Economics for Managers
- Deadline: 11:59pm on Sunday, September 19, 2021. Note that the assignments delivered past deadline will automatically get grade 0.
- You should deliver your assignment via Blackboard.
- This is an individual take-home assignment. Prepare your answers on your own.
- In order to receive full credit for your work, your answers should be clear, correct, and complete.
- Please use a font size at least 11. As of the rest — style, number of pages, etc. – it is completely up to you. I do not evaluate your assignment based on the literary criteria or number of pages.
- Please deliver only one file. Preferably, send a pdf file.
- List all the sources you have researched to prepare this assignment.
Exercise 1 (30 points)
Imagine an audience consisting of people who have never taken a single lecture on economics. Use your own words and provide real-life examples to answer the following question.
What is economics about?
Imagine your family gathering for some social event.1 Everyone is at the table. Now, the conversation centers on you. Someone just asked you about your studies at MBSC. In particular, they want to know more about economics.2
The important part of your answer is to avoid formal definitions. Recall that, formally speaking, economics is about agents who make optimal choices under scarcity. Obviously, this is not an answer that I expect. In fact, this is very much not the kind of answer I am looking for.
You should use only your own words and examples you are familiar with. Remember who your audience is! Stay away from abstraction. Rather, rely on specific examples that people in your audience can relate to. Importantly, do not use the examples we have seen in our classroom. Make sure your answer is clear, correct, and complete.
- If there are economists in your family, suppose they are not attending the gathering; it is crucial that you speak only to non-economists.
- Of course, such a scenario is unlikely in real life. After all, it is difficult to imagine for “economics” to be a topic of discussion at a family gathering. But, then, why not? Also, this exercise is supposed to help you find your own voice, the voice that you use while talking with your family.
Exercise 2 (10 points)
In this exercise, you will take two roles. In part (a), you are an instructor of this course (ECN 511), while I am student. In part (b), you are again a student taking ECN 511, while I am an instructor.
- (5 points) Imagine that you are teaching ECN 511. Prepare one question based on what we covered during the first weekend (sessions 1 – 6).
- (5 points) Now, answer the question you asked in (a).
- Your question must not be a repetition of any question that this assignment consists of.
- Try to think of a question that would be interesting for the students.
- In part (a), I evaluate how much your question relates to what we had covered in sessions 1 – 6. I also judge the clarity of your question. If I do not understand your question, I will not be able to evaluate your answer in (b).
- In part (b), I evaluate whether how clear, correct, and complete your answer is.
Exercise 3 (60 points)
In this exercise, you will analyze and try to modify the willingness-to-pay (WTP) for some good (product or service). This exercise is experiential in nature. The main objective is for you to practice and polish your skills related to WTP.
There is a significant learning-by-doing component. You need help from your spouse, child, sibling, other family member, or a friend. The person who helps you will be the subject of your study.
- Pick a good (10 points). First, you pick a good (product or service) that you will analyze. It is crucial that the good you choose is something that
- you personally never or almost never use/buy and do not know much about, but
- the subject is very familiar with and uses it frequently.3
- I assign this exercise every time I teach ECN 511. Here are some examples of goods that former students chose. A male student asks his wife to be a subject and analyzes a make-up kit; another student asks her child to be a subject and analyzes a video game platform; another student asks her spouse to be a subject and analyzes a good that he frequently buys for his hobby. If I were a student in ECN 511, then I would ask my wife to be a subject and probably pick a nail polish or something for make-up/hair. If I were to study my son (5th grade), I would probably pick something related to Minecraft (or whatever game he is playing right now).
In (a), you need to explain a good you chose. Now, it is not the place to talk about the “needs” (you will do that in part (c)). What is required is a verbal description of the good – the way you would describe it outside of an economics classroom.
Try to be as specific and detailed as possible. For example, “milk” or “carton of milk” is not as specific as desired; rather, you might want to describe the brand (Lala), size (500 ml), category (non-fat), and other attributes that matter.4
If you think that I might be unfamiliar with the good – which would be the ideal scenario from my perspective as this would be more fun for me – then attaching a picture might be a good idea. Keep in mind that I need to be able to visualize what the good is; your task in (a) is to help me with that visualization.
If I do not understand what good you picked, then it will have a detrimental impact on your grade.
The good can be whatever you choose as long as conditions (i) and (ii) are met. I would recommend products (tangible goods) instead of services as the latter are usually more difficult for analysis. However, the choice is completely up to you.
In a typical research study, we always describe the subjects (demographic variables). Since the study involves just one subject who might not want you to share any information about her/him, I do not require any description of the subject. There will be no score subtraction if you do not talk about the subject. However, since this might also help with your analysis, consider as an option to provide a brief explanation of who the subject is.5
- Measure WTP (40 points). This is the crucial part of this exercise. Your task is to figure out the subject’s
willingness-to-pay (WTP) for the good described in (a). Use the method that we learned about in class. Essentially, you need to replicate and describe all the steps. Explain in detail the process that you and the subject went through.
- Carton of milk might not be an appropriate good to be studied in this exercise as this is a product that all of us are familiar with. I want you to be outside of your familiarity zone with the good you analyze. You are supposed to learn about the good from a consumer perspective rather than be biased with your own experience.
5Focus on what matters. For example, your relationship with the subject or their name should not be disclosed because they are not relevant pieces of information for the WTP analysis. You need to keep the study anonymous and professional. Do not provide any personal details or information about the subject that she/he would not want you to share.
Keep in mind that I do not witness the study you conduct. However, I must be able to visualize it so I can correct mistakes that you potentially make. If your description is not detailed enough, then I am unable to do my job.
Prepare table(s) tracking subject’s behavior. Record everything that you might find relevant. Explain problems that you have encountered and how you solved them. Finally, explicitly state the conclusions.
Your answer should be clear, complete, and correct. I must understand the experiment and data. I must clearly see your conclusions. Finally, the conclusions must be consistent with the experiment.
I prepared the step-by-step instructions on how to measure WTP. They are at the end of this assignment.
- Shape WTP (10 points). Start with explaining the needs/desires that the good satisfies. Importantly, explain how the good satisfies these needs.
Next, propose two (2) changes in the good to increase its WTP. The changes can be tangible or only reflected in the consumer’s perception. Importantly, explain how your changes help with satisfying the needs/desires – after all, if your modifications have no impact on the consumer’s needs/desires, then there will be no change in WTP. In short, you need to think about what you would do to make a good better in terms of higher WTP.
Note that I do not ask about the costs of making the changes you propose – this is not relevant for this exercise (but, of course, relevant later when we determine the optimal strategy to boost WTP).
Be imaginative and innovative. Do not replicate what companies producing the good already are doing or did in the past. This is the moment for your creativity to shine.
Measuring WTP with the Good vs Cash Method
Recall a simple method we used in class:
- Subject chooses between good and cash.
- Cash starts at X SAR, where X is below WTP. (You need to use your judgment to figure out the starting point.)
- For low values of cash, subject chooses the good. But, when the amount of cash is high enough, the subject switches to cash – this is where you stop the experiment.
For example, consider the following table tracking a subject’s behavior. (Remember that your analysis should include a table like that.) The good is something simple and we start with low value of cash. Of course, for more valuable goods, you would start with a higher value.
|Cash (in SAR)||Subject’s choice|
Subject switched at 4 SAR; the experiment ends. From the table above, we deduce that WTP is between 3 and 4.
Of course, you might opt to refine your analysis to get a more precise estimate of WTP. For instance, in the next round, we increase the cash amount by 0.1 SAR instead of 1 SAR. We start with cash 3.0 SAR (because we know it is the lower bound of WTP). Here is the new table.
|Cash (in SAR)||Subject’s choice|
Subject stopped at 3.3, and we end the experiment. Now, we have a more precise estimate of WTP: it is between 3.2 and 3.3. Let’s agree that this is already good enough.