Managerial economics Harvard Case Solution & Analysis

Answer 1

The basis of the argument most likely used by union officials:

The basis of the argument of the union officials would be that the workers will lose their jobs if investment tax credit will be introduced as most or all of the investors would be wanting to reduce their cost spend on labor. More mechanical work will reduce the cost of the investors, but this will increase unemployment.

Answer to the union officers arguments by automakers representative:

The proposal of investment tax credit is attractive for the investment makers. It is probable that the investors will invest in machinery more to reduce their cost of making a vehicle. This proposal will reduce the relative price of capital to labor. By the implementation of this proposal the demand for labor will decrease as some labor will be laid down from work, this will make the is o-cost line steeper. The prices of labor will go down due to the loss in demand.

The argument of the representative should be that if all the automakers will leave then more people will be jobless and therefore,the, prices of labor will go steeper than it will go in the current situation. After this proposal of investment tax credit, the automakers will stay here and will give jobs to the locals and only some people will be laid down instead of all being laid down if they leave from here. The capital will be on the higher side of the ratio between capitals to labor ratio. So it is better lose some jobs instead of losing all in the case when automakers will leave in search of a cheaper labor than here. In this situation, the automakers will move all the capital they have invested here to a country where they find cheaper labor.

Answer 2:

A student, Alan, buys 12 tickets a year at $7 rather than the full price of $10. The reason why Alan gained from discount scheme is not $36,but because the idea behind this is the buyer’s surplus. The idea of buyer’s surplus is that at the full price of tickets Alan’s demand would not be 12 tickets. At the start his demand for the tickets would be 6 assuming that his demand will be linear.

On Alan’s first purchase of 6 tickets he will be earning a profit of $18.

On Alan’s second purchase his willingness to buy the tickets would fall to half on the buy of next 6 tickets, he will earn from his second buy a profit of $9.

Alan will be making a total of $27 as his earning from his total buy of tickets. This will be Alan’s total surplus.

Particulars

dollars

Actual price of tickets

$10

Discounted price of tickets

$7

Gain on discount

$3

Number of tickets bought

6

Total gain on tickets from discount(first buy)

$18

Particulars

dollars

Actual price of tickets

$10

Discounted price of tickets

$7

Gain on discount

$3

Number of tickets bought

6

Demand for tickets

0.5

Total gain on tickets from discount (second buy)

$9

Particulars

dollars

Total gain on tickets from discount(first buy)

$18

Total gain on tickets from discount (second buy)

$9

total gain from tickets

$27

Answer 3:

A

The cross price elasticity of demand for wind power plants and price of coals is “Positive”. This is because wind power plants& coal both are inputs in the process of producing electricity and in this case they are substitutes and an increase in price of one will increase the demand for another. 

B

The cross price elasticity of demand would be positive as oil-generated powered plants and coals are used as substitutes. If the price of coal increases, it will decrease its demand and will result in an increase in the demand of oil-fired powered plants. The demand for oil will increase as a result of an increase in the prices of coal.

Managerial economics Case Solution

Demand for fuel in the long run as compared with the short run:

The demand for fuel in the long term would be less elastic. This is because in the short term, before establishing a plant or in the planning stage of a plant, inputs can be changed.

This can be understood in a case study, if a person wants to build a coal powered plant and the price of coal increases before that person starts to build the power plant, then the person can change his intentions and instead of building a power plant that fuels up with coal, builds a solar powered plant. This is because of high elasticity in the short term.........................

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