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)
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)
