ECO402 Microeconomics Assignment 1 Solution Fall 2013

The Case:
Nestlé Pakistan Limited is working in Pakistan since 1988 under a joint venture with Milk
Pak Limited. The Company has production plants at four places. It has effective
marketing and a vast distribution network throughout the country. According to Nestle
Pakistan’s filing with Karachi stock exchange,the company’s net sales grew by 6.4
percent in January-September 2013 as compare to the same in last year. During the
same year, distribution and selling expenses grew by around 25 percent while
administrative expenses jumped to 10.8 percent from a year ago.Suppose, quantity
demanded and quantity supplied equations for Nestle Pakistan’s products are:
Qd= 12000 –4P
Qs= 1050 + 6P
According to some analysts, the huge increase in company’s expenses is due to higher
marketing costs for the company, as companyfinds itself increasingly competing for
market share with a few other heavyweights in the food and consumer goods sector. In
its detailed report for the half year 2013, Nestle Pakistan has mentioned that ongoing
power crises, inflation, and frequent shutdowns due to strikes and protests are drags on
its performance.
a. Find the equilibrium price and equilibrium quantity for the Nestle Pakistan’s
products. Also show the equilibrium condition graphically.
b. Find out the price elasticity of demand and price elasticity of supply of Nestle
Pakistan’s products when the company is inequilibrium and interpret the results.
c. What will be the effect on the equilibrium situation of the company if cost of
production of company increases due to high administrative expenses. Illustrate
d. Suppose the company takes measuresto reduce distribution and selling
expenses, what will be the impact of these measures on equilibrium situation?
Illustrate graphically.
(Marks: a: 2+2+3, b: 4+4, c: 2.5, d: 2.5)