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Monday 4 June 2012

ECO401 Assignment no 2 Spring 2012 Idea Solution

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 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. 


Number of 
Total Cost (Rs) 
students 
20 30,000 
60 30,000 
100 30,000 
150 30,000 
200 30,000 
250 30,000 


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)