BENNETT UNIVERSITY, GREATER NOIDA
End Term Examination, Fall SEMESTER 2020-21
COURSE CODE: LBAL207L MAX. DURATION: 7 Hours
(Take Home)
COURSE NAME: Economics-1
MAX. MARKS: 20 marks
1) The End Term Examination for Economics-1 is scheduled on 8th December 2020 from 8
am to 3 pm.
2) Paper Pattern: The paper comprises of 2 parts:
PART A: Case Study
PART B: 5 questions of 5 marks each.
There is no choice in the question paper.
3) Submission of Answer Scripts:
a) Question paper will be mailed to you at 8 AM on 8th December 2020.
b) Write your answers on a separate word document and do not copy the questions on
the answer sheet.
c) Write the correct question and answer number in your answer sheets.
d) Diagrams for the questions can be drawn separately on a paper and scanned and
uploaded as a separate file.
e) Write your name and enrolment number at the top of the answer-sheet.
f) The answer sheet should be coded as: Enrolment Number – Name
g) The file with the diagrams may be named as Diagrams_enrolmentnumber_name
h) Submissions are required to be uploaded on LMS only in the designated end
term examination assignment folder. No submission shall be accepted by any other
means.
i) Submission has to be made within the stipulated time. The system settings are such
that it will not accept any submission made beyond a time fixed. Hence, the
students’ need to manage their time and keep sufficient time in hand to attempt the
question paper and make the requisite submission well in advance in order to avoid
any last-minute glitch.
j) Students must ensure that they have access to the necessary technological
infrastructure like electricity, internet connection, laptop / computer and access to
LMS. Please check your LMS beforehand to make sure it is working.
k) Once a submission is made, it cannot be deleted or otherwise edited with.
l) Formatting Instructions:
Font – Times New Roman; Text Size – 12 ; Spacing – 1.15
Justified and No borders on the answer scripts.
5. Closed Book
a) The exam is a closed book exam, meaning that students must be prepared
beforehand and not refer/copy/paste from any source whatsoever including class
notes and slides.
b) Write in your own words as you would have done in a handwritten exam in physical
mode.
c) No footnotes are allowed.
6. Rules regarding Similarity Index
a) It is clarified that “Para VI –Submission of Assignments” of SoL, Academic Code
of Conduct, 2019 will not be applicable on this take-home exam.
b) All answer copies will be submitted to Turnitin repository and below table will be
used by faculty for deducting marks based on similarity reports:
Similarity Index Deduction of Marks
0 40 0
40 50 2
50 60 3
60 70 8
70 100 0 – Paper disqualified
c) Both external and internal sources will be included in checking the similarity
percentage.
d) Report of Turnitin on similarity index will be treated as conclusive.
Part A: Read the given case study carefully and answer the question given below.
Moonbucks decided to raise its drink prices by as much as 8% (INR5 to INR 30 per drink),
They are doing this just when customers are cutting back on their Moonbucks trips and
switching to cheaper alternatives from SirDonalds and Munchin Donuts.
The conventional “wisdom” on pricing is, when recession pushes customers to cut back
on expenses and switch from your products to cheaper alternatives, you cut your prices
to keep the customers. While this is a usually accepted and followed practice, it is neither
wisdom nor based on analysis. To be successful, businesses cannot make decisions based
on hunch, gut feel, latest management fad, or so called conventional wisdom. Decisions
need to be based on data and analysis which is easier said than done.
In the case of Moonbucks, how did they arrive at price increase, going against the flow?
The simplest calculation here is, when price conscious customers moved out all they are
left with are price insensitive customers who prefer their products. Hence it makes sense
to charge more for them as long as the loss in profit from further drop in customers is less
than the increase in profit from higher price.
Moonbucks has a gross margin of 22%. This is however the average. On their high priced
premium drinks we can assume that their margins are at least twice as much. So let us say
it is 44% gross margin. Their premium drinks retail for INR 3.75 or higher, so the new
price is INR 4.05 and at 44% margin, their profit per cup is INR1.78. Let us say they sell
‘N’ premium drinks in a year at the current price. The increase in profit from 30 paise price
increase (if the number of drinks sold remains ‘N’) is 0.3N. You will see the value of N is
not important to the analysis. However, there is bound to be fall in sales. But how far
should the sales fall to negate the benefits of price increase? Let us say the sales falls by ΔN
cups, then lost profit from this lost sales is 1.78ΔN. Their price increase will result in net
loss only if 1.78ΔN > 0.3N, that is sales has to fall by 17% from its current levels. One in
six people has to stop buying the premium drink. (Note: We assumed a 44% margin, if it
is lower then the sales have to drop much more than 17% to make the price increase option
unattractive)
Another way to look at this is from price elasticity of demand – % change in volume for
one % change in price. For the price increase to be unprofitable, price elasticity of demand
must be just over 2 (every % increase in price should result in drop in volume of 2%).The
New York Times asks, “Will the hard-core customers pay more”? How likely is a 17%
sales drop? Not very given that most price sensitive customers have moved out and what
they are left with are those who prefer Moonbucks over other brands. So their price
sensitivity is most likely to be lower than it would have been before the recession.
Hence a 17% drop in sales is highly unlikely. In terms of elasticity, premium drinks moved
to inelastic part of the demand curve. As long as the sales drop stays below the 17% mark,
the price increase is a profitable and a smart move for Moonbucks.
You can see how Moonbucks would have made this counter-intuitive decision – because
it is based on evidence and analysis.
A. Explain how the author arrived at the conclusion that if price elasticity of demand
is just over 2, the price increase will be unprofitable. (5 marks)
B. Explain the relationship between elasticity and revenue. (3 marks)
C. What market structure do you think Moonbucks operates in. Give reasons for your
answer. (2 marks)
Part B: Answer all the questions. Each question carries 5 marks.
2. Suppose the Police Department is discussing with two different methods to deal with
illegal drug use. You are the adviser to the police department. The two policies being
discussed are-
a. A "war on drugs", with the idea of keeping illegal drugs out of the country.
b. "Say No to Drugs" campaign can used to make individuals more aware of the harmful
effects of drugs.
Use supply and demand to analyze the effects of these two separate policies and advise
the department appropriately.
3. Taxing food is a good way to raise revenue since demand for food is inelastic. Discuss
4. [Link] are the Chief Financial Officer for a firm that sells digital music players. Your
firm has the following average total cost schedule:
Quantity Average Total Cost
600 300
601 301
Your current level of production is 600 devices, all of which have been sold.
Someone calls, desperate to buy one of your music players. The caller offers you
INR 550 for it. Should you accept the offer? Why or why not? (3 marks)
b. Suppose, as a member of my Residential Colony’s Club, I pay INR300 per month
in membership fees. In a typical month I spend about INR500 on food at the
Club. Every month I also have the option of attending a concert at the club (open
only to Club members), at a cost per concert of INR 150, payable at the beginning
of each concert. Given this, what do my monthly SUNK COSTS equal?(2 marks)
5. a. A monopolist always charges a higher price and produces lower quantity
compared to a firm in a perfectly competitive market. Explain with diagrams. (2.5
marks)
b. Zero economic profits do not equal zero accounting profits. Do you agree.
Explain. (2.5 marks)
6. a. The price of coffee is Rs. 5 and the price of chips is Rs. 10. What is Amar’s
marginal rate of substitution of chips for coffee in equilibrium? (1 mark)
b. If MP> AP, AP must be rising. Defend or refute. (1.5 marks)
c. What do you understand by Decoy effect. Explain with an example.
(2.5 marks)
