Economies Of The Scale Plant Size Economics Essay

The freshly formed Bangladesh Automobile Corporation plans to bring forth and export an expensive athleticss auto and has asked your confer withing house for advice on the size of works to build. Because of the brotherhood contract and proficient characteristics of car production, labor must be paid the equivalent of $ 12,000 per individual per annum, and each incremental alteration in works size involves $ 900,000 in one-year disbursals for depreciation, involvement, and other fixed costs. The maximal the house will hold available for outgo on capital and labor is $ 9 million per annum. BAC has supplied the following inside informations of its production map, meticulously derived by its head applied scientist. ( The information in the organic structure of the table represent cars produced, in units. ) Labour can be varied virtually continuously ; the tabular array shows units of 50 individuals for convenience. All other variable disbursals are changeless at $ 2,500 per vehicle produced.

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Capital

( units of

$ 900,000 )

Labour ( units of 50 individuals )

1

2

3

4

5

6

3

40

90

140

170

180

185

4

60

120

180

220

230

236

5

100

170

230

250

260

268

6

170

200

240

270

280

289

BAC ‘s market research indicates that the new vehicle should be sold at around $ 50,000 per unit and that the expected demand state of affairs is as follows:

Unit of measurements Demanded ( yearly ) 100 150 200 250

Probability 0.20 0.50 0.20 0.10

( a ) Plot the short tally ATC curves suggested by the production map and input cost figures.

( B ) Remark on the economic systems and diseconomies of works size ( if any ) which are apparent in your graph.

( degree Celsius ) Ignoring the chances, which works do you propose that BAC construct if the demand is expected to be ( I ) 150, ( two ) 200, or ( three ) 250, and why?

( vitamin D ) Now sing the chances, which works do you propose that the company physique, and why?

Answers:

( C ) ( I ) If the demand is considered to be 150, so to cipher Net income, we would utilize the undermentioned expression: Net income = Entire gross – Entire cost

For Plant 1:

The sum of labour required to bring forth 150 units will be 200 ( 50×4 ) .

Therefore, Profit =150*50000- ( 2700000+ ( 200*12000 ) + ( 150*2500 ) ) = $ 2025000

For Plant 2:

The sum of labour required to bring forth 150 units will be 150 ( 50×3 ) .

Therefore, Profit =150*50000- ( 3600000+ ( 150*12000 ) + ( 150*2500 ) ) = $ 1725000

For Plant 3:

The sum of labour required to bring forth 150 units will be 100 ( 50×2 ) .

Therefore, Profit =150*50000- ( 4500000+ ( 100*12000 ) + ( 150*2500 ) ) = $ 1425000

For Plant 4:

The sum of labour required to bring forth 150 units will be 50 ( 50×1 ) .

Therefore, Profit =150*50000- ( 5400000+ ( 50*12000 ) + ( 150*2500 ) ) = $ 1125000

Therefore in this instance where demand is 150, to bring forth net income, BAC should travel with Plant 1 as it would maximise net income.

( two ) If the demand is considered to be 200.

For Plant 1:

In this instance, where the demand is 200, Plant 1 can non be used, as the maximal figure of units that can be produced by Plant 1 would be 185.

For Plant 2:

The sum of labour required to bring forth 200 units will be 200 ( 50×4 )

Therefore, Profit =200*50000- ( 3600000+ ( 200*12000 ) + ( 200*2500 ) ) = $ 3500000

For Plant 3:

The sum of labour required to bring forth 200 units will be 150 ( 50×3 )

Therefore, Profit =200*50000- ( 4500000+ ( 150*12000 ) + ( 200*2500 ) ) = $ 3200000

For Plant 4:

The sum of labour required to bring forth 200 units will be 100 ( 50×2 )

Therefore, Profit =200*50000- ( 5400000+ ( 100*12000 ) + ( 200*2500 ) ) = $ 2900000

Therefore in this instance where demand is 200, to bring forth net income, BAC should travel with Plant 2 as it would maximise net income and with Plant 1, 200 units can ne’er be produced.

( three ) If the demand is considered to be 250,

For Plant 1:

In this instance, where the demand is 250, Plant 1 can non be used, as the maximal figure of units that can be produced by Plant 1 would be 185.

For Plant 2:

In this instance, where the demand is 250, Plant 2 can non be used, as the maximal figure of units that can be produced by Plant 2 would be 236.

For Plant 3:

The sum of labour required to bring forth 250 units will be 200 ( 50×4 )

Therefore, Profit =250*50000- ( 4500000+ ( 200*12000 ) + ( 250*2500 ) ) = $ 4975000

For Plant 4:

The sum of labour required to bring forth 250 units will be 100 ( 50×4 )

Therefore, Profit =200*50000- ( 5400000+ ( 100*12000 ) + ( 200*2500 ) ) = $ 4075000.

Therefore in this instance where demand is 250, to bring forth net income, BAC should travel with Plant 3 as it would maximise net income and with Plant 1 and Plant 2, 250 units can ne’er be produced.

( D ) If we consider the chances, to place which works the company should construct, so we need to see the net income that can be made by each works and so place which works makes maximal net income.

For Plant 1:

Case1:

When the demand is 100, the maximal net income that they would gain is $ 250000. Now if we consider the chance factor, where in this instance it is 0.2, so the net income made would be:

Entire Profit = Profit * Probability

Demand = 100 ; Profit = $ 250000 ; Probability= 0.2

Entire Profit =250000*0.2 = $ 50000

Case 2:

When the demand is 150, the maximal net income that they would gain is $ 2025000. Now if we consider the chance factor, where in this instance it is 0.5, so the net income made would be:

Demand = 150 ; Profit = $ 2025000 ; Probability= 0.5

Entire Profit = 2025000* 0.5 = $ 1012500

Case 3 and Case 4:

If the demand increases to 200 or 250, Plant 1 can non be used as the maximal units that can be produced by works 1 is 185.

Therefore the entire net income that can be made by Plant 1 is $ 1062500.

For Plant 2:

Case1:

When the demand is 100, the company would do a loss of – $ 50000. Now if we consider the chance factor, where in this instance it is 0.2, so the net income made would be:

Demand = 100 ; Loss = – $ 50000 ; Probability= 0.2

Entire Profit =-50000 * 0.2 = $ -10000

Case 2:

When the demand is 150, the maximal net income that they would gain is $ 1725000. Now if we consider the chance factor, where in this instance it is 0.5, so the net income made would be:

Demand = 150 ; Profit = $ 1725000 ; Probability= 0.5

Entire Profit = 1725000* 0.5 = $ 862500

Case 3:

When the demand is 200, the maximal net income that they would gain is $ 3500000. Now if we consider the chance factor, where in this instance it is 0.2, so the net income made would be:

Demand = 200 ; Profit = $ 3500000 ; Probability= 0.2

Entire Profit = 3500000* 0.2 = $ 700000

Case 4:

If the demand increases to 250, Plant 2 can non be used as the maximal units that can be produced by works 2 is 236.

Therefore the entire net income that can be made by Plant 2 is $ 1552500

For Plant 3:

Case1:

When the demand is 100, the company would do a loss of – $ 350000. Now if we consider the chance factor, where in this instance it is 0.2, so the net income made would be:

Entire Profit = Profit/Loss * Probability

Demand = 100 ; Loss = – $ 350000 ; Probability= 0.2

Entire Profit =-350000* 0.2 =- $ 70000

Case 2:

When the demand is 150, the company would do a loss of – $ 1075000. Now if we consider the chance factor, where in this instance it is 0.5, so the net income made would be:

Demand = 150 ; loss = – $ 1075000 ; Probability= 0.5

Entire Profit = -1075000* 0.5 =- $ 537500

Case 3:

When the demand is 200, the maximal net income that they would gain is $ 3200000. Now if we consider the chance factor, where in this instance it is 0.2, so the net income made would be:

Demand = 200 ; Profit = $ 3200000 ; Probability= 0.2

Entire Profit = 3200000* 0.2 = $ 640000

Case 4:

When the demand is 250, the maximal net income that they would gain is $ 4975000. Now if we consider the chance factor, where in this instance it is 0.1, so the net income made would be:

Demand = 150 ; Profit = $ 4975000 ; Probability= 0.1

Entire Profit = 4975000* 0.1 = $ 497500

Therefore the entire net income that can be made by Plant 3 is $ 530000.

For Plant 4:

Case1:

When the demand is 100, the company would do a loss of – $ 1250000. Now if we consider the chance factor, where in this instance it is 0.2, so the net income made would be:

Entire Profit = Profit/Loss * Probability

Demand = 100 ; Loss = – $ 1250000 ; Probability= 0.2

Entire Profit =-1250000* 0.2 =- $ 250000

Case 2:

When the demand is 150, the maximal net income that they would gain is $ 1125000. Now if we consider the chance factor, where in this instance it is 0.5, so the net income made would be:

Demand = 150 ; loss = $ 1125000 ; Probability= 0.5

Entire Profit =1125000* 0.5 = $ 562500

Case 3:

When the demand is 200, the maximal net income that they would gain is $ 2900000. Now if we consider the chance factor, where in this instance it is 0.2, so the net income made would be:

Demand = 200 ; Profit = $ 2900000 ; Probability= 0.2

Entire Profit = 2900000* 0.2 = $ 580000

Case 4:

When the demand is 250, the maximal net income that they would gain is $ 4075000. Now if we consider the chance factor, where in this instance it is 0.1, so the net income made would be:

Demand = 150 ; Profit = $ 4075000 ; Probability= 0.1

Entire Profit = 4075000* 0.1 = $ 407500

Therefore the entire net income that can be made by Plant 4 is $ 1300000.

Plant 2 is the works that would do maximal net income for BAC. Thus BAC should travel with Plant 2.

Question II

Increasing returns with Network consequence

The jurisprudence of decreasing returns is non a mathematical theorem, but an empirical averment that has been observed in about every economic production procedure as the sum of variable input additions. An interesting exclusion occurs, nevertheless, with web effects. The greater the installed based of a web merchandise, the larger the figure of compatible web connexions and therefore the more possible value for a new client. Consequently, as the gross revenues incursion additions, the house ‘s publicities and other merchandising activities to get new clients become progressively more productive.

Discuss two illustrations of the merchandise that fits this form.

Supply a in writing illustration of gross revenues incursion curve refering to the web consequence and explicate your logic.

Answers:

Network consequence occurs when the value of the merchandise increases as the figure of people utilizing the merchandise additions. Here the merchandises success is determined by the increasing acceptableness and compatibility of the merchandise instead than it being superior of inferior than and of its competition.

( A ) Examples of Network Effect are as flows:

Stock Exchanges: These are fundamentally stock exchanges where stocks of listed companies are traded. They are really typical illustrations of the Network Effect. Here, the Market Liquidity or the sum of money that is at that place in the market is a major determiner of dealing cost for the sale and purchase of securities. As the figure of purchasers and Sellerss additions, the market liquidness besides increases and therefore the dealing cost lessenings as the spread between the monetary value at which purchase can be made and the monetary value at which a sale can be made diminishes. This lessening in the difference between monetary values is because of increased fight within the market and the power to find the monetary value displacements from few to many people and hence this full event attracts a big figure of purchasers and Sellerss towards the market.

Web sites: Many web sites besides display the Network Effect. One really of import illustration is the online shops. For e.g. eBay. EBay has a command system wherein purchasers can put commands on the merchandises they want to purchase within a certain period of clip and the highest command gets the merchandise when the clip frame expires. This theoretical account would non win if the figure of purchasers or Sellerss on eBay were less as few purchasers or Sellerss can act upon the monetary value of a merchandise well and take undue advantage. However, as the figure of purchasers and Sellerss on eBay additions, the auctions become more and more competitory which attracts more eBay users on both terminals ( Buying and merchandising ) . As the figure purchasers on eBay increases the commands monetary values rise and hence it becomes more feasible to sell on eBay. This consequences in a spike in the figure of Sellerss on eBay and hence brings down the monetary values of merchandises as the supply additions. All in all, more and more people find eBay more utile as the figure of eBay users additions.

Social Networking web sites such as Facebook, Twitter are besides a really good illustration of The Network Effect. Here, as the figure of people who register onto the web sites additions, the better it is for the already bing users.

( B. )

Degree centigrades: UsersAdminDesktopUntitled.png

Explanation and Logic:

In the above figure, from 0 to 30 per centum market portion, the gross revenues and publicizing attempt required to achieve each extra point of market portion have a decreasing return indicated by the cut downing incline of the gross revenues incursion curve. But when the figure of users on a web based merchandise reaches 30 to 40 per centum market portion, accomplishing more and more market portion beyond that point becomes cheaper and cheaper ( indicated by the increasing incline of the gross revenues incursion curve ) . This is because beyond 30 per centum market portion, every point addition in the market portion increases the chance of acceptance of the merchandise by another client and hence the gross revenues and publicizing disbursal required to derive extra unit gross revenues becomes relatively less. Beyond 80 to 90 per centum market portion, it becomes progressively expensive to derive the concluding adoptive parents for the merchandise as the merchandising and advertisement required to accomplish these clients once more become capable to decreasing returs.

Question III

Demand: CASE STUDY: PERSONAL VIDEO RECORDER

Personal picture recording equipments ( PVRs ) are digital picture recording equipments used to enter and play back telecasting plans received from overseas telegram, orbiter, or local broadcasts. But unlike VCRs, which they replace ; PVRs offer many more maps, notably the ability to enter up to 80 hours of plans and easy scheduling. A PVR consists of an internal difficult disc and microprocessor. After the proprietor installs the hardware, the PVR downloads all approaching Television agendas to the hardware via a phone or overseas telegram connexion. Users simply enter the name of the show ( s ) they want recorded and the system finds the clip and channel of the show and automatically records it. Users must subscribe to a overseas telegram or orbiter system if they wish to enter plans off these channels.

Besides easiness of programming and much larger entering capacity than videotape, PVRs allow the user to watch a prerecorded show while the unit is entering a new plan, pause watching unrecorded plans ( for illustration, if the phone rings ) and so restart watching the remainder of the unrecorded broadcast, position instant rematchs and slow gesture of unrecorded plans, and skip commercials.

In consequence, PVRs, like older VCRs, allow viewing audiences to command when they watch broadcast plans ( called clip switching ) . However, PVRs provide much sharper images and are much simpler to run than VCRs, and PVRs allow the user to download the telecasting agenda for the following hebdomad.

Two companies presently sell the hardware and supply the subscription service: TiVo and ReplayTV. Both houses started in 1997: As of mid-2003 TiVo had about 700,000 endorsers and ReplayTV had about 100,000. Companies are developing new engineerings that make it even easier for users to “ nip off ” commercials.

Cable companies have begun offering a combined overseas telegram box and PVR in one unit for a little extra monthly charge. This farther simplifies apparatus and operation, and the user gets a individual measure.

Discussion Questions

1. Discourse how PVRs will impact the demand from advertizers?

2. Suppose you are in charge of puting the monetary value for commercial advertizements shown during Enemies, a top web telecasting show. There is a 60-minute slot for the show. However, the running clip for the show itself is merely 30 proceedingss. The remainder of the clip can be sold to other companies to publicize their merchandises or donated for public service proclamations. Demand for advertisement is given by:

Qd = 30 – 0.0002P + 26 V

where Qd = measure demanded for advertisement on the show ( proceedingss ) , P = the monetary value per minute that you charge for advertisement, and V is the figure of viewing audiences expected to watch the advertizement ( in 1000000s ) .

a. All your costs are fixed and your end is to maximise the entire gross received from selling advertisement. Suppose that the expected figure of viewing audiences is one million people. What monetary value should you bear down? How many proceedingss of advertisement will you sell? What is entire gross?

B. Suppose monetary value is held changeless at the value from portion ( a ) . What will go on to the measure demanded if due to PVRs the figure of expected viewing audiences falls to 0.5 million? Calculate the “ spectator snap ” based on the two points. Explain in words what this value means.

3. As more viewing audiences begin utilizing PVRs, what happens to the grosss of the major webs ( CBS, NBC, ABC, and FOX ) ?

4. Discourse the long-term effects if a important proportion of the viewing audiences begin following these “ advertisement snippet ” systems:

5. What advice would you give the major commercial webs and manufacturers of programming for these webs as more consumers adopt PVRs?

Beginning: J, Gudmundsen ( 2002 ) ; “ Video Gizmos Change the Rules, ” Democrat and Chronicle ( August ) , 5E and 8E ; B. Fisher ( 2003 ) ; “ TiVo and Replay N Have Features to Satisfy any N Junkie, ” Detroit News ( June 24 ) ; R. Reilty ( 2003 ) , “ Great Invention Period ; ” Sports Illustrated ( December 22 ) , ( Adopted from Managerial Economics, 4th erectile dysfunction. James Brickley, et. al.Ch. 4, pp. 120-121 )

Answers:

( 1. ) If there is a rush in the usage of PVRs, there will be a lessening in the demand from advertizers. It is for the simple ground that more people would utilize the PVRs to enter Television shows and would jump the commercials shown in between shows, thereby ensuing in less viewership of ads. Hence there would be a lessening in demand from the advertizers and they would hold to happen other agencies of publicities.

( 2. ) ( A ) The production equation: Qd = 30- 0.0002P + 26V

Viewership: 1 mil

Gross: Qd * P

Qd

30

29

28

27

Monetary value

130000

135000

140000

145000

Gross

3900000

3915000

3920000

3915000

The ideal monetary value to be charged is $ 14000 for 28 proceedingss because this is the value where the gross is maximal.

To entire gross will be $ 3,920,000

( B ) If the value is kept changeless at $ 140,000 and the viewership lessening because of PVRs to 0.5 million, so Qd: 30- ( 0.0002 x 140,000 ) + ( 26 x 0.5 ) = 15. The measure demanded will diminish from 28 to 15.

Viewing audiences snap would be defined by [ I”Q/ ( Q1+Q2 ) /2 ] / [ I”V/ ( Va+V2 ) /2 ] = 0.9

This is below 1, the snap of viewing audiences is inelastic. The lessening in viewership will non do a significant lessening in demand of advertisement.

( 3. ) As more consumers start utilizing PVRs, the grosss of major webs like CNN, ABC, and Foxaˆ¦ etc will most likely autumn well. Since entire gross is a constituent of monetary value multiplied by the measure demanded, the lessening in the measure demanded will ensue in lower net incomes.

( 4. ) If a immense ball of the viewing audiences start to follow these “ advertisement snippet ” systems, the long-term effects would be unfavourable towards the broadcast medium houses ensuing in lower net incomes and since lesser companies would utilize commercials to attending their merchandises, there will be a important lessening in the demand of informercials and Ads severally.

( 5. ) The suggestion that we would supply to these major commercial web houses for these webs would be

a. To increase the quality of the commercials and do them interesting and exciting. The houses should see tha mark audience watching that peculiar show at the clip and concept commercials targeted towards them, so the viewing audiences can really bask the commercials alternatively of nip offing them out.

B. The other suggestion would be to slowly diminish the monetary value of the advertisement rate per second so that the companies still continue to publicize and are non discouraged to halt advertisement at all.

c. Another signifier of advertisement could be to incorporate advertisement into the shows itself. The companies con collaborate with the production house of the premier shows and the histrions can be made to utilize the merchandises on the show ( e.g. Actors can be shown have oning a peculiar trade name of jacket )

Question IV

HP and DELL personal Computers

See the undermentioned inquiries about competitory scheme in personal computing machines.

Questions

Does easy entree to distribution channels at Best Buy, Office Depot, and the direct- to- consumers on the Internet, and little minimal efficient graduated table in assembly operations indicate high or low entry menace in the Personal computer concern? Why?

Do providers allow small or most of the value in the Personal computer value concatenation? Why?

What factors determine the strength of competition in an industry? Is the strength of competition in the Personal computer industry high or low? Why?

Anwers:

( 1. ) Entry menace is Low for mature markets and Medium for developing markets.

Established participants have a immense advantage over new entrants, because they have already attained their Minimal Efficient Scale, making a cost advantage. Patents and right of first publications are the most common unreal barriers to entry in the Personal computer industry. Besides, exchanging to viing merchandise is really rare due to high shift costs and likely package mutual exclusiveness.

Startup costs for new entrants are besides rather high largely due to research and development, market research licensing outgo and deficiency of established dealingss with cardinal providers.

However, new entrants are capable of accomplishing market portion in developing markets, like Eastern Europe, Latin America, Asia Pacific part, and the Middle East. So, smaller houses with the right resources and capableness may be able to accomplish economic systems of graduated table in developing markets.

( 2. ) Suppliers appropriate the most of the value in PC value concatenation because of the followers:

Suppliers of nucleus Personal computer hardware ( IBM, Intel ) and package ( Microsoft ) hold dominant market place and about impossible to exchange, hence they have considerable bargaining power and can sell their merchandises at premium monetary value.

There is ever a menace of forward integrating by the providers since their merchandises are technically sophisticated, advanced and protected by right of first publications and other non-core Personal computer constituents are easy gettable through legion beginnings.

Main competitory advantages in Personal computer industry presents are costs and client trade name trueness, hence net income borders of Personal computer makers are really low, which does non impact supplier net income borders.

Therefore, the providers tend to hold small value in the Personal computer value concatenation.

( 3. ) Harmonizing to Porter ‘s five forces,

Intensity of competition is high, when:

Intensity of competition is low, when:

aˆ? Rivals are legion

aˆ? Rivals are few

aˆ? Rivals have comparatively equal size

aˆ? Rivals have comparatively unequal size

aˆ? Rivals have comparatively equal market portion

aˆ? Rivals have comparatively unequal market portion

aˆ? Industry growing is slow

aˆ? Industry growing is fast

aˆ? Fixed costs are high

aˆ? Fixed costs are low

aˆ? Merchandises are weakly differentiated

aˆ? Merchandises are extremely differentiated

aˆ? Brand trueness is undistinguished

aˆ? Brand trueness is important

aˆ? Consumer shift costs are low

aˆ? Consumer shift costs are high

Personal computer market nowadays is comparatively extremely competitory, with merely four chief participants selling weakly differentiated merchandises. Brand trueness is really of import, because consumer shift costs are really high, therefore chief focal point of the competition lies in invention ( to make impermanent distinction ) and edifice tailored solutions to increase trade name trueness. Therefore we can reason that strength of competition in Personal computer industry is comparatively high.

Question V

Coke and Pepsi have sustained their market laterality for about a century. General Motors and Ford gave been difficult hit by competition. What is different about product/market state of affairss in these two instances that affect sustainability?

Answer:

The two sets of merchandises are really different from each other. Pepsi and Coke is a fast moving consumer good, which is sold everyplace – and therefore, it ‘s highly accessible and is consumed multiple times. However, autos fall in to the car industry and is non a fast moving good, a individual takes into consideration multiple factors before graduating into a phase to be willing to buy ( preparedness to purchase ) the merchandise unlike Pepsi or Coke. For Pepsi and Coke due to the trade name trueness created through the old ages we can non clearly say at what monetary value a consumer will do a displacement. However, when it comes to a auto, we can state that at even a little autumn or rise in the monetary value can hold an inauspicious consequence on the demand of the merchandise and a consumer will do the displacement.

Why Pepsi and Coke managed to keep its leading place compared to General Motors and Ford because of it managed to accommodate to altering market state of affairss and consumer gustatory sensations and penchants whereas the two auto makers could n’t. In economic footings Coke and Pepsi managed to keep its oligopolistic nature of market constructions in comparing to General Motors and Ford who lost the conflict of market laterality and the market turned into a monopolistic 1. The lone two ways in which a rival can come in the market and make a break in an oligopolistic market is by come ining with big scale operational substructure to be able to vie with the economic systems of graduated table or the other manner would be to yield to the cost advantage by come ining little graduated table. With regard to pepsi or coke when a new rival enters the market with small cognition or little scale production capablenesss, they either purchase it out or establish its ain version of the merchandise. Never have they of all time faced a rival of a competitory advantage until late by ruddy bull which is besides merely in the energy drinks class, overall drink class its an unrealistic idea to suppress the market as no company can come in with a competitory border in the mainstream carbonated drinks class. This helps Pepsi and Coke to keep its leading place. However, when the Japanese invaded the U.S market they had big scale operational advantage and brought merchandises into the market which the consumer so wanted ( little, dependable and good priced ) which posed as a direct menace to General Motors and Ford. Their competitory advantage along with riotous selling lead to dwindling gross revenues and finally the sad death of one the taking auto makers in the universe. Therefore, above are the grounds why Pepsi and Coke managed to keep their leading state of affairs when market state of affairss changed and General Motors and Ford could n’t.

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