Managerial Economics: Group Project

August 25, 2017

1 Instruction
The main purpose of this project is to have you, entirely through your own
initiative, consolidate what you are learning in this class. The project topics
have a direct connection with course materials covered in the lectures. Keep in
mind that there are no right or wrong answers here: Be as creative as possible,
but also make sure that your analysis is logical. Show that you can think like
an economist!

Important dates: Topic 1, 2, 3 (page 3, 4, 5) will be presented on week 10 (23

Oct-27 Oct). Topic 4, 5, 6 (page 6, 7, 8) will be presented on week 11 (30 Oct-3
Nov).

1.1 How to Prepare

• Substance: How do you approach and analyze the question? Do you
understand and/or define it properly? It is not always better to start
with a big problem. Try to be specific and to the point. You may use
the discussion questions to organize your analysis. You don’t have to
go through the questions in their posted order. Depth is preferred to
coverage.
Try to assess your analysis by asking: What is the key concept/framework
applied in the analysis, and does it fit the problem here? Are you aware
of the limitation of the framework or your assumptions? How are the
data collected? Ideally, what kind of data would you like to collect? Are
the examples cited relevant to your argument? Can you generalize the
conclusion/implications to other scenarios?

• Format: How is your presentation received?

Do you communicate the main argument effectively? It takes practice to
make a presentation clear and flow well. Feel free to use slides, handouts or
any other materials suitable for your topic. Also, do you address audience’s
questions well? A good presentation is not solely a successful show: You
are communicating ideas!

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1.2 FAQ
• What types of supporting material can we draw on outside of the lecture
materials?
Basically, any evidence that you believe supports the argument is fine:
newspaper articles, data and statistics, research reports, etc. Cite the
source and original author if you are using other people’s research or opin-
ions.

• Do we have to apply economics concepts/theory taught in class?

No. You can employ concepts and framework from previous or forth-
coming lectures, even beyond our course material. The main idea is to
construct a fact-based, logically-grounded analysis of a real-world issue.

• What kind of data/quatitiative methods shall we use for the analysis?

Generally, data analysis help demonstrate a pattern or relationship of
interest. You may show descriptive statistics, such as mean/standard
deviation/time trend, etc. More advanced methods involve regressions,
that is, estimating the relationship among variables. You may use software
packages (Excel, R, Stata, etc) for statstical analysis.
• Is every team member required to talk during the presentation?
No. Your team decides what particular format fits the project best. Al-
though every member should participate in team discussion and prepara-
tion, individual contribution is not necessarily linked to whether and how
long each team member speaks during the presentation.

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Topic 1: Driving the World’s Costliest Cars
Singapore cars are the world’s most expensive. A main reason is deliberate
government policy. Buyers must pay several levies on top of the basic price for
a car, including the “Additional Registration Fee” (ARF) and “Certificate of
Entitlement” (COE) on new car registrations.
The ARF is based on the wholesale cost or import price of the car, which
is officially called the “open market value” (OMV). The COE is essentially a
vehicle quota system where people bid for a certificate to own a vehicle. A new
car may be registered only with a COE, which is valid for ten years.

Discussion Questions

1. Decompose the total amount paid by a new car buyer. That is, given the
car’s open market value, write the total amount paid by the buyer as a
function of the open market value and policy surcharges.

2. Both ARF and COE policies provide rebates for de-registration of a car.
Do some research and figure out the details of the policy. With respect
to the price equation you have specified in 1, which part of the total price
paid by the consumer is sunk cost?
3. What do you think is the key motivation for the government to charge
ARF and COE? Why would it be effective? How would ARF and COE
affect the demand/supply and equilibrium price of cars compared to a
market without these government policies?

4. Despite the high prices, we observe more luxury cars on the streets of
Singapore than in most US cities. Why? Are American consumers more
frugal than Singaporeans?

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Topic 2: The Demand for Babies

The number of children an average Singaporean woman can expect to have

during her lifetime—the fertility rate—has fallen from 3.07 in the 1970 to 1.19
in 2013, an enormous drop. Why does one of the world’s richest and most
productive countries have one of the lowest fertility rates? In fact Singapore is
not alone: the total fertility rate in East Asia has also fallen from 5.3 in the late
1960s to below 1.6 now. To understand the phenomenon, consider an economic
framework for fertility analysis.

Discussion Questions

1. Consider a household’s decision on how many children to have. The supply

of children reflects a couple’s natural fertility and the child’s survival rate.
How about demand? What are the basic determinants of the demand for
children? What is the “price” here?

2. One well-documented relationship is how the mother’s education affects

fertility. Collect cross-country data and plot the relationship, with fertility
on the horizontal axis and female education(literacy rate) on the vertical
axis. 1 What do you see from the plots, and how does it fit your framework
established in 1?

3. The Singapore government has initiated a series of childcare subsidies

dating back to the mid-1980s. These include various tax relief schemes,
housing and medical benefits, and direct financial incentives—the Baby
Bonus. Describe one of the policies and briefly discuss why it may or may
not work.

1 Country-level fertility and female literacy data can be found from public sources, for ex-

ample the World Bank(http://data.worldbank.org/) or CIA World Fact Book(https://www.

cia.gov/library/publications/the-world-factbook/rankorder/rankorderguide.html)

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Topic 3: Fringe Benefits
In the U.S., current federal tax law requires that firms provide fringe benefits
in a way that does not discriminate against lower-income workers. Presumably,
the purpose of this regulation is to ensure that low-income workers will have
access to healthcare, pension benefits, and other fringe benefits. Unfortunately,
this policy often limits the employment opportunities of low-income workers.
Discussion Questions

1. Analyze the following numerical example: Consider a company that hires

computer programmers and secretaries. Suppose that the annual wage
of a computer programmer is $30K and that of a secretary is $15K. The
company is now considering offering a family health care plan worth $3.6K
annually to its employees.

• What is the relative price of a secretary to a computer programmer,

with and without the cost of health plan?
• Given your answer above, can you apply isoquant and isocost analysis
to predict how firms hiring decisions will change after adding this
benefit?
2. A group of economists found a relationship between health care costs and
employment of low-wage workers from industry data: First, industries
that offered more generous health care plans employed significantly fewer
bookkeepers, keypunch operators, receptionists, secretaries, clerk-typists,
janitors, and food-service workers than did industries with lower health
care costs. Moreover, industries with higher levels of fringe benefits hired
more part-time workers than did industries with lower fringe-benefit levels
since the government does not require firms to offer pensions, health care,
and many other fringe benefits to part-time workers. Following the logic
developed in (1), explain the relationship that these economists found.
How can we understand it via firms’ cost analysis?

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Topic 4: Uber Cuts Prices
Founded in 2009, Uber develops, markets and operates the Uber mobile app,
which allows consumers with smartphones to submit a trip request which is then
routed to Uber drivers who use their own cars. By May 28, 2015, the service
was available in 58 countries and 300 cities worldwide. In January 2015, Uber
extended fare cuts from the U.S. markets to 48 more cities. Uber asserted that
the lower fares would benefit clients and drivers: “with the increased demand,
drivers’ income goes up as well. More demand turns into significantly more
efficiency for the driver, more trips for every hour, and more earnings for every
hour on the road”.

Discussion Questions

1. Does fare cuts necessarily lead to higher income? What information does
Uber need to rationalize the decision?

2. In Chicago, the reduction of fares by 23% led to 12% increase in revenue.

What does these data imply?

3. Now consider drivers’ decision on how many hours they work everyday.
How do they determine the optimal quantity of labor to supply? What’s
the impact of fare cuts on their decision of labor supply?

4. Does an increase in earnings necessarily make drivers better off?

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Topic 5: Pertamina and Fuel Subsidies2
The government of Indonesia subsidizes the retail sales of petrol (branded as
“Premium), kerosene, and diesel (branded as “Solar) to consumers, small busi-
nesses, and transport operators. As the price of oil increases, the fuel subsidies
have grown to one of the largest items in government expenditure. In June
2013, the government raised the price of Premium from Rp 4,500 per litre to
Rp 6,500, and the price of Solar from Rp 4,500 per litre to Rp 5,500. Indonesias
national oil company, Pertamina, is the exclusive retailer of subsidized fuel. Per-
tamina also sells non-subsidized fuel, including higher grades of petrol, brand
as “Pertamax. Competitors, such as Shell, which opened its first retail station
in Karawaci, Tangerang, sell only non-subsidized fuel.

Table 1: Pertamina: Sales volume (million kilolitres)

Product 2010 2011 2012

Subsidized Premium 22.92 25.50
Subsidized kerosene 2.35 1.70 44.96
Subsidized Solar 12.95 14.50
Non-subsidized fuel 21.54 22.91 19.92
Total 59.76 64.60 64.88

Discussion Questions

1. Assume that (i) the quantity demanded of Premium petrol is 8 million

kilolitres at a price of Rp 14,500 per litre, and (ii) before the cut in subsidy,
Pertamina sold 28 million kilolitres of Premium. Draw a linear demand
curve for Premium petrol.

2. Suppose that, before the cut, the government subsidy for Premium was
Rp 3,000 per litre. Calculate the effect of the cut in subsidy on consumer
welfare and government expenditure.

3. From the viewpoint of reducing government expenditure, which is better?

Elastic or inelastic demand for petrol?

4. How would the cut in subsidy affect: (i) Taxi drivers; (ii) Ownders of taxi
licenses; (iii) Pertamina; and (iv) Shell?

2 c
2013, Ivan Png

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Topic 6: Philippines Soft Drink War
Cosmos Bottling is a bottler of carbonated drinks in the Philippines. From the
late 1980s until 2001, Cosmos expanded its market share from 10% to 25% of
the $1 billion local soft drink market and produced attractive financial results.
But Cosmos sold its business to Coca-Cola and exited the market.
The local soft-drink bottling market had been dominated (65% market share)
by Coca-Cola Bottlers Philippines, a joint venture between Coca-Cola and San
Miguel, Cokes local partner.
Coca-Cola Bottlers Philippines defeated PepsiCo Inc. in the battle over
Cosmos in a deal worth about $300 million. By buying Cosmos, Coca-Cola
Bottlers Philippines figured to control 90% of the market and achieve a higher
profitability. In the process, Coca-Cola Philippines could, in practical terms,
permanently exclude its archrival, Pepsi, from the local market.

Discussion Questions

1. Think of Coca-Colas decision to acquire Cosmos: Why would the acquisi-

tion expand Coca-Colas already impressive profitability? (Hint: consider
the cost structure of a bottler)
2. Why would Coca-Cola be willing to offer such a high sale price? Does the
$300 million reflect Cosmos market value?

3. Cosmos was doing very well on the local market. What would be the
owners rationale for selling and no longer operating as an independent
company?

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