Applied Economics For Managers

Project 1: Applied Economics for Managers

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Scenario

You have recently been hired as an economic analyst by Maryland Creative Solutions LLC (MCS), a company specializing in mergers, acquisitions, and consulting. Prepare for your first day by reviewing your job description below:

Job DescriptionMaryland Crative Solutions LogoPosition TitleEconomic AnalystReports ToFrank Marinara, Senior Partner FinanceJob OverviewThe Economic Analyst provides support to Maryland Creative Solutions by performing client assessments, financial reporting, and development models for economic analysis.Responsibilities and Duties· Develops and maintains models to support economic analysis and investment decision making, long- and short-term planning, enterprise valuation, portfolio evaluation, mergers & acquisitions, strategy, and competitor analysis.· Supports the assessment and recommendation of improvements to the financial and performance planning systems (including external and management reporting systems).· Supports senior management in performing ad hoc analysis and supports the CFO to manage the company’s financial framework.· Prepares presentations to the board of directors and shareholders and supports preparation of internal presentations and financial analyses.Qualifications (Preferred but not required)· Education: Bachelor’s· Experience: 2–3 years’ experience preferred with business finances· Skills include: financial reporting, presentation development, planning, and evaluation· Team player, creative thinker, fiscally responsibleMaryland Creative Solutions (MCS) is an equal opportunity employer and complies with all applicable federal and state laws regarding nondiscrimination. MCS is committed to a policy of equal opportunity for all persons and does not discriminate on the basis of race, color, national origin, age, marital status, sex, sexual orientation, gender identity, gender expression, disability, religion, ancestry, political affiliation or veteran status in employment, educational programs and activities, and admissions.

You’ve been in your new analyst role with Maryland Creative Solutions, LLC for a few days and are finally getting used to the rapid workflows and office culture. After a competitive bidding process, MCS has signed a consulting contract with ExxonMobil. You receive an email from senior partner, Frank Marinara, tasking you with your first assignment to support the project.

INBOX (1 NEW EMAIL)From: Frank Marinara, MCS Senior PartnerTo: YouNow that you’ve settled in, I need your help with an industry analysis. ExxonMobil accepted our consulting bid, and now the CFO needs us to assess its positioning within the oil and gas industry. I would like you to analyze the data provided. We need to know the price and quantity of crude oil where equilibrium exists, and it will be helpful to discover the market structure of the industry. I will need this done by the end of this week.If it goes well, I’ll also need you to investigate price elasticity so we can advise the client on a pricing strategy for one of its local franchisee stations.Two weeks from now, I’d like you to attend a special project meeting with senior consultants from across MCS. Keep in mind, you will be the only employee in the meeting that is not on the senior consultant level, so please be as prepared as possible. The meeting has been called to discuss world oil price movements and their impact on ExxonMobil’s business. Come ready to discuss the world oil price movements expected within the next few weeks.Finally, I’ll be asking you to develop an executive summary based on your work on this project.Follow the project steps to get started on the industry analysis for ExxonMobil.Best,FrankFrank Marinara Contact Information

Click Step 1 to begin your work on this project.

When you submit your project, your work will be evaluated using the competencies listed below. You can use the list below to self-check your work before submission.

· 1.3: Provide sufficient, correctly cited support that substantiates the writer’s ideas.  

· 1.6: Follow conventions of Standard Written English.  

· 1.7: Create neat and professional looking documents appropriate for the project or presentation.    

· 3.1: Identify numerical or mathematical information that is relevant in a problem or situation.

· 3.2: Employ mathematical or statistical operations and data analysis techniques to arrive at a correct or optimal solution.

· 3.3: Analyze mathematical or statistical information, or the results of quantitative inquiry and manipulation of data.

· 3.4: Employ software applications and analytic tools to analyze, visualize, and present data to inform decision-making.

· 5.3: Create, implement, and evaluate a personal leadership development plan.

· 6.2: Evaluate strategic implications for domestic and international markets of an organization’s industry.

· 10.1: Apply relevant microeconomics principles to support strategic decisions for the organization.

· 12.1: Assess market risk and opportunity.

Step 1: Complete Skills Gap Analysis

As you’re about to get started on your assignment, the Human Resources department at MCS sends you an email with an attachment requesting that you complete a self-evaluation of your skills.

INBOX (1 NEW EMAIL)From: Jennifer Craylin, Human Resources GeneralistTo: YouI hope this email finds you well, and that you are settled in at Maryland Creative Solutions. It is Human Resource policy to request your completion of a performance self-evaluation. Please use the attached skills gap analysis file to self-evaluate your work-related knowledge and skills before beginning work on your assigned projects.The skills gap analysis will help you identify the skill areas you want to enhance. You will be completing another self-evaluation in Project 5 to measure the gains in competencies you have developed through working with MCS.Complete your preliminary skills gap analysis by the end of Week 1. Carefully follow the instructions below:· Use the attached skills gap analysis file to self-evaluate your course-related knowledge and skills before beginning your work with MCS. Use the  Week 1 worksheet (see attachment) to complete this step.· From each major category, select a gap you would like to work on reducing during the next 10 weeks to help you achieve your long-term career goals.· Decide what activities you will engage in to acquire the knowledge and hone the skills you have identified. Think creatively, and consider all appropriate resources, such as conferences, books, free online classes, mentorship, coaching, observation, professional associations and groups, networking, volunteering, and journaling.· In the text box provided in the skills gap analysis file, include a summary of no more than 200 words describing the gaps you will work to reduce and the activities you will pursue to do so.· Submit your updated skills gap analysis to the submission folder located in the final step of this project.Thank you,JenniferATTACHMENTS· Skills Gap Analysis InstrumentFrank Marinara Contact Information

When you have completed Step 1, proceed to Step 2, where you will examine supply and demand.

Step 2: Analyze a Supply and Demand Graph

For the first assignment, Frank has given you data to analyze an illustrative supply and demand graph for the production of crude oil in the world. To analyze the graph, you will need to understand demand, supply, and equilibrium economics concepts. The graph is useful to know how prices are set for crude oil on a minute-by-minute basis in world commodity markets.

Frank has passed along some data he has gathered to help you analyze a supply and demand graph for the oil and gas industry. View Frank’s data and read the instructions on the Supply and Demand Graph worksheet of the Project 1 Excel Workbook, which you will access below. You will use different sheets from this workbook in the subsequent steps of this project.

To help you build a basic understanding, you must determine what economic model best describes the oil and gas industry. There are three basic economic models, and none fits the oil and gas industry perfectly. Is this industry in perfect competition? Is it an oligopoly? Or a monopoly? To make this determination, read about perfect competitionoligopoly, and monopoly. You should also read competition production and pricing decisionsmonopoly production and pricing decisions, and price discrimination.

The key point in deciding on the economic model is the number of sellers.  If there is only one seller, the industry is likely a monopoly.  On the other hand, if there are five or fewer sellers, the industry is expected to be an oligopoly.  Finally, if there are a dozen or more sellers, the industry is closer to perfect competition.

Here is an illustrated example of a supply and demand graph with the point of equilibrium:

A graph with Price per Pound on the y-axis and quantitiy in millions on the x-axis.

Equilibrium Price of Coffee

When we combine the demand and supply curves for a good in a single graph, the point at which they intersect identifies the equilibrium price and equilibrium quantity. Here, the equilibrium price is $6 per pound. Consumers demand, and suppliers supply, 25 million pounds of coffee per month at this price.

Source: Demand, Supply, and Equilibrium is licensed under CC BY-NC-SA 4.0.

When you have finished this step, post the Project 1 Excel Workbook (see attachment) to the submission folder located in the final step of this project.

When you have completed Step 2, proceed to Step 3, where you will examine costs, pricing, elasticity, and the production function.

Step 3: Analyze Cost, Pricing, Elasticity, and the Production Function

In your second week on the job, you’re beginning to realize the responsibilities and complexities of your job, and you’re glad to have analyzed the supply and demand graph you created. As you come into work, you see a voicemail from flashing on your office phone—it’s Frank:

Voicemail from Frank“Good morning. I just wanted to say you really did a great job developing that supply and demand data. Now that you have some understanding of the industry, I would like you to apply the concepts of  elasticity of demand  and  elasticity of supply . “Exxon is concerned about a franchisee store in Fitzhugh, Maryland. The owner is having trouble maintaining profits while managing price changes. They’d like MCS to offer advice on price adjustments for that franchise to achieve maximum profit.“I’ll provide with data that describes the gas station franchise operations and competition. You can find this data in the Profit Maximization worksheet of the Project 1 Excel Workbook you used in the last assignment (Step 2). Complete the tables in the worksheet and answer the client’s questions.“The tables in the worksheet show the quantity and price of oil sold by the franchisee. First you will need to calculate the elasticity of supply; the total revenue, total cost and profits at several levels of price and gallons sold (demand). Economists point out that maximum profit is achieved when Marginal Cost equals Marginal Revenue. Hence, you will need to solve for:· marginal cost  (MC)· total revenue (TR) and marginal revenue (MR)· profit To complete your calculations, it is important for you to understand  average total cost  opportunity cost  and the  profit maximization  formula. “Please reach out if you have any questions. Thanks so much.”

Step 4: Discuss World Oil Price Movements

The days are passing quickly now. Week 2 starts slow, but an email from Maryland Creative Solutions’ Managing Director, Elisa Izuki, changes the pace.

INBOX (1 NEW EMAIL)From: Elisa Izuki, Managing DirectorTo: You and Frank Marinara, MCS Senior Partner FinanceGood afternoon,I am requesting your attendance at the upcoming junior partner meeting. The primary objective of this meeting is to discuss the concerns held by ExxonMobil about world oil prices. Based on your analysis last week of the oil and gas industry’s economic model, I’d like you to contribute your insights to the project meeting. Looking forward to having a productive and informative working session.Sincerely,ElisaElisa Izuki Contact Information

This is a good moment for you, as you are the only employee in the meeting that is not at the executive level. This is your time to shine!

As the meeting approaches, Frank briefs you on the key points of discussion:

· Exxon has been concerned about developments in the world supply of crude oil. Both Venezuela and Iran have very significant proven oil reserves. Both countries are under sanctions from the US to restrict or prevent them from selling oil.

· To put things into perspective, the world production of crude oil is just over 100 million barrels per day. The U.S. produces about 12 million barrels and all of OPEC about 30 million barrels. As of early 2019, Venezuela produces just over 1 million barrels down from a peak of 6 million barrels. Iran also produces over 1 million barrels.

· Both Venezuela and Iran need the “hard currency” that comes from the sale of crude oil and refined products. 

· Russia and China have the technology and expertise to help these countries expand their production and sale of oil.  However, Russia relies on the sale of its own oil and gas as a main source of income and has an incentive to avoid the decline of oil prices when Venezuela increases production.

· MCS has been tasked by ExxonMobil with looking at new research into the world price of oil. Find one current article about the price of crude oil and post it in the discussion.   Discuss the likely price movements of oil over the next few weeks. What are the analyst’s main concerns? Please provide a link to any sources that you use.

When you have finished Step 4, proceed to Step 5, where you will present your recent findings from Steps 1 through 4 in an executive summary.

Step 5: Prepare Executive Summary

Your busy second week on the job isn’t over yet. After a busy morning of ad hoc team meetings, you’re greeted in your office with a phone call from Frank.

Phone Call from Frank“Hi again. I’ve got news about our client.“ExxonMobil is looking to send a report to all company franchised gasoline stations.  I’m going to need an executive summary based on the analysis you’ve done for this client so far on Cal’s Exxon.  Also, this  executive summary , along with citations for any sources you use, should be about one page long.“Thanks again!”

When you have completed Step 5, proceed to Step 6, where you will submit all work for Project 1.

Step 6: Submit Your Work

Thank you for all your work with Maryland Creative Solutions. Take note of the recommended deliverable in the table below:

Recommended Project Delivery

  
Supply and demand graph worksheetlastname_firstname_supply_and_demand graph.xlx 
Profit maximization worksheetlastname_firstname_profit maximization sheet.xlx 
World oil prices discussionSubmit discussion post in the world oil prices discussion section in Step 4 
Executive summary· lastname_firstname_executive summary.docx

Supply and Demand Graph

Future Supply and Demand for Crude Oil
Price per barrel (2208)Daily US demand for crude oil (in millions of barrels per day)Daily US supply of crude oil (in millions of barrels per day)
$25.001.00.5
$30.000.90.6
$35.000.80.7
$40.000.70.8
$45.000.60.9
$50.000.51.0
$55.000.41.1
Data from https://www.iea.org
Question 1:
Equilibrium:
Question 2
Question 3
Question 4
Question 5

Show your work below.

Oil Supply and Demand

Daily US demand for crude oil (in millions of barrels per day) 1 0.9 0.8 0.7 0.6 0.5 0.4 0 25 30 35 40 45 50 55 Daily US supply of crude oil (in millions of barrels per day) 0.5 0.6 0.7 0.8 0.9 1 1.1000000000000001 0 25 30 35 40 45 50 55

Oil Supply and Demand

Daily US demand for crude oil (in millions of barrels per day) 1 0.9 0.8 0.7 0.6 0.5 0.4 30 35 40 45 50 55 60 Daily US supply of crud e oil (in millions of barrels per day) 0.7 0.8 0.9 1 1.1000000000000001 1.2 1.3 30 35 40 45 50 55 60

To complete this project step, address the following: 1. Based on the information provided from the International Energy Agency (IEA) in the table on the left, examine the supply and demand graph in the space below. This information is helpful for our client ExxonMobil to know how much oil to produce. The graph shows crude oil prices per barrel and the supply and demand for the number of barrels in the united States per day. After you have examined the graph below, identify the price and quantity and price at which equilibrium exists. This information is important for the client to determine the quantity of oil to produce for profit maximization. 2. The global demand for oil changes with the changes in global economies. As economic activity increases, the global demand for oil increases. For the past several years, the global demand for oil has increased (https://www.iea.org/oilmarketreport/omrpublic/). As the global demand changes, we can observe this change graphically. What changes are expected in the short-term? To answer this question, please see https://www.eia.gov/outlooks/steo/. Support your statements with research and references. 3. What are potential supply and demand risks in the global oil market? Support your statements with research and references. 4. Is the global oil and gas market in a monopoly, oligopoly, or competitive economic model? Why? Support your statements with research and references. Answer in the space below. Be as descriptive as possible and credit any sources you use.

Show your work below.

Show your work below.

To complete this project step, address the following: 1. Based on the information provided from the International Energy Agency (IEA) in the table on the left, examine the supply and demand graph in the space below. This information is helpful for our client ExxonMobil to know how much oil to produce. The graph shows crude oil prices per barrel and the supply and demand for the number of barrels in the united States per day. After you have examined the graph below, identify the price and quantity and price at which equilibrium exists. This information is important for the client to determine the quantity of oil to produce for profit maximization. 2. The global demand for oil changes with the changes in global economies. As economic activity increases, the global demand for oil increases. For the past several years, the global demand for oil has increased (https://www.iea.org/oilmarketreport/omrpublic/). As the global demand changes, we can observe this change graphically. What changes are expected in the short-term? To answer this question, please see https://www.eia.gov/outlooks/steo/. Support your statements with research and references. 3. What are potential supply and demand risks in the global oil market? Support your statements with research and references. 4. Is the global oil and gas market in a monopoly, oligopoly, or competitive economic model? Why? Support your statements with research and references. 5. To what extent do you think that the current Covid-19 pandemic crisis will impact the global oil market in the long run and more specifically are there implication for Exxon Oil? Be as descriptive as possible and credit any sources you use.

Show your work below.

Profit Maximization

Profit Maximization
Base price of unleaded regular delivered in New York harbor (January 27, 2020)$1.517
Added cost to Cal:
Maryland state gasoline tax (Effective July 1, 2018)$0.353
Federal gasoline tax$0.184
Distribution & Delivery$0.042
Advertising and Marketing to ExxonMobil$0.042
Additives$0.020
Total additions$0.641
Total cost per gallon$2.158
Answer question 1 below.
QuantityPrice
40002.658
36002.758
AverageAverage
% change% changeElasticity of Demand
Elasticity:
By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline?
Gallons sold per dayPriceRevenue (price x gallons)Cost per GallonVariable Cost (cost per unit x volume)Fixed cost per dayTotal Cost (Fixed + Variable)Daily Profit (revenue – all costs)
4000$ 2.658$ 10,632.00$ 2.158$ 8,632.00$ 438.00$ 9,070.00$ 1,562.00
3600
Answer question 2 below.
QuantityPrice
36002.758
44002.558
AverageAverage
% change% changeElasticity of Demand
Elasticity:
By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline?
Gallons sold per dayPriceRevenue (price x gallons)Cost per GallonVariable Cost (cost per unit x volume)Fixed cost per dayTotal Cost (Fixed + Variable)Daily Profit (revenue – all costs)
3600
4400
Answer question 3 below.
QuantityPrice
44002.558
48002.458
AverageAverage
% change% changeElasticity of Demand
Elasticity:
By how much did revenues increase or decrease as a result of the change in price?
By how much did profits increase or decline?
Gallons sold per dayPriceRevenue (price x gallons)Cost per GallonVariable Cost (cost per unit x volume)Fixed cost per dayTotal Cost (Fixed + Variable)Daily Profit (revenue – all costs)
4400
4800
Profit Maximization
Gallons sold per dayPriceRevenue (price x gallons)Cost per GallonVariable Cost (cost per unit x volume)Fixed cost per dayTotal Cost (Fixed + Variable)Daily Profit (revenue – all costs)
2400$ 3.058$ 7,339.20$ 2.158$ 5,179.20$ 438.00$ 5,617.20$ 1,722.00
2800$ 2.958
3000$ 2.908
3200$ 2.858
3600$ 2.758
4000$ 2.658
4400$ 2.558
4800$ 2.458
5200$ 2.358
5600$ 2.258
6000$ 2.158
6400$ 2.058
6800$ 1.958
7200$ 1.858
7600$ 1.758
8000$ 1.658
8400$ 1.558
8800$ 1.458
9200$ 1.358
Answer question 5 below.
Marginal RevenueMarginal Cost
Gallons sold per dayPriceRevenue (price x gallons)Marginal revenueCost per gallonVariable CostFixed CostTotal CostMarginal Cost
2800.0$ 2.958000$8,282.40$2.158$6,042.40$438.00$6,480.40
2800.1$ 2.957975$8,282.63$0.2258$2.158$6,042.62$438.00$6,480.62$0.2158
3000.0$ 2.908000
3000.1$ 2.907975
3200.0
3200.1
3600.0
3600.1
4000.0
4000.1
4400.0
4400.1
4800.0
4800.1
5200.0
5200.1
5600.0
5600.1
Select One
Price Elastic
Price Inelastic
Unit Price Elastic

Cal Overhaut operates an ExxonMobil gas station franchise in Fitzhugh, MD. The price of gasoline is volatile and varies greatly from day to day. The price per gallon varies based on the seasonal blend of gasoline, which is determined by clean-air requirements. Cal’s pricing options are based on the desired profit margin. Conventional Gasoline Regular Spot Prices can be found at https://www.eia.gov/dnav/pet/hist/EER_EPMRU_PF4_Y35NY_DPGD.htm. Cal recently raised the price of regular gas by 1 cent per gallon from $2.658 to $2.758, and his revenue decreased and profit increased. Cal would like you to explain why that happened. Cal competes with another gas station across the street that typically sells regular gas for 2 to 3 cents per gallon less than his station. They are currently selling gasoline for $2.458 per gallon. Recently, regular gasoline for delivery in New York harbor sold for $1.517 per gallon. Cal tells you that his gas station has fixed operating costs of about $438 per day. To the right are the components that determine the cost of a gallon of regular gasoline to Cal’s business. Answer the seven questions below. You are required to use Excel for all calculations.

1. Last week, Cal sold an average of 4,000 gallons per day at an average price of $2.658 per gallon. This week, he raised the average price to $2.758 per gallon, and both revenues and profits dropped. His station is now selling an average of 3,600 gallons per day. Fixed costs of operating the gas station are $438 per day. What is the price elasticity of demand? Can the demand be characterized as price elastic, price inelastic, or neither? By how much did revenues increase or decrease as a result of the change in price? By how much did profits increase or decline? (Profit is revenue minus total cost.)

6. Next calculate marginal revenue, knowing that it is the difference between the revenue at the price shown and the revenue at 1/400 of a cent less. Calculate 1/400 of a cent as well as the new price. Calculate the marginal cost of selling zero point one (0.1) more gallon at each price. Prove that MC = $0.2158 Complete the table to the right.

7. What advice can you give to Cal on setting prices to maximize profit?

2. After seeing your analysis, Cal decides to lower the price of gas from $2.758 to $2.558 per gallon. After this change, the volume sold increased to 4,400 gallons per day. He asks you to measure his business gains or losses as a result of this price change. Fixed costs are $438 per day. What is the price elasticity of demand? Can the demand be characterized as price elastic, price inelastic, or neither? By how much did revenues increase or decrease as a result of the change in price? By how much did profits increase or decline? (Profit is revenue minus total cost.)

3. After seeing the result (from question 2), Cal decides to lower his price once again from $2.558 to $2.458 per gallon. Once again, volume sold increases and settles at 4,800 gallons per day. He is worried that any further price cut will cause the discount station across the street to also lower it price. What is the price elasticity of demand? Can the demand be characterized as price elastic, price inelastic, or neither? By how much did revenues increase or decrease as a result of the change in price? By how much did profits increase or decline? (Profit is revenue minus total cost.)

4. Cal’s son is studying in the MBA program at UMUC. He tells his father that profit maximization occurs when marginal cost (MC) = marginal revenue (MR). Cal understands that his marginal cost is the same as his variable cost, or $2.158 per gallon. Technically, marginal cost is the added cost from selling one more gallon. Cal asks you for a chart to show how profits vary with sales volume, assuming that he sells an additional 400 gallons for each 10 cent decrease in price. Also, he wants to know by how much he can lower his price without losing money. Given that you know the price and quantity of gallons sold so far, and that Cal’s cost per gallon is $2.158 per gallon and his fixed cost is $438 per day, complete the table to the right.

5. Once you calculate total profit, what is the profit maximizing price?

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