Ec 4550 -Tansey
7/17/2016
ASSIGNMENT 7 (Due JULY 26):
This assignment will help you to:

Effectively grasp appropriate economic methodology.

Use elementary microeconomic theory and models to understand buyer and seller
behavior in both the product and resource market.

Evaluate the impact of macro and government policy on the firm

Analyze and evaluate economic policy.
You will be using your model from the previous assignment 6 to complete this
assignment. MAKE SURE THAT YOU CORRECT ANY MISTAKES FROM THE
PREVIOUS ASSIGNMENT BEFORE TRYING TO DO THIS ASSIGNMENT;
STARTING ERROR FREE WILL SAVE A LOT OF TIME. Feel free to make
adjustments to your previous assignment model to make your model more realistic
or creative.
PROBLEM #2. Create seven scenarios for your first year of experience for the business
you created in the previous assignment. For each scenario work out a DIFFERENT
worksheet based on the changes in prices and costs that are likely to result from each of
the scenarios for the different number of consumers you might decide to target. Here are
the scenarios (and have a separate worksheet page, each entitled at the bottom
“Scenario..” with the number of the scenario as follows):
(0) Scenario 0: No consumers show up. This is the scenario where you have
set up your business, but some event suddenly prevents you from
accepting any consumers. While you have no revenues, you still have
fixed costs- the costs you have already committed to. These fixed costs
will be the same for all of the following scenarios.
(1) Scenario 1: You target only 1/3 as many consumers as you originally
planned in the previous assignment.
(2) Scenario 2: You target only 2/3 as many consumers as you originally
planned in the previous assignment.
(3) Scenario 3: This is the scenario 3 that you developed in the previous
assignment.
(4) Scenario 4: You set up your business to accommodate fifty percent more
consumers than you had planned in scenario 3 (i.e. the previous
assignment).
(5) Scenario 5: You set up your business to accommodate 100% more
consumers than you had planned in scenario 3.
(6) Scenario 6: You set up your business to accommodate 200% more
consumers than you had planned in scenario 3.
In each case assume that you have made the necessary adjustments in ALL variable costs
(but not fixed costs) to accommodate each of the different scenarios. You can change
your prices, the number of people you hire, or anything that affects variable costs or
revenues to accommodate the different quantity demanded in each of your scenarios. Try
to envision all of the changes that would be necessary.
There is an important way to save time in making your changes. Before creating
worksheets for each separate scenario, create equations for your variable cost and
demand items that reference the number of consumers in your exogenous variable box in
scenario 3. That means that when you change the number of consumers all the price and
cost items will automatically adjust. The trick is to make sure those equations accurately
reflect how prices and costs adjust to the number of consumers you serve. After entering
the equations then you copy scenario 3 onto seven separate pages and you can just
change the number of consumers. Using equations means you only have to explain the
equation, not the changes you make to each item in each scenario.
Once you have created seven separate worksheets by copying scenario 3 seven
separate times, you can go through and make changes to each scenario separately. But do
this methodically one-item-at-a-time. In other words, for each item you change in one
scenario, make sure you make check or make changes to that item in each of the
scenarios- otherwise you may forget to make important changes and end up with weird
results. Making changes to each scenario separately for each item takes a lot of
explaining.
On each EXCEL worksheet corresponding to each scenario describe in a textbox
the changes that occur in each scenario relative to Scenario 3. Each change from scenario
3 should have at least one sentence explaining the change. Where equations have been
used, the explanation of the equation should appear in scenario 3, but does not have to be
explained again.
If you prefer to use different numbers of consumers that is fine, but you must have
a zero consumer scenario and each scenario must be based in order on the quantity of
output sold (number of customers or patients served) from lowest (starting with scenario
0) to highest.
PROBLEM #3. From each of the worksheets in problem #2 create an end-of-the-year
income statement for the first year of the operation of your business (do not simply copy
the business plan example). Simplify the income statements to show just the fixed costs,
variable costs and revenues in each case and put them in a single worksheet entitled on
the bottom tab “Sensitivity Analysis”. In that worksheet fill in a table in the following
form to be totally dynamically consistent with your previous worksheets so that I can
change any of your scenarios in the previous worksheets to see the resultant change in the
“Scenario Analysis” worksheet:
Scenario
0.
1.
(Q=0) (1/3 *
Q)
2.
(2/3*Q)
3.
(Q=prob
1 last
assn.)
4.
(1.5*Q)
5.
(2*Q)
6.
(3*Q)
# of
0
Consumers
(Q)
Total
0
Revenue
Price
Variable
0
Cost
Fixed Cost
Total Cost
Profit
Based on the information that you have in this table,
1. Compute the average revenue, marginal revenue, average total cost, average
variable cost, average profit and marginal costs across each successive scenario
which means you will add a row in the above table for each of these items and
then will use the formulas to compute these items. (SEE YOUR TEXTBOOK
FOR EXAMPLES FOR HOW TO COMPUTE THESE ITEMS) Remember, you
do not have any marginal or average numbers in scenario 1; you can’t divide by
zero in computing an average and you need two scenarios in order to compute a
marginal quantity.
2. Graph the demand curve (namely, price which is average revenue), marginal
revenue curve, average total cost curve, average variable cost curve, and marginal
cost curve all in the same graph using the chart capability of EXCEL
3. Answer the following questions (CRUCIAL TO THE GRADE)
 What is the shut down price for your firm?
 What is the output that your firm would be at the shut down price
 What is the revenue maximizing output?
 What is the profit maximizing output?
 In which scenario does your firm achieve the greatest efficiency of production?
 In which scenario is average profit maximized?
4. Based on your graph in 2, classify which of the type of markets (monopoly,
oligopoly, monopolistic competition, perfect competition, monopsony,
oligopsony, bilateral oligopoly, or bilateral monopoly) you have implicitly
assumed exists in the market place for your company (HINT: look at your
textbook). In support of your answer, and assuming your classification of the
market is correct, in a text box for this exercise:
a. Please explain your reasons for classifying your market as you have (not
more than a paragraph).
b. Your classification in “a.” should be consistent with the graph of your
scenarios and your descriptions of your different scenarios
c. Assuming your analysis of your market is correct, will your company be
viable (make economic profits) in the long run? (Not more than a
paragraph).
d. Will you need to differentiate your services from other doctors in order to
make economic profit? How might differentiation be achieved if you had
to do so in order to survive? (Not more than a paragraph).
e. Will your company choose the most efficient technology and utilize that
technology most efficiently if your company maximizes profits? (Not
more than a paragraph).
f. Would you want to produce at the profit-maximizing scenario or not? If
not explain your answer with what implicit economic costs that are not
included in your income statement. (Not more than a paragraph).
g. Are their any implications you have discovered from this exercise about
the long run viability of ANY business like the one you are setting up?
SEND THE EXCEL WORKSHEET TO ME THROUGH WEBCT UNDER THE
TITLE, “MIL11UlastnameAssn07.”