Eco 704 Managerial Economics Assignment 01 Discussion and Solution Fall 2014

The Case:
Pakistan Beverage Limited has been launched in 1950’s and created the brand Pakola which has earned as a booming proprietor and easily became the target of many a multinational companies. Pakistan Beverage Limited has become a market leader of Soft Drinks in Karachi and then later in Hyderabad, within five years of acquiring the Pepsi Franchise. In visualization of the largest branded beverage manufacturing and selling company, it is streaming forward and stays to deliver superior quality beverages to the consumers with a quality backup service in the market place. It also produces plain & flavored milk in Tetra Pack through M/s Pakola Products Limited (another Group Company), which has a wide range of different flavors and become a market leader in flavored milk. However, price competition in the flavored milk supplies industry is growing rapidly in the increasingly price-conscious new millennium. Suppose, during the past years, Pakistan Beverage Limited sold 8 million packs of flavored milk at a price of Rs.44.50 per pack, for total revenues of Rs.87 million. During the current year, flavored milk packs sales have fallen from 8 million units to 4 million units following a competitor price cut from Rs.43.95 to Rs.40.85 per pack.
A. Calculate the arc cross price elasticity of demand for flavored milk packs. Holding all else equal, would you expect a price decrease of flavored milk can raise the revenue of Pakistan Beverage Limited? Explain.
B. Pakistan Beverages' director of marketing projects that unit sales will recover from 4 million units to 5.8 million units if Pakistan Beverages reduces its own price from Rs.44.50 to Rs.43.50 per pack. Calculate flavored milk packs’ implied arc price elasticity of demand.
C. Assuming the same implied arc price elasticity of demand calculated in Part B, determine the further price reduction necessary for flavored milk packs to fully recover lost sales (i.e., regain a volume of 8 million packs).
D. An analyst has suggested that if Pakistan Beverages offers a 1% discount off the average price of flavored milk packs sold during summer season, sales will be enhanced by 40% over the previous summer season. Keeping in view of this suggestion, calculate the profit-maximizing price per pack if Pakistan Beverages has an average wholesale (invoice) cost of Rs.30 and incurs marginal selling costs of Rs.9 per unit.
(Hint: First calculate point price elasticity of demand by the give information)
(Marking scheme: 5+5+5+5)
Case 2:
Pak Elektron Limited (PEL), a pioneer manufacturer of electrical goods, is contributing towards the advancement and development of the engineering sector in Pakistan by introducing a range of quality electrical equipment and home appliances. Appliances division of PEL consists of appliances manufacturing like Air Conditioners, Refrigerators, and Deep Freezers etc. Its products have proven themselves in functional performance parameters set by international industry experts. Today's business environment is volatile and unpredictable. The best way to predict the future is to create it. The strategic planning, effective implementation and transparent evaluation are made before projecting new targets. Comprehensive reports both in units and values of the products are compiled so that accurate forecast and achievable results may be obtained.
Let for this purpose, company gathered following data about yearly sales and its advertisement expenditures:
Years 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Yt 65 60 62 66 68 72 74 78 76 80
Xt 30 29 31 32 31 32 33 33 34 35
Where Yt and Xt are annual sales and advertisement expenditures, both in millions, respectively.
A. Estimate OLS equation for Pak Elektron Limited.
B. Find out the significance level of advertisement for the company.
C. Calculate and interpret following significance tests:
a. Confidence intervals
b. Coefficient of determination
c. Coefficient of correlation
d. Adjusted R2
e.Analysis of Variance [Marking scheme: 8+4.5+7.5(1.5 for each part)]

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