10/08/2022, 19:42 Assignment 2 - Profit Maximization Analysis

Assignment 2 - Profit Maximization Analysis

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Course code and name: ECON1194 Prices and Markets

Assessment name: Data Analysis of Firm Behavior for Profit Maximization 

Length: 1500 words

Type: Individual Written Report

Feedback mode: The assignment is due at the end of week 7.  Feedback and grading results will be provided in Canvas
GradeMark section within 2 weeks after the submission date.

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submission exceeds the word count by 150 words (from 1501 words to 1650 words), a discretionary penalty of no more
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awarded and the feedback on the piece of work. 

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for papers with no number of word counts or providing incorrect numbers of word counts on the cover page.

Learning Objectives Assessed

Identify appropriate foundational microeconomics theories and techniques to apply in the business environment.
Apply the economic method to systematically and rigorously analyse economic phenomena.
Analyse microeconomic issues within the frameworks of modern microeconomic models and analytical techniques to
explain and predict the outcomes of changes in a variety of economic variables.
Identify and assess, in a microeconomic framework, the economic issues confronted by individual decision makers
and by society as a whole to guide economic decision making.

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10/08/2022, 19:42 Assignment 2 - Profit Maximization Analysis

Ready for Life and Work

This group work is designed to employ the framework of principle micro-economic model of firm profit maximization for
individual firm behavior analyses given the structure of the industry the firms are operating their businesses in. This
activity is to help you practice collaborative work with your peers and apply the language of economics in a
business environment.

Assessment Details
Theory of the firm, introduced by the economist Joe Bain (1959) in the course Prices and Markets, argues that a firm’s
objective is profit maximization. The theory gives explanations of how a firm works and what drive the firm’s profit. Firstly,
a firm aims to lower costs of resources used in its production processes. The firm should realize the importance of
enhancing productivity in its production for the cost minimization. Secondly, a firm determines to gain revenues either by
the choices of types of products, output levels and price levels of its products. The firm should realize the degree of
competition in the market for the product choices and pricing strategies which in turn affect its revenues.

*Reference:  Bain, Joe S., Industrial Organization, New York: John Wiley and Sons, Inc., 1959, Third printing 1967.

This assignment 2 is designed for students to demonstrate their understanding of the core concepts of the theoretical
framework above.

Assignment Questions: 
In big cities, there are many small businesses producing and selling necessity goods and services (such as laundry
services, hair salons, garage services, restaurants, fruit shops, bakeries, etc.) to serve the local citizens. The common
problem of all the small businesses in the cities is that their products look quite similar and they are likely to engage in
aggressive price competition. Each firm currently sets the same price level with each other. The demand function format is
P(Q) = a, with a is a constant number (i.e. price level remains at “a” regardless any change in Q).

A small firm ABC is considering whether it should upgrade its product quality to compete with its rivals. The owner of a
shop ABC comes to know a new kind of equipment that helps to reduce the product errors and enhance the typical
product quality attributes better suiting customers’ orders. Most of ABC’s customers said they would be willing to pay more
than the current price for the enhanced quality attributes while the other customers said they are happy at current price
level. The demand function is now down-ward sloping: P(Q) = A -b*Q, with A and b as constant numbers (i.e. price
changes with respect to Q) and b is smaller than 1, and please note "A" of this demand function after quality upgrade is
now different from "a" before the quality upgrade.

Additionally, the firm’s marginal cost is MC(Q) = c*Q, with c > 1, and c is a constant number (i.e. the firm is currently facing
diminishing marginal returns, MC increases with respect to Q). The business owner finds that the new equipment brings
another benefit for the firm to program and monitor workers’ production time and hence helps the firm to determine
optimal uses of labor and would mitigate the problem of diminishing marginal returns the firm currently has. It would help
the marginal cost decreases, but c still remains constant, demonstrated by movement downward along MC function.
Assuming the cost of buying the equipment minimally affects to fixed capital of the shop business. Average total cost
varies accordingly to the marginal cost.

The owner of ABC believes that investing in the equipment for the product quality upgrade would bring higher profits in
short run rather than keeping doing the same business as he has been doing.

Requirements:

Would you agree or disagree with the business owner’s belief? Discuss your position. Make sure you explain your
argument exhaustively about the effects of product quality upgrade on the change in profitability of the firm, whether those
positive effects of the new equipment definitely bring higher profit for the firm, what factors the profitability depend on;
based on the argument, conclude your recommendation whether the owner of ABC should invest in the new equipment
for product quality upgrade or not.
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10/08/2022, 19:42 Assignment 2 - Profit Maximization Analysis

Your discussion should reflect the concepts of competitive market structures, the framework of profit maximization in
competitive markets (topics 4 and 5) that you have learnt in the course. Furthermore, you should note that price elasticity
of demand and production costs (topics 2 and 3) are the two relevant reasonings for your discussion.

Hint: A suggestion of high-level structure of your discussion with the firm’s owner is as below.

PART 1: DISCUSS THE SHORT-RUN PROFITABILITY OF THE FIRM IN THE CASE OF NOT UPGRADING THE
PRODUCT QUALITY.

{suggested max 300 words} 

What is the market structure and the firm’s price setting? How does the firm generate marginal revenue given the price
setting? Facing the problem of diminishing marginal returns (DMR), what is the cost structure the firm currently has, i.e.
the relative proportion of labor and capital in total cost? What are the slopes of marginal cost and average costs with the
cost structure? What is the firm’s output decision given the price setting and the production cost condition? What is the
associated short-run profit for the firm in this business setting?

PART 2: DISCUSS THE SHORT-RUN PROFITABILITY OF THE FIRM IN THE CASE OF INVESTING IN THE NEW
EQUIPMENT AND UPGRADING THE PRODUCT QUALITY.

What is the market structure and the firm’s price setting? How does the firm generate marginal revenue given the price
setting? Assuming the cost of buying new equipment has minimal change in the firm’s cost structure, with the positive
effect of the new technology of the equipment, measuring the labor productivity and mitigating the problem of DMR,
 would the firm’s marginal cost and average costs be higher or lower than before? What is the firm’s output level decision
and associated short-run profit in the new business setting?

{suggested max 400 words}

PART 3: COMPARE THE SHORT-RUN PROFITABILITY OF THE FIRM WITH AND WITHOUT PRODUCT QUALITY
UPGRADE.

Particularly, compare the optimal output levels between two cases, then compare price levels the firm can set, and
compare the production costs with and without the quality upgrade. From the comparison of the profitability, conclude
whether buying the new equipment definitely bring the firm higher profit, what factors the profitability depend on and
conclude your recommendation whether the owner of ABC should invest in the new equipment for product quality upgrade
or not.

{suggested max 400 words}

PART 4: TO CONVINCE THE OWNER OF THE FIRM ABC BETTER, YOU NEED TO SUPPORT YOUR DISCUSSION
BY REAL LIFE EXAMPLE CASES. You have learnt from the lectures of the course and from the theoretical discussion of
profit maximization framework that the profitability changes accordingly to the firm’s price settings, the output levels and
production costs with respect to the product differentiation (quality upgrade). While it is hard to find the evidence of output
levels and production costs of firms, it is feasible to collect the evidence of price settings with respect to product
differentiation.

With assumption of firms having similar product cost structure, now you only need to provide evidence whether investing
in product differentiation would help firms able to set higher price levels or not. If you have real life evidence to support this
point, you can argue that the firms can not only avoid the aggressive price competition with other rivals, but also can set
the higher price level without losing many customers.

Investigate one of the example business in the city you are living in. Several business cases representing competitive
market structures you may want to choose one to investigate are: laundry services, hair salons, garage services,
restaurants, fruit shops, bakeries, etc. Collect data of their product attributes, investments in their product quality upgrades
to be competitive in the markets, and their price levels. The data can be from websites, social networks, or from your own
observations.

{suggested max 400 words}

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10/08/2022, 19:42 Assignment 2 - Profit Maximization Analysis

Support Resources
This assessment requires that you meet RMIT's expectations for academic integrity. More information and advice on how
to avoid plagiarism are available in the Getting Started module.

Open the academic integrity page.

Additional library and learning resources are available to help with the assessment in this course

Link to Assignment Support.

Submission Instruction
Your assignment reports are submitted by soft copy on the Turn-it-in. Only reports that have been uploaded on the
website will be marked by the teaching staff.

The following assignment format requirements must be met:

Format: Word Document (.docx). You need to submit Word file NOT PDF file. All texts with PDF format or images will
not be marked (excluding texts in graphs).
File name: "Assignment 2 ECON1194_ your first name _ ID number.docx".
The front page of the report should state: (i) Your name and student number; (ii) The lecturer’s name; (iii) Your group
number; (iv) Number of words. No cover page will be deducted by 20% of total marks.
Clearly defined sections and sub-sections.
Text should be justified, 1.5 line spacing, character size 12 point, Times New Roman font,1 inch margins.
References should be presented using the RMIT modified Harvard (author-date) referencing system. A copy of the
referencing and presentation guidelines is available at Havard referencing and presentation guidelines
(https://www.lib.rmit.edu.au/easy-cite/) .
Quotations and source of figures should be referenced.

Rubric
Please refer to the rubric below as generic marking criteria of the assignment.

Rubric Assignment 2 - 2022B

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10/08/2022, 19:42 Assignment 2 - Profit Maximization Analysis

Criteria Ratings Pts

ILO 1, 3: ILO 11
pts 11
to >8.79 pts 8.79
to >7.69 pts 7.69
to >6.59 pts 6.59
to >5.49 pts 5.49
to >0 pts
1, 3 - Full HD DI CR PA NN
Discussion of Marks "Exhaustive "Sufficient "Clear "Limited "Poor
short-run
explanation of explanation of explanation of explanation of explanation of
profitability
optimal price optimal price and optimal price and optimal price and optimal price
without
and output output levels and output levels and output levels and and output
product
levels and the the firm's the firm's the firm's levels and the
differentiation
firm's profitability; linked profitability given profitability given firm's
profitability; with the market structure market structure profitability
coherently discussion of and absence of and absence of given market
linked with market structure product quality product quality structure and
market and absence of upgrade; missing upgrade; poorly absence of
structure and product quality some linkages linked with market product quality 11 pts

absence of upgrade. Minor with market structure and upgrade;missing

product quality errors. structure and absence of discussion of
upgrade. absence of product quality firm's
product quality upgrade. A few profitability in
upgrade. A few errors. the given
errors. market structure
and absence of
product quality
upgrade.A few
errors.

"ILO 2, 4, 6: 11
pts 11
to >8.79 pts 8.79
to >7.69 pts 7.69
to >6.59 pts 6.59
to >5.49 pts 5.49
to >0 pts
Discussion of Full HD DI CR PA NN
short-run Marks "Exhaustive "Sufficient "Clear "Limited "Poor
profitability
explanation of explanation of explanation of explanation of explanation of
with
optimal price optimal price and optimal price and optimal price and optimal price
investment in
and output output levels and output levels and output levels and and output
product
levels and the the firm's the firm's the firm's levels and the
differentiation
firm's profitability; linked profitability given profitability given firm's
profitability; with the market structure market structure profitability
coherently discussion of and absence of and absence of given market
linked with market structure product quality product quality structure and
market and the upgrade; missing upgrade; poorly absence of
11 pts

structure and investment in some linkages linked with market product quality
the investment product quality with market structure and the upgrade;missing
in product upgrade. Minor structure and the investment in discussion of
quality upgrade. errors. investment in product quality firm's
product quality upgrade. profitability in
upgrade.A few the given
errors. market structure
and the
investment in
product quality
upgrade.

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10/08/2022, 19:42 Assignment 2 - Profit Maximization Analysis

Criteria Ratings Pts

ILO 2,4,6- 7
pts 7
to >5.6 pts 5.6
to >4.9 pts 4.9
to >4.2 pts 4.2
to >3.5 pts 3.5
to >0 pts
Relative Full HD DI CR PA NN
profitability Marks Clear position in Clear position in Clear position in Clear position in Unclear position
with and
the argument if the argument if the argument if the argument if in the argument
without
the firm should the firm should the firm should the firm should if the firm
investment in
invest in invest in product invest in product invest in product should invest in
product
product quality quality upgrade; quality upgrade; quality upgrade; product quality
differentiation
upgrade; with with good with explanations with explanations upgrade; with
excellent explanations how how relative how relative poor
7 pts

explanations relative profitability with profitability with explanations

how relative profitability with and without the and without the how relative
profitability with and without the quality upgrade, quality upgrade, profitability with
and without the quality upgrade. but lack of clarity but lack of clarity and without the
quality upgrade. Minor mistakes. at times. at times. quality upgrade.

ILO 2,4,6- 5
pts 5
to >4.0 pts 4
to >3.5 pts 3.5
to >3.0 pts 3
to >2.5 pts 2.5
to >0 pts
Graph Full HD DI CR PA NN
illustration of Marks Graphs are Graphs are well Graphs are Graphs are presented Graphs are
short-run
excellently presented and presented and and linked with the poorly
profitability in
presented and coherently linked with the written analysis in presented and
two cases
coherently linked with the written analysis previous parts 1,2 and 3. not clearly
with and
linked with the written analysis in previous Missing several linked with the
without
written analysis in previous parts parts 1,2 and 3. components of written 5 pts

investment in
in previous 1,2 and 3. Minor Several errors. comparisons of analysis in
product
parts 1,2 and 3. errors profitability between two previous parts
differentiation
cases. 1,2 and 3.

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10/08/2022, 19:42 Assignment 2 - Profit Maximization Analysis

Criteria Ratings Pts

ILO 2,4,6- 6
pts 6
to >4.8 pts 4.8
to >4.2 pts 4.2
to >3.6 pts 3.6
to >3.0 pts 3
to >0 pts
Real-life data Full HD DI CR PA NN
to support Marks Original and Original and good Sufficient data for Limited data for Poor data for
the case
excellent data for data for evidencing the evidencing the evidencing the
analysis
evidencing the evidencing the argument of argument of argument of
argument of argument of product product product
product product differentiation and differentiation differentiation
differentiation differentiation and price setting. The and price and price
and price setting. price setting. The data represents setting. The data setting. The data
The data data represents well the represents the does not
represents well well the theoretical theoretical represent the
the theoretical theoretical argument: the argument: the theoretical
argument: the argument: the more more argument: the
more more differentiated differentiated more
differentiated differentiated products the firms products the differentiated 6 pts

products the products the firms have, the price firms have, the products the
firms have, the have, the price levels of the price levels of firms have, the
price levels of the levels of the products diverge; the products price levels of
products diverge. products diverge. but the diverge; but with the products
Excellent Good explanation explanation how poor explanation diverge; with
explanation how how the real-life the real-life data how the real-life poor explanation
the real-life data data relates to the relates to the data relates to how the real-life
relates to the discussion of the discussion of the the discussion of data relates to
discussion of the case above. case above is the case above. the discussion of
case above Minor errors. unclear at times. the case above.

Total Points:
40

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