Determine if they have an elastic or inelastic demand curve.

1) Introduction of the Firm – Who are they and what do they do? It would be nice if you could add some key statistics on the firm such as their annual sales, market share and some product information. In general, do you believe they are a successful firm overall. Please don’t make the introduction any longer than two pages.

2) Please Identify Their Market Structure – Is the firm operating in a competitive, oligopoly, cartel, monopolistic competition or a monopoly market structure. Why?

Please comment on who their largest competitors are. What is the current situation in the industry? Is it a growing and profitable industry or are they facing special problems such as the hardship created by the COVID-19 virus, stiff and costly government regulations, international competition, etc.…?

3) Please Comment on the Firm’s Demand Curve – Do your best to draw the demand curve and try to calculate the price elasticity for their main product or service. Determine if they have an elastic or inelastic demand curve. You will probably need to guess on the quantity that they sell because many firms do not reveal this information, but use your best judgment. I will trust your best estimate, there is no need to panic if you can’t find the actual quantity sold. If you are using an estimate, then state that in your paper.

Please refer back to Weeks 3 & 4 on CANVAS and look again at the document entitled, “How To Use Excel 2016 To Solve Economic Problems.” Go to page 2 to see the instructions on how to create a demand curve using Excel. If you do not have access to Excel, then you can also use the slightly inferior Google Sheets, or I’ll accept a hand-drawn demand curve. Let me state again you’ll need to try to calculate a price elasticity number for the product or service. Please show the calculation of your paper.

4) Please give general comments on the firm’s actual history and potential for growth in sales, market share,and profits.Are they on an upward trend or are they on a declining trend in these areas?

5) Please comment about their stock if they are a public company – Basically do you think the firm’s stock is a good investment? Why or why not? If they are a private firm and do not have a publicly traded stock, then do you feel the firm is a good investment for private investors? Why or why not?

6) In your opinion has the senior management team of the firm practiced excellent, good, average, or very poor microeconomic policies? Why or why not?

7) Other: You are free to add anything else.

This paper doesn’t need to become a complex endeavor. Keep it simple and stick to the questions listed above. You are free to include graphs, charts and other information you think is vital. This paper represents 40 percent of your grade. For some of you, this paper might help you get a higher grade.

If you stick to a firm that you know something about and if you choose a firm that publishes information about itself on the Internet, then you’ll have a much easier time. You’ll probably need to invest 8 hours of time into doing this paper. I don’t think that is asking a lot. Please remember that I do expect to see some citation on the last page. I don’t care if it is in MLA or APA format. Good luck!

NB

n short, everyone will still need to choose a public or private firm, say something about their history, review the industry they are in, make comments about their main product or service, try to calculate the price elasticity of the main product or service, create a graph of the product or service demand curve, review the firm’s potential for growth, review their stock (if they have a public stock) and ascertain if it is a good or poor investment, and ultimately conclude whether or not the firm is practicing excellent, good, average, or very poor microeconomic policies. You won’t need to address cost factors at all.

I know this looks like a lot of work but what makes this easier is that I’m willing to accept your opinions. In my standard term paper, I would insist on hard facts for every question and that made the standard term paper project much more challenging.

The purpose of this project is to verify that you do understand the basic microeconomic concepts that we reviewed and your ability to apply those concepts to a real-world firm

even if the majority of the paper contains unsubstantiated opinions. I would still like to

see citation sources on the last page of your paper.

Tags: microeconomics Monopolistic Competition market structure monopoly Coca Cola American University of Health Sciences
universityofthepacific.microeconomics__1_.pdf
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XXXXXXX 1 XXXXXXXXXXXXX Prof. Torres Econ 01B May 13, 2010 University of the Pacific: Quality with Affordability? When people think of California’s higher education system, many think of the UC or CSU system. These schools, however, were not the first schools on the west coast. That honor is bestowed to Delta’s neighbor, University of the Pacific. UOP was the first of many colleges founded by Jesuit missionaries in Santa Clara, CA in 1851 as an attempt to counter the negative effects of the gold rush on the morality of the youth (“In the Beginning” 1). This is a full 50 years before any of the UC’s were around. In 1871, the college moved to San Jose before finally finding its permanent home in Stockton in 1923. UOP’s fame doesn’t stop there. It was the first California college to allow women as students, the first west-coast medical school, and the first conservatory of music west of the Mississippi. Today, UOP continues to grow as a wellknown four-year university that offers undergraduate and graduate degrees in nine different colleges. UOP has remained small with only 3,501 undergraduate students making up a student to faculty ratio of 12:1 and a market share of about 3%1 (“Fast Facts”1). Despite the fact that it is not a “powerhouse” of education, there is a lot that UOP has to offer an undergraduate student. UOP’s mission is: “to provide a superior, student-centered learning experience integrating liberal arts and professional education and preparing individuals for lasting achievement and responsible leadership in their careers and communities” (“Pacific’s Mission” 1). UOP promises to do this by offering practical learning, a 4 year graduation guarantee, broad selection of classes, learning tailored to the individual, accelerated degree programs, continuous 3,501/125,674 The denominator is the total number of private college undergraduate students in California (comparable to UOP). This number is a sum of all universities that offer live-in, 4 year, undergraduate degrees that are not technical/career institutes (“List of Private Colleges”, each schools’ website). 1 XXXXXXX 2 improvement, and most importantly, “quality with affordability” (“What Makes Pacific Distinctive?” 1). That last strength leaves many students scratching their heads. “Affordability?” they ask, “UOP is more expensive than UC’s and CSU’s, so how can that be true?” I felt the same way when I first heard that UOP claimed “quality with affordability”, but after some evaluation, I tend to agree with UOP. It is true that a UOP degree is expensive. The undergrad tuition costs $31,370 not including fees/living expenses. This means that with the 4 year degree guarantee, a student can expect to pay $125,480 in tuition. After looking at these scary numbers, it’s quite easy to scoff at affordability. The catch is, not everyone has to pay that price. UOP maintains the IRS Federal 501(C)(3) Tax Exemption Status as a non-profit organization, which means that there is no “owner’s equity”, or CEO that claims a part of the assets (“Institutional Info” 1). Pacific has an annual budget of $192,063,000 and an endowment of $208,852,000, which collects interest to further invest in the university (“Fast Facts” 1). In the year of 2009, UOP’s financial aid distribution to undergraduate students is reflected in the chart on the right (“Financial Aid Facts” 1). Over 80% of the student population receives a financial aid package. The average package of financial aid is $22,000 (“Fast Facts 1”). Basically, many students don’t end up paying the sticker price of $31,370. So how does UOP do this? Quite simply, they understand their industry, demand, and cost information. The Industry Before looking at the microeconomic variables, it is important to understand the industry that UOP belongs to. University of the Pacific is part of two Private Education Industries, undergraduate and graduate. While the undergraduate private education industry includes private colleges and universities throughout the world, the main competition of UOP lies in other California Private colleges. So, for the sake of analysis, UOP’s main industry is comprised of 4 XXXXXXX 3 year, live-in private colleges in California. I am choosing to focus on the undergraduate education program because undergraduates form the majority at UOP. The private education industry in California is closest to the monopolistic competition form of industry. The main characteristics of the monopolistic competition form of competition are: a relatively large number of sellers, differentiated products, easy entry and exit, and extensive advertising. The California private education industry possesses all of these characteristics. There are approximately 65 private live-in colleges in California, each advertising a slightly different type of education. Whether it’s a religious/racial emphasis, or accelerated degree programs, each college advertises extensively to distinguish itself from the others. A college can enter or exit the industry fairly easily. While it would take some time for a college to build a reputation, as long as they accept a high percentage of students who apply and charge tuition rates high enough to cover their costs, then a college could enter the industry. For example, there are some colleges who have fewer than 100 undergraduate students enrolled. By the same logic, they could close admissions, pay expenses and leave the industry with ease. For some small private colleges, the recent recession has brought that possibility closer to reality. Throughout California, there have been massive problems with education in the public education system due to our national economy. Luckily for the private system, these budget problems do not directly affect operations. Because public schools are funded in part by the government, they suffer when the government suffers. Private schools do not face this issue. While the private colleges in California have not faced layoffs and steep increases in tuition, many private colleges have had to raise tuition to accommodate for the challenging economic times. Because there are so many private colleges offering education, the demand for the majority of the market is elastic. For that reason, the recent recession has been problematic for smaller private colleges who have had to raise tuition a substantial percentage just to cover costs. UOP, on the other hand, has had the freedom to avoid such steep tuition increases, XXXXXXX 4 increase revenue, and still maintain the same demand. Looking at UOP’s demand curve and price elasticity explains how they have been able to do this. Demand Analysis Perhaps the most important information to a business owner (or President in this case) is the demand curve. Understanding the consumer is crucial whether a firm is selling hot dogs or a diploma. So, in order to create the demand curve for UOP I went straight to the consumer. I took a simple random sample (SRS) of 56 undergraduate students who attend UOP and asked them one question: What is the highest price you will pay to attend UOP? To eliminate extraneous responses I had them choose from 8 options ($35,000-70,000 in $5,000 increments). 2 The results of the survey are graphed below. Points A-D reflect the hypothetical Demand Curve $60,000 A Annual Tuition $50,000 B C D $40,000 E A B C D E $30,000 $20,000 $10,000 $0 0 1,000 2,000 3,000 Students (x) Tuition (y) 375 $50,000 1001 $45,000 1565 $40,000 3047 $35,000 3501 $31,730 4,000 Undergraduate Students responses of the students, while point E reflects the current tuition and enrollment. There is no x intercept due to the inevitability of an outlier, or one incredibly rich person who is willing to pay an incredibly high tuition. There are no points past E because there is no way to survey the population of people who would go to UOP if it were cheaper as they are scattered worldwide. From these points, it is possible to determine the elasticity between the different price levels using the midpoint elasticity formula. Here are the elasticity calculations for each line segment: 2 To see the statistical procedures used to apply the survey to the population and proof of validity see appendix. XXXXXXX 5 AB 1001-375 (1001+375)/2 ÷ 45,000-50,000 (45,000+50,000)/2 = 8.64 ≥ 1 elastic BC 1565-1001 (1561+1001)/2 ÷ 40,000-45,000 (40,000+45,000)/2 = 3.74 ≥ 1 elastic CD 3047-1565 (3047+1565)/2 ÷ 35,000-40,000 (35,000+40,000)/2 = 4.82 ≥ 1 elastic DE 3501-3047 (3501+3047)/2 ÷ 31,732-35,000 (31,732+35,000)/2 = 1.416 ≥ 1 elastic While the specific elasticity coefficient is different for every line segment, all of them indicate that UOP’s demand curve is elastic. AB is the line segment that is most elastic. The fairly high coefficient indicates that moving between $45,000 and $50,000 in either direction will lead to a large percentage change of students able and willing to enroll. Basically, raising tuition past $45,000 would lose a higher percentage of students than moving from $40,000 to $45,000. CD is similar in behavior to BC, but slightly more elastic. This indicates that a higher percentage of students would respond to a price change between $35,000 and $40,000 than would react to the change of BC. The most interesting and important segment is DE. This is the segment that UOP pays attention to the most because it predicts the behavior of the students in response to the most realistic changes in tuition, slight ones. The coefficient of 1.416 is very close to unit elasticity. This shows us that the raising the cost of tuition within the $3,000-4,000 range will not cause a drastic change in consumption or total revenue. While there may be some students who are no longer willing or able to attend UOP, they do not form a large enough percentage of the student population to significantly decrease total revenue. It also has to be taken into consideration that there can be a difference between what people say they would do and what they actually do. Just because students say they will not attend UOP at any price higher than the current price does not mean that they will drop out should the tuition rise. Realistically, transferring is a long, difficult process. And $3,000 out of $31,730 is not even 10%. In most XXXXXXX 6 cases, the opportunity cost of transferring would be much higher than $3,000, which would mean that those students would most likely decide to stay after all even if it means taking out student loans to do so. This is something that people may not consider when presented with a hypothetical situation versus the real one. Even if there are students who no longer decide to attend UOP in response to the modest increase, it must also be considered that California is facing a “shortage” in college education. If someone who isn’t willing to pay 35,000 declines an acceptance or transfers because of the increase, then there are still many waitlisted people who are most likely be very eager to pay $35,000. So essentially, UOP can get away with charging higher tuition rates (within the $3,000-4,000 range) and still see a modest increase in revenue. It is with this knowledge that UOP forms its pricing strategy. Pricing Strategy . In the last decade, prices in the education industry have been on the rise everywhere, including UOP. In the private education industry, colleges have combated the challenging economy by engaging in “price discrimination.” Upon application, students are split into the category of those who can afford, and those who cannot. Colleges do this through the use of FAFSA, a student profiling application which asks about all relatively liquid assets owned by the student and their immediate family. After the student is profiled accordingly, the college estimates the available contribution from family and student and then fills the gap (if there is one). In the end every student has their own “unique” tuition costs. This helps split the demand into the more inelastic consumers and the elastic consumers. Once the consumers are split, UOP can raise the tuition costs gradually on the inelastic consumers to increase revenue while decreasing the cost on the inelastic consumers, thus maximizing revenue on both ends. While it may seem like more revenue could be made by only admitting the inelastic consumers, it’s not the most economically wise decision for UOP. For colleges, reputation is a very important part of generating demand. If UOP starts only admitting wealthy students, the opportunity cost is the prestige they sacrifice by choosing candidates who may not reflect well XXXXXXX 7 on the school’s academic programs. They must admit both groups of students in order to keep their demand curve from shifting down (which would force their tuition prices down). In the last five years, UOP has increased their tuition by an average of $1,518 each year (“Fast Facts”1). They have also slightly increased the percentage of students granted financial aid. This shows how they are widening the price discrimination gap in order to maximize their revenues. This pricing strategy, especially the elastic portion, has been successful at increasing UOP’s market share in the last five years. UOP awards more financial aid than any other California university (“Financial Aid Facts” 1). The two biggest shareholders, USC and Stanford, do not even come close. USC grants 60% and Stanford does not report that statistic, which suggests that it’s nothing to brag about (Stanford, USC). While prestige alone used to be enough to maintain demand, recent economic challenges have caused students to seek more affordable options. Last year, UOP not only had a record amount of applicants, but it also increased its national rankings in Top schools (“What Makes” 1). As long as UOP keeps their tuition steady and continues to draw in more and more elastic consumers, UOP will only continue to improve. Cost After observing UOP’s demand and pricing strategy, it’s clear that they understand their consumers. Now it’s time to examine how well they handle their costs. It is important to note that UOP is independent from government regulation of any kind (including taxes). That being said, UOP’s biggest cost by far is labor. Because UOP is a service company, it does not have to deal with the massive inventories that merchandising companies do. Therefore, most of UOP’s costs are related to the cost of labor that goes into research and programs. In 2009, the largest expense category was “Institutional and Departmental Research” coming in at $115,380,0003. The two second largest categories are “Sponsored Programs” and “Auxiliary Enterprises” at All financial statement information is the total annual amount for the whole university. The statements do not differentiate between which campus/level of education incurred what expenses and revenue, so I will be evaluating the cost information using the full school population, not just undergraduate. 3 XXXXXXX 8 $36,734,000 and $28,370,000 respectively. Both of those categories are different types of programs for students and other school funded clubs and activities. This indicates that the majority of expenses are variable costs which will increase as the amount of students enrolled increases. The cost information supports this (all values in thousands)4: 44.412 The values in this chart were found by taking the cost information 40.61 from the FY09 financial statements, categorizing them into fixed 3.16 43.77 70 280,185 65 MC ATC 287,281 60 6401 55 50 AVC and variable, and then Tuition/Fees AVC AFC ATC TC TR Q dividing them by the total quantity of students (“Fast Facts 09” 1). The cost curves are estimates of what the cost curves may 45 40 35 30 25 20 15 10 5 0 6000 Demand MR AFC 6200 6400 6600 6800 look like at hypothetical levels of production. The cost data supports the claim that variable costs are much higher than fixed costs and indicates that both an accounting and economic profit was made. Because total revenues exceed total costs, it is simple enough to see that an accounting profit was made. It can be surmised that an economic profit was made because the price exceeds the ATC. This means that UOP is covering both its explicit an implicit costs. In addition to the economic profit that UOP makes based on tuition, it also must be mentioned that they receive a sizeable amount of gift contributions, or “endowments”. While this money may not always come without restrictions, it is money that can be invested into improving 4 See Financial statements and Cost Curve calculations included in appendix for source information 7000 XXXXXXX 9 the campus, enhancing student programs, or accruing interest in a bank account. In FY09, Pacific gained $14,574,000 dollars of tax free revenue (Income Statement 3). Based on the cost information for the FY09, UOP appears to be doing well at covering their costs, but how strong is UOP financially? The answer lies in their financial statements. The most obvious aspect that goes into evaluating a company’s financial strength is their net income. For a non-profit organization such as UOP, this is not necessarily the case. As a nonprofit organization, any net income that UOP realizes becomes “net assets” which must then be reinvested into the organization. As long as UOP does this, they are exempt from state and federal tax (Financial Statements 9). In the year 2009, UOP saw an increase in net assets from operations of $10,090,000, a significant decrease from their 2008 total. This is due mainly to a decrease in revenues from investment returns and an increase in nearly every expense category. While the $6,000,000 decrease may seem shocking, it is actually not that bad. To an organization which handles such large quantities of money $6,000,000 is not a significant amount. It must also be considered that for tax purposes, it suits UOP to maximize its expenses so that they can guarantee that they will not have to pay state or federal taxes. Other items of interest are UOP’s accounts receivable and accounts payable. For any company, it is not a good thing for the accounts receivable to make up a large percentage of the assets. This indicates that a company is operating on IOU’s. Nor is it a good idea for a company to have their accounts/notes payable be too high relative to their assets. If that’s the case, it stands to reason that a company could default on those accounts in the future. Luckily for UOP, the accounts receivable, and payable are both relatively small compared to their assets (Financial Statements 11,19). Perhaps the only truly negative aspect of UOP’s fiscal year for 2009 is their investment returns. As can be expected with the current recession, UOP’s investments actually created a loss. The total investment loss for 2009 was $35,913,000, approximately a 500% increase in loss from the previous fiscal year (Financial Statements 14). While this is certainly not good, it XXXXXXX 10 was unavoidable. When UOP locked into their various different types of investments (stocks, bonds, MMF’s, etc.), they did so without the knowledge that the stock market would crash along with interest rates. This means that anything that did not have a guaranteed rate of return took a large hit. Looking at the value lost indicates that the loss could have been much greater. Annually, UOP brings in about $200,000,000 in revenue and increases net assets. While $35,913,000 seems rather sizeable, it is a loss that the university can and will recover from. It should also be taken into consideration that the economy cycles. We are currently in a trough, but eventually the economy will rebound and the rates of return on investments will increase. Overall, UOP’s financial state …
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