Scanning of business environment and strategic planning are designed to
make business people alert in line with the problem (Rosemann & vom Brocke, 2015). Pro
activity is the best way to defend business from any shocks. Once a problem is identified,
complete information is required to study about the nature of problem identified and taking up
actions to resolve it.
Solution to the identified problem
This refers to the management of identified problems. There are two-steps strategy
involves here. First is process and second one is decision . In the first part, solution is designed in

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line with existing system as the business can easily cope up with the inherent system. The next
part is decision or choices that have to be made (Pettigrew, 2014). Here the decision choice
required a number of elements such as business setting, level and scope of the decision taken and
then use of technical and procedural aids.
Implementation
Once the problem is indentified and solution is designed to address the problems then, it
should be properly implemented. Otherwise, there is no meaning of business plan and the taken
decision (Antunes, Zurita & Baloian, 2014).
Decision Making; Woolworths
Woolworths is one of the top grocery retailers in Australia, holding a major share in the
grocery market. Identifying increasing competition from other retailers such as Coles, Aldi the
organization designed its plan and set the agenda such that it can receive highest priority over its
competitors (Ferrell & Fraedrich, 2015). The goal has been set with five major objectives with its
proposed solution.
 First objective is to build a specialized team that can look after its customers and store led
culture.
 Focus is given in maximizing sales in food components
 Evaluation of beverages business, in an attempt to give more value and a greater
convenience to customers
 Empowerment of business portfolio to undertake strategy for providing value to the
shareholder
 Achieve system excellence and becomes a retailers inclined to its customers through an
end-to-end process.
The last part of the decision-making is successful implementation of strategies as
mentioned above. A retail team has built to listen to the problems frequently faced by the
customer, suppliers and team members. The support team of the organization receives feedbacks
on a regular basis. The beverage business is developed with innovation and introduction of new
product. These are made available with the best value and convenience to customers either in

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stores or online. BIG W, ALH and Quantium are business portfolios for looking after
shareholder value.
Therefore, Woolworths follow the three common steps for its business decision making
and operate successfully in Australian grocery retail market.
Answer 2
Marginal analysis in business decision refers to the analysis of marginal benefits of an
activity and compares it with the associated marginal costs (Levy, 2015). Companies use the
concept of marginal analysis as a prime decision making tool to optimize potential profits.
Individual decision-making is also based on marginal analysis.
Investment decision is based on the rate of return on invested capital. Higher and stable is
the return, more fund are attracted there. The tool of marginal analysis is used for computing
marginal return of investment and then investors can make a comparative analysis among
alternative investment opportunities based on those returns (Rios, McConnell & Brue, 2013).
Generally, funds are invested where is has greater marginal benefits as compared to the addition
cost of investment.
Additional benefit from investment is expected rate of net return from the investment
made less total profit of the investors. Marginal cost of investment is the cost of capital including
additional opportunity cost.
The important concept behind marginal decision-making is incremental analysis. Fr
example, consider an investor owning 100 common share of a company stock. He is deciding
over buying additional 20 shares there. In this situation, considering total return of 120 shares is
wrong for making a rational decision. Total and Average analysis are secondary things to be
considered in the investment decision and making additional purchase of shares. The investor
instead should consider additional cost of this decision that is the cost of 20 new shares, involved
time for market research and additional risk and other alternative use of funds. The investor can
also analyze the marginal cost and benefit of each share alone. Whatever be the analysis,
investment is undertaken only when marginal benefits from invested share is more than marginal
cost (Perera & Kulendran, 2016).

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The theory of marginal analysis suggests that investors keep on purchasing share to the
point where marginal benefit equals to the marginal cost (Hirschey, 2016). However, perfect
anticipation cannot be made in real life.
Part 2
Answer a
Linear relationship
i) The dependent variable here is Sales and independent variables are advertising expense, selling
price and disposable income.
ii) For linear estimation, a regression analysis needs to be conducted using the dependent and
independent variables (Draper & Smith, 2014).
Sales=α + ( β∗advertiising expenses ) + ( γ∗selling price ) +(δ∗dispsable income)
Regression Statistics
Multiple R
0.88858308
9
R Square
0.78957990
6
Adjusted R Square
0.68436985
9
Standard Error
17.4171075
4
Observations 10
ANOVA
d
f SS MS F Significance F
Regression 3 6829.866189 2276.622 7.504796 0.018697722
Residual 6 1820.133811 303.3556
Total 9 8650
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 310.24 95.07 3.26 0.02 77.60 542.88
ADVERTISING EXPENSES (A) 0.01 0.20 0.04 0.97 -0.49 0.51

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($'000)
SELLING PRICE (P) ($/gallon) -12.20 4.58 -2.66 0.04 -23.41 -0.99
DISPOSABLE INCOME (M) ($'000) 2.68 3.16 0.85 0.43 -5.06 10.41
From the regression, result the estimated relationship as follows
Sales=310.24+0.01∗advertising expenses−12.20∗selling price+ 2.68∗Disposable income
iii) For a linear model, after conducting regression analysis and ANOVA, the next important
thing for the analysis is how well the chosen model is fit the selected data. R square statistics
provides a test for goodness of fit.
R square= Expalined variation
Total variation
The measure shows how much variation in sales or demand is explained by the
independent variable that is advertising expenses, selling price and disposable income. The
higher the R square value, better is the chosen model fits to the data (Chatterjee & Hadi, 2015).
The multiple R square value is .89. This means the independent variables together explains 89%
variation in sales or demand. The value of R square lies between 0 and 1. Where 1 indicates
perfect fit and 0 indicates the model is unfit for the data. The estimated R square is closer to 1.
This means the model is good fit for the data selected data.
iv) The first independent variable is advertisement expenditure. The coefficient is positive
having a value 0.01. This implies the advertisement expenditure has a positive impact on sales or
demand. When advertising expenses change by 1 unit then sales or demand increases by 1%. The
coefficient is not statistically significant as suggested by the p value. The p value is 0.97. The
next variable to be considered is the selling price. The coefficient is negative and having value of
-12.20. This means hen selling price increases then demand is reduced. The standard law of
demand also supports this. Law of demand states an inverse relation between price and quantity
demanded. The variable is statistically significant as reflected from the p value of 0.04. This
means selling price significantly influences demand. The last variable is disposable income. The
value of the coefficient is 2.68. This implies when income increases then sales also increases.

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v)
Price elasticity of demand= percentage change∈demand
Percentage change ∈Price
¿
dY
dP ∗P
Y
From the estimated demand equation ¿ dY
dP ∨¿ 12.20
At period 10, Y= 190 and P= 15.50
Therefore,
Price elastcity= 12.20∗15.50
190 =.99
The price elasticity of demand is .99 which is approximately equal to 1. This implies
when price changes, there is an almost equivalent percentage change in quantity exhibiting a
unitary elastic demand with respect to price.
Income elasticity of demand = percentage change ∈demand
Percentage change∈Price
¿
dY
dM ∗M
Y
From the estimated demand equation dY
dM =2.68
At period 10, M= 20 and Y= 190
Therefore,
Income elastcity= 2.68∗20
190 =.28

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Income elasticity of demand is less than 1. This means proportionate change in demand is
less than the proportionate change in income making demand relatively inelastic with respect to
income.
Answer b
Non-linear relationship
Regression Statistics
Multiple R
0.88924094
2
R Square
0.79074945
3
Adjusted R Square 0.68612418
Standard Error
0.10106026
3
Observations 10
ANOVA
d
f SS MS F Significance F
Regression 3 0.231571122 0.07719 7.55792 0.018397319
Residual 6 0.061279061 0.010213
Total 9 0.292850183
Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 6.95 1.44 4.82 0.00 3.42 10.48
log (A) -0.02 0.14 -0.16 0.88 -0.37 0.32
log (P) -1.04 0.37 -2.84 0.03 -1.93 -0.14
log (M) 0.39 0.38 1.03 0.34 -0.53 1.31
Logarithm form of demand function
ln ( Sales )=a+ b∗ln ( advertising expenses ) +c∗ln ( selling price )+d∗ln ( disposable income )
From the regression result, the estimated equation is

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ln ( Sales ) =6.95−0.02∗log ( A ) −1.04∗log ( P ) +0.39∗log ( M )
ii)The goodness of fitted model is analyzed in terms of obtained R squared value (Cohen et al.,
2013). The R square value is same as obtained for the linear demand function. The estimated
value of multiple R square .89. This means advertising expenses, selling price disposable income
together able to explain 89% variation in demand. This means the logarithm model is also a good
fit.
iii) The coefficient of advertising expenses is -0.02. This implies a negative relation between
sales and expenditure. An increase in advertisement spending likely to decreases the demand.
This is in contrast to the result obtained under for linear demand estimate. In the linear estimate
the coefficient corresponds to advertising spending appears as positive. However, in neither of
the demand function advertise expenditure is statistically significant (Frost, 2013). The
coefficient for sales is -1.04. This means when selling price in increases then sales fall for the
obvious reason. The variable is also statistically significant as like linear demand function.
Therefore, the conclusion about selling price is unambiguous. As far as the disposable income is
concerned, the coefficient is 0.39. That means a rise is income raises demand as well. The
variable again is statistically insignificant same as the linear demand estimate.
Part 3
Answer a
CREW SIZE
(NUMBER
OF
WORKERS)
AMOUNT OF
FISH CAUGHT
PER WEEK
(TONNES)
Percentag
e change
in inputs
Percentag
e change
in Output
Return to
scale
2 3
3 6 33.33 100.00 Increasing
4 11 25.00 83.33 Increasing
5 19 20.00 72.73 Increasing
6 24 16.67 26.32 Increasing
7 28 14.29 16.67 Increasing
8 31 12.50 10.71
Decreasin
g

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9 33 11.11 6.45
Decreasin
g
10 34 10.00 3.03
Decreasin
g
11 34 9.09 0.00
Decreasin
g
12 33 -100.00 -2.94 Negative
Return to scale shows the relation between inputs and output. If the proportionate change
in output is greater than the proportionate change in inputs then production function said to have
increasing return to scale. If proportionate change in output is less than the proportionate change
in input, then the production function exhibits decreasing return to scale (Baumol & Blinder,
2015). The scale or return is constant in cases where output changes exactly matches with
proportionate change in inputs.
i)
For number of workers ranging from 3 to7, there are increasing return to scale. Within this range
the percentage change in total amount of fish caught exceeds the percentage change in number of
workers.
For number of workers ranging from 8 to 11, there are decreasing return to scale. Here,
percentage change in number of workers is greater than the amount of fish caught that is the total
output.
There is no level of production having constant return to scale.
When number of workers is 12 there are negative returns. At this level when number of worker
increases then total amount of fish caught decreases, hence exhibiting negative returns.
ii) Total amount of fish caught is maximized corresponding to the crew size 10. Therefore the
crew size should be as large as having 10 workers if the trawler owner is interested in
maximizing total amount of fish caught.

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0 2 4 6 8 10 12 14
0
5
10
15
20
25
30
35
40
Total Amount of Fish caught per week (Tonnes)
TOTAL AMOUNT
OF FISH CAUGHT
PER WEEK
(TONNES)
Number of workers
Total amout of fish caught
Figure 1: Total amount of fish caught corresponding to the crew size
iii) Average amount of fish caught per worker is maximized corresponding to a crew size of 6.
Hence, the trailer owner should choose a crew size having 6 workers to maximize average fish
caught per workers.
0 2 4 6 8 10 12 14
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Average Amount of fish caught (Per worker)
Average Amount
of fish caught
(Per worker)
Number of Workers
Average amount of fish caught
per worker
Figure 2: Average amount of fish caught corresponding to crew size

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Answer b
CREW SIZE
(NUMBER
OF
WORKERS) Total Revenue Total cost Profit
2 225 300 -75
3 450 450 0
4 825 600 225
5 1425 750 675
6 1800 900 900
7 2100 1050 1050
8 2325 1200 1125
9 2475 1350 1125
10 2550 1500 1050
11 2550 1650 900
12 2475 1800 675
From the computed profit, it is seen that the maximum amount of profit is 1125,
computed as difference between total revenue and total cost. The profit is maximized
corresponding to a crew size having 8 crew members. Hence, it is the optimal crew size.
Part 4
Answer a
P = $250 - $0.15Q
TC = $ 25,000+10 Q
In an unregulated environment firms operate to maximize, profit. Now, profit equals total
revenue less Total Cost.
Total Revenue ( TR )=P∗Q
¿ ( 250−0.15Q )∗Q
¿ 250 Q−0.15 Q2
Given total cost,

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TC=$ 25,000+$ 10 Q
Profit=Total Revenue−Total Cost
¿ 250 Q−0.15 Q2−25,000−10 Q
¿−0.15 Q2 +240 Q−25,000
The first order condition for profit maximization,
dΠ
dQ =0
−0.30 Q+240=0
¿ ,−0.30 Q=−240
¿ , Q=800
P=250−0.15 Q
¿ 250− ( 0.15∗800 )
¿ 130
Total Revenue=800∗130=104000
Total cost=25,000+ ( 10∗800 ) =33000
Total profit=104000−33000=71000
Rate of return= Profit
Assets ∗100
¿ 71000
500000∗100=14.2 %
Answer b
At price 100,
P=250−0.15 Q

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0 r , 100=250− ( 0.15 Q )
¿ , 0.15 Q=150
¿ , Q=1000
Total revenue=100∗1000=100000
Total cost=25,000+10∗Q
¿ 25,000+ ( 10∗1000 )=35,0000
Total Profit=100000−35000=65,000
Rate of return= 65,000
500,000∗100=13 %
Answer c
Given return of asset = 0.10
Therefore,
Profit
assets =0.10
¿ , Profit
500000 =0.10
Profit=50000
Now, Profit = 50,000
0 r , 240Q−0.15 Q2−25000=50000
¿ ,−0.15 Q2 +240 Q−75,000=0
0 r , Q2−1600 Q+500000=0
Q=1600 ± √(1600¿¿ 2−4∗500000)
2 ¿

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¿ 1600± 748.33
2
¿ 425.83 425 ,1174.16 1174
P = 250 – 0.15 *Q = 250 – (0.15*425) = 186.25 ῀ 186
P= 250 – 0.15 *Q = 250 – (0.15* 1174)= 73.9 ῀ 74
Profit for P = 186 and Q = 425
Profit=TR−TC
¿ ( 186∗425 ) − ( 25000+10∗245 )
¿ 79050−25425=53625
Profit P = 74, Q = 1174
Profit=TR−TC
¿ ( 74∗1174 )− ( 25000+10∗1174 )
¿ 86876−36740=50136
Therefore, the firm should charge a price of $74. The produced output is 1174 and
corresponding profit is 50136 or approximately 50,000.
Part 5
Answer 1
Different forms of collusion
Formal collusion
Collusion undertaken with formation of cartel is the most general form of formal
collusion. In an oligopoly market, small number of rival seller involve in the sales of a more or
less homogenous product joined to form a cartel (Frank, 2014).It is their join interest to collude
in the market rather than participating is harsh competition to undercut each other share. Once

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the cartel is formed then its members agreed on a common industry price and output in an
attempt to attain some common goals. This requires setting of output quota as agreed upon that
will lead to the objected price.
In a successful cartel, agreement is one where the cartel operates like a single
monopolies. In this framework, profit of each individual member is maximized as a monopolist
does. The figure below illustrates this.
Figure 3: Profit maximization for cartel
(Source : Frank, 2014 )
The figure is similar to the traditional profit maximization diagram of a monopolist. The
different here is instead of an individual monopoly firm the curves in the figure are
representatives of aggregate situation for firms involved in cartel formation. The profit
maximization condition requires marginal revenue to match with marginal cost. Corresponding
to this point, optimal price is set at OP and potential output level of the industry is at OQ. The
decided output quota is allocated between members depending on the geographical location,
Productive capacity based on their market shares before joining cartel, respective cost conditions.
There can be unequal distribution of allocated output based on favorable condition (Fine, 2016).
However, the output is fixed for the industry as a whole and from price level set at OP, each
members reap as much benefit as they ca from potential output level OQ.
In reality, Cartels are more likely to be fragile and cannot last for a significantly long
period. The individual members of cartel have a tendency to breach the contract by setting price
below the cartel price secretly. The mutual concession of restricting output to raise price to the

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monopoly level breaks for firms leaving with spare productive capacity. They are tempted to
expand output to attain a high level of profit. The additional profit generated not only from
increased sales but also from the existing sales because of scale advantage with output
expansion.
Informal or tacit collusion
Models of price leadership are the informal or tacit form of collusion. This is the
situation where one firm sets price and other existing firms shows their acceptance to this price
as the market price. There is no need of any written or formal agreement. Every other firms
believes the set price as the best way to achieve maximum benefits (Kolmar, 2017). There are
various forms of price leadership:
Dominant firm price leadership
In this model, one firm probably confined with its large size appeared as a dominant
player in the industry. The dominant firm is driven by its own interest. Once price and output
decision are taken by the dominant firms other comparatively small sized firms then accept this
price and adjusts their output plan according to the set price.
Barometric price leadership
Unlike the dominant leadership model, in barometric price leadership model price leader
is not defined by its size. It can even be a small size. The price leader here needs to have the best
insight abut recent market dynamics and therefore is believed to take the best decision for the
industry and other operating firms. Reputation of the firm allows it to act as a barometric leader
in the industry and other firms in the industry mostly follow its pricing decision.
Collusive Price leadership
This is tacit group collusion where there is a simultaneous change of prices. The
mechanism here linked with that of price parallelism involving identical price and movement of
prices in a given market (Nicholson & Snyder, 2014). It often becomes difficult to differentiate
between dominant firm leadership and collusive price leadership, especially where leader are
followed quickly.

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Apart from these three mentioned forms, informal collusion can also occur in industries
where firms follow a pricing decision based on a rule of thumb rather than following a specific
leader. The rule of thumbs are set in such a way that it can prevent destructive competition in
order to ensure long term profitability. Some shirt term benefit may be sacrificed as the rule of
thumb is not based of equalization of marginal cost and marginal revenue. Cost pricing rule is
one such rule of setting price. Here, firms set price by summing a standard profit percentage
above its average cost.
Price = AFC +AVC+ Profit Margin.
Answer 2
Factor affecting likelihood of successful collusion
Number and Size distribution of Sellers
It is desirable to have a few firms in any form of collusion. In the presence of one
dominant firm, the likelihood of success for a collusion increases.
Heterogeneity of product
The successful collusion requires firms to sell a homogenous or standardized product. It
is advantageous to mutual decision for identical product rather than heterogeneous product.
Structure of Cost
It becomes difficult to allocate output quota uniformly among firms having different
structures of costs. Firms having high level of cost supply a smaller quantity while firms having
low cost structure supply a higher quantity in the market. This can create dissatisfaction among
the members. Therefore, identical cost strictures are desirable for successful cartel formation or
any other form of collusion.
Frequency and Size of Orders
Orders that are small and obtained frequently in the market have a tendency for bringing
long-term success for any form collusion.
Retaliation and Secrecy

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When firm breach contract by secretly deviating from set output then collusion breaks
down. In situation where it is difficult to give price concessions secretly, then collusion lasts for
a long term.
Percentage of External Orders
When all the exchange in the market are taking place within the boundary of cartel en
there are little scope to deviate from the contract. Smaller the percentage of exchange outside the
cartel greater is the likelihood of success of the cartel.
OPEC story
The organization of Oil and Petroleum Exporting Countries (OPEC) is a prime example
of cartel formation within the petroleum industry. It consists of a large number of firms acting
like a price taker. As there are similar firms that are not members of OPEC, the structure of
OPEC is similar to a oligopoly structure rather than being a monopoly.
Success of OPEC
In 1973, the OPEC members made the negotiation of restricting output by introducing
quota. OPEC accounted nearly 70 percent of world crude oil supply and 8 percent of oil export.
The restriction of output by OPEC initially pushes the prices to a very high level. The increased
price stayed there in the short run as major supply then belonged to OPEC while other suppliers
could not increase their supply at a small span. Also, the inelastic nature of oil demand kept the
oil prices high and benefitted OPEC members from the increased price. Seeing initial success
The OPEC members went for another round of upward revision of price in 1980’s. This hike
was huge where oil price rose from $3 per barrel to $12 in 1973 and finally $30 in 1980’s.
The scenario changes in the long-run. OPEC’s decision of restricting output encouraged
non-OPEC members to increase their oil supply because of high price in oil price. This increases
word supply of oil. OPEC share in the world market had declined from 70 percent in 1970 to 30
percent 1985 (Griffin & Teece, 2016). Consequently, power of OPEC to manipulate price
decreases and price started falling. To maintain high price OPEC needs further to cut its output.
Another factor that changes in the long-run is the responsiveness of demand. In the long-run

20ECONOMICS
people adjusted to the increased price by cutting down their consumption. Because of huge cut in
output to keep prices, high OPEC members had experienced a fall in their income.
Dissatisfaction among the cartel members arose and they violated their negotiations and
output Quota. OPEC finally forced to remove the quantity restriction in 1985. This history of
OPEC has prevented to draw any conclusion in favor of overwhelming success of OPEC.
Despite having, many large oil producers OPEC fail be keep a hold of world oil price and
maintain stability. The infighting of OPEC is a part of problem towards a successful collusion.
OPEC fails to maintain internal disciplines and agreement of the cartels.
Answer 3
Russia is one of the largest crude oil producer and exporting country. Despite this fact,
Russia is not an active member of OPEC. The head of Rosneft, announced for not cutting their
production of oil in line with OPEC. Since, Russia is one of the major oil producers; it has
significance influence on world price. Hence, the non co-operation of Russia cannot be ignored.
As the Chairman of OPEC, it is the responsibility to protect the interest of its members.
Therefore, while deciding over a quantity reduction focus should be given on the fact that OPEC
cannot alone influence the world price and hence, in the long term the decision can go against
OPEC members. Therefore, the chairperson of OPEC should seek for Russia’s cooperation or
should revise the set quota to maintain profitability of member countries.

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