SEMESTER SPRING 2012
Economics (ECO401)
Assignment No. 2
Due Date: 7th June, 2012
Marks: 30
The Case:
E-Commerce refers to the buying and selling of products over electronic system like Internet and other computer networks. An E-Product can be digitally encoded then transmitted rapidly, accurately and cheaply. These products may include music, movies, magazines, news, books etc. Information is expensive to produce but very cheap to copy and distribute. Initially the fixed cost of creating a usable product is large but the marginal cost of distributing it is tiny. Information products with high fixed cost but low data is copied from vu solutions dot com marginal cost are potential monopolies. Consider a case of Mr. Kashif who wants to promote some web based information for the subject of Finance after combining his knowledge of computer and finance. As Mr. Kashif has monopoly power in his product so initially when he designed the web based course, he had to face large amount of total fixed cost of Rs.30, 000 and once his product is launched on the web, any number of potential customers can access it without any additional cost to him. Following table shows the strength of students who are willing to take
this course and total cost incurred by Mr. Kashif.
Requirements:
Part A:
a. Use the above information and calculate marginal cost (MC) and average cost (AC) at each level of student’s strength.
b. What the values of marginal cost (MC) and average cost (AC) are showing? Interpret in your own words.
Part B:
Following graph shows average revenue, marginal revenue and average cost curves for Mr. Kashif drawn from hypothetical data.
Analyze the above graph and answer the following questions:
a. What will be the maximum possible number of students who will take this course and maximum price for this course?
b. What will be the profit maximizing / loss minimizing level of output (students) for Mr. Kashif?
c. Is this E-business profitable or not for Mr. Kashif? Give your answer by calculating profit/loss value.
(Part A: 14+4, Part B: 4+2+6)
Solution:
