The document presents a hypothetical business model for a gourmet chocolate company. It analyzes the market conditions and structure of the chocolate industry in the country. It performs a SWOT analysis and discusses pricing, costs, demand and the impact of elasticity for the company's chocolate. It then addresses four questions - determining the optimal price to maximize profits, the effect of competitor pricing, implications of increased input costs, and competitiveness against an overseas producer. The analysis concludes that the company should price its chocolate at Rs. 15 per 10 grams to maximize profits.

1. Hypothetical Business Model
Managerial Economics

2. Group members
FAHAD ALI MIRZA 121103
FAIZA RIAZ 121107
FAROOQ HAIDER 103119

3. Purpose Statement
Managers make effective business decisions
Learning the field of managerial economics
(market structure, pricing strategy and
competition ).

4. Problem statement
Problem statement

5. Gourmet
chocolate

6. Market Conditions of Chocolate Industry







Hilal
B.P sweets
Cadbury’s
Kidco
Mayfair
Mitchells
Sweet Hills

7. SWOT ANALYSIS
Strength
Weakness
Opportunities
Threats

8. Strong Demand
Levels of Flavor
Preferred in Children
All firms are able to
enter and Exit
Free entry & exit
Non Branded
Substitute
Market Power
everyone Holding
Hot temperature
Melting
Industrial
Conditions
Taste change
Chocolate Variety
Richer Chocolate
Health Conditions

9. Market Structure:
Monopolistic competition.
Produce differentiated products.
Freedom of entry and exist.

10. Available substitute
Perk
Jubilee
Dairy milk
Kit Kat
Snickers
Bounty
Mars

11. Price Comparison
Price
Weight
GOURMET
chocolate
Rs. 15
10 grams
Dairy milk
chocolate
Rs. 17
10 grams

12. Flavor Comparison
GOURMET chocolate
Cadbury Dairy milk
chocolate
Milky chocolate
Dark chocolate
White chocolate
Wafer chocolate
Peanut chocolate
Almond chocolate
Treat chocolate
Mint chocolate
Crackers chocolate
Peanuts
Raisins
White Chocolate
Bourneville (original)
Bourneville Almond
Crunchy (original)
Crunchy Rocks
Dairy Milk Hazelnut
Blackcurrant & Vanilla

13. Impact of elasticity!!!
If demand function is;
Q = 40 – 2P
E = -2(15/10).
E = -3
3> 1 in absolute terms
This shows that the demand of
GOURMET chocolate is highly elastic.

14. Cost for the maintenance of Labor and
Equipment
Cost of Labor (variable)
Cost of equipment (fixed)
Wage rate per day = Rs.333
Wage per labor each month = Rs.10, 000
No. of labor units employed = 16
Total cost of labor per month =
Rs. 160,000

15. Sales per month

16. Questions???

17. Question # 1
At what price Gourmet chocolate
should be sold to maximize profit?

18. Answer!!!
Where MC = MR
Demand function
Q = 40 – 2P
Cost function
C (Q) = 4 +0.1 Q2
TR=P*Q
TR=(20-1/2Q)Q
Q2
TR=20Q-1/2
MR=20-Q
MC=Q
MC = MR
Q = 20 – Q
Q = 10 gms
P = Rs. 15
At price of Rs.15 Gourmet can maximize its profit.

19. Question # 2
How does the cost of Dairy milk
chocolate affect sale of Gourmet
chocolate?

20. Answer!!!
We can use Cross price elasticity in order
to know the effect of prices of Dairy milk
chocolate on the Gourmet chocolate
demand i.e.
E = %∆ Gourmet / %∆ P Cadbury
Where; E = 3
10% increase in price of Cadbury milk
chocolate causes the increase in quantity
demanded of Gourmet chocolate to 30%.

21. Question # 3
If a severe snow storm raises the price
of coca beans, should the Gourmet
sell chocolate and if so, at what price?

22. Answer!!!
Price and cost
Result
P > ATC
Profit maximization
ATC > P > AVC
Loss minimization
P < AVC
Shutdown point

23. cont
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•
•
•
•
•
•
•
C(Q)=4+1.5Q2
Q=40-2P
2P=40-Q
P=20-0.5Q
R=P*Q
R=[20-0.5Q]Q
R=20Q-0.5Q2

24. cont
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•
•
•
•
•
•
•
•
•
MR=20-Q
MR=MC
20-Q=3Q
4Q=20
Q=5
P=20-0.5(Q)
P=20-0.5(5)
P=20-2.5

25. cont
•
•
•
•
•
•
•
•
•
P=17.5
Profit=R-C
Profit=PQ-C
Profit=[1705*5]-[4*1.5(5)2]
Profit=87.5-41.5
Profit=46
Variable cost=Total cost-Fixed Cost
=41.5-20
=21.5

26. cont
• AVC= VC/Q
• =21.5/5
•
=4.3 per unit

27. Example
Cost before flood C1 = Rs. 14 (according to the given cost function: C = 4 + 0.1Q2)
Cost after flood C2 = Rs. 154 (according to the new cost function: C = 4 + 1.5Q2)
The existing price is Rs.15
The existing revenues are 15 * 10 = Rs.150
New MC = 3Q
MR = 16 – Q
When MC = MR
3Q = 16 – Q
4Q = 16
Q = 16 / 4
Q = 4 gms
P = 20 – 1/2 (4)
P = Rs. 18
This shows that the price will increase Rs.3 more than the previous one.
Now the revenues are (18 * 4) = Rs.72

28. Question # 4
Can the Gourmet remain competitive if
an overseas chocolate producer pays
30 percent more for cocoa beans but
pays 20 percent less for labor?

29. cont
• New entry of firm
• NO competitive

30. Answer!!!
Not be more competitive of Gourmet.
Total variable cost of the overseas
company will increase it will result in
incase of the price of chocolate

31. Example
Gourmet chocolate
Dairy milk chocolate
Labor cost = Rs. 88
Cocoa beans cost = Rs. 100
Labor cost = Rs. 70
Cocoa beans cost = Rs. 130
TC = FC +VC
TC = FC +VC
TC = 20 + ( 70+130)
TC = 20 + 200
TC = 220
TC = 20 + ( 100+88)
TC = 20 + 188
TC = 208

32. Conclusion
• At Rs. 15 per 10 gms of chocolate,
GOURMET chocolate should be sold to
maximize its profit.
• The cost of cadbury Chocolate affect sale
of Gourmet chocolate i.e. 10% increase in
Cadbury Chocolate causes to increase in
quantity demand of chocolate to 30%