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.

**Solution:**

Price = MR = AR

• AC = MC and MC always touch from downward

• According to my info, if we expand our E-Business,

then additional cost will be zero.

Part A (1)

**Part A (2)**

MC is fairly zero because MC is the additional cost which raise when the Q raise but here in the above

scenario additional cost is not incurred and the average cost decreasing because total cost is fixed and

the total number of students will increase. So AC is decreasing and it asymptote to X-axis.

**Part B (1)**

**What will be the maximum possible number of students who will take this course and maximum price for this course?**

According to assignment maximum nuber of student will be 250

and maximum cost will be 1500. Reason is that, business will start from minimum 20 students and at the

minimum 20 students, per unit cost will be 1500. After 20 student, when number of student will

increase per unit cost will be decrease.

**Part B (2)**

**What will be the profit maximizing / loss minimizing level of output (students?) for Mr. Kashif?**

There are several ways to calculate profit.

Profit = TR – TC

Profit = P x Qt.

Here are two possibilities;

a). Profit is not calculated:

Profit is always calculated where MC always equal to MR and MC touch the MR from down. So in the

diagram, you can see Cure of MC is not available. So lack of info, we can’t calculate profit.

b). Profit is calculated on some assumption:

Secondly, we know that MC = MR and MC touch from bottom. So according to above data, we find that

MC = 0 (Zero). So in the diagram, you can see on X-axis @ 180 = MC = MR

So at 180

AC = 450

AR = 600

The difference is the profit 150 (600-450).

Part B (2)

Is E-Business is profitable or not for the Mr. Kashif?

Definatetly, E-business will be profitable for Mr. Kashif. Because, at the quantity 180 cost will be 450 and

return will be 600. So return will be grater then cost and Mr. Kashif earn profit.