Question

Question 2 a. Ace Body revenue for 2018 was £2.1 million, down 35% over the previous year. Management attributes the decrease in revenue to a decrease in quantity demanded by 20% as a result of a change in price from £20 to £22 per month. Given this information calculate Ace Body PED marks) b. What would be the sign of the cross-price elasticity between gym membership and a 70% reduction in the price of home gyms sold by Amazon? (2 marks) c. Explain three ways in which Ace Body gym can practise price discrimination in their markets. What criteria are relevant for price discrimination to be effective for Ace Body? marks) Question 3 a. Explain how Ace Body gym can benefit from economies of scope. (4 marks b. Identify two ways in which Ace Body gym can benefit from technical and financial economies of scale. marks) c. Using the information in table 1 below, calculate the marginal cost and marginal revenue for Ace Body Gym and indicate the level of production where profit will be maximized. (6 marks) Table 1 Output Price received Total Costs 35 MON 5 6 17 15.50 108 Question 4 a. Ace Body is considering purchasing a new piece of equipment and has two possible choices but can only raise enough funds to proceed with one of them. Using the Payback Period decision model, which purchase would you recommend Ace Body to undertake if there is a three year cut-off period for recapturing the initial cash outflow? Assume that the cash flows are equally distributed over the year for Payback Period calculations. (5 marks) Projects A B Cost -£10000|-£25000 Cash Flow Year 1 £4000 £2000 Cash Flow Year 2 £4000 £8000 Cash Flow Year 3 £4000 £12000 Cash Flow Year 4 £4000 £20000 Cash Flow Year SE4000 £26000 Cash Flow Year 6 £4000 £32000 b. Analyse the extent to which the market in which Ace Body Gym operates is subject to asymmetric information. (6 marks) c. Explain the measures that governments can take to regulate the gym and fitness industry. How effective are the use of these regulations? marks)

Answer 1

Ans 2.

a) % Change in Quantity demanded, Q = -20%

%Change in Price, P = (22/20 - 1)*100 = 10%

Price elasticity of demand, E = % Change in Q/%Change in P = -20/10 = -2

Hence, demand for gym membership is elastic.

b) Price of home gym sold by amazon is substitute of Ace body gym. So, a 70% drop in prices of home gym will lead to a decrease in quantity demanded of memberships of the Ace Gym. Thus, cross price elasticity is positive.

c) Gym can price discriminate on the basis of-

A) Bulk pricing i.e. charging less from the customer if he is paying for the membership of more number of months.

B) Couple discounts i.e. charging less from the couples rather than single customers

C) Discount on the basis of age, charging more from the younger customers than the older customers

So, the relevant criteria for price discrimination are age, time period and number of people joining together.

*As it is mot specified whether the answer to all the 3 questions is needed or not, so, I am doing question 2 only. If you need solution to the rest, please reupload the question and specifically tell which one to answer.

Thank you