Managerial Economics

Managerial Economics

In this week’s discussion you assume the role of CEO of a company. In  anticipation of the upcoming quarterly disclosure of profits, you  prepare your Board of Directors for the pressure that cost-push  inflation is having on profits. There will be some erosion of profits.

Also see the help provided in the discussion preparation.

Instructions

For this discussion, assume the role of CEO of one of the following hypothetical companies:

• All America Grocery Inc. We serve communities in  the middle of the income market, providing low prices for all basic  grocery needs. Our modest-income consumers expect good deals on good  quality foods. The Covid-19 pandemic has put upward pressure on the  price of everything we sell. Cost-push inflation from multiple sources  is impacting our operating cost and our cost of goods. We are both  fortunate and unfortunate that the price elasticity of demand for food  is .20.
• Very Big US Auto. Very Big US Auto is one of the  oldest and largest manufacturers of autos in the United States. Very Big  US Auto has an international supply chain and is highly dependent on  components manufactured abroad and assembled in the United States. Costs  are rising on all aspects of production across the industry. Very Big  US Auto is seeing inflationary pressure in everything we use: labor,  materials, components, and computer chips. On the demand side, Very Big  US Auto knows that demand is relatively elastic with a price elasticity  of demand of 1.2. But we also know that the pandemic has made some  transportation substitutes less acceptable.
• Big Time Entertainment. Big Time Entertainment is a  nationwide firm providing movies, concerts, arcades, and other  in-person entertainment venues such as bowling and roller skating. Our  operations have been heavily impacted during the Covid-19 pandemic,  including continuing limits on number of guests and new costs associated  with safety measures for both staff and customers. We are now reopening  but facing a continued cost-push inflation. We also face uncertainty as  to the potential for additional shutdowns. Customers are fearful, and  the guidance on operating our facilities means we are operating far  below our optimal number of patrons to cover the higher cost of  everything. Price elasticity of demand is 1.6, and we are also faced  with competition from online entertainment and gaming, which are not  experiencing many of these cost pressures.

In your discussion post, address the following prompts within  the context of your chosen hypothetical company of which you are the  CEO:

• Is the demand curve for your product relatively elastic, inelastic,  or unitary elastic? Demonstrate this for your company’s product by how  much the quantity demanded will change if you pass on the 10% increase  in cost. In other words, prepare a forecast showing by what percentage  the quantity demanded will change if your prices are raised by 10%. You  must provide calculations showing the percentage change in quantity  demanded.
• Will you pass on most or all of the cost increase to your customers? Why or why not?