This Activity is designed to be used in the classroom or as a homework task to support the teaching and learning of Costs and Revenues.
Costs and Revenues - Activity
This Activity asks you to think about the basic concepts associated with the subject area of costs and revenues and to apply these to a series of different situations. The Activity is designed to encourage you to go beyond knowledge of the concept, i.e. that average cost is total cost divided by output and to think about the practical implications of this in a firm's decision making.
Each of the situations does have some relation to one of the key concepts covered in the PowerPoint Presentation. You should therefore be looking to try to apply one or more of these concepts; however, it is equally important that you are not worried about making mistakes in your analysis. Making mistakes is a key part of the learning process and should be looked upon in this manner. What is important is that you understand why your analysis might have been flawed and what the appropriate analysis might be.
Remember this: when a baby is learning to walk, it experiments. It often gets things wrong and falls over or bangs into objects in its way. We do not chastise them for making those mistakes, so nor should we view the learning process for something like economics in any different way. Look upon it as the challenge of exploring your knowledge.
The Scenarios:
A major airline carrier operating a scheduled (regular) service between London and New York analyses its carrying loads and spots that on the regular Wednesday evening flight, vacant seats are at their highest level of all the flights, amounting to an average of 45% of the plane.
Image: What has marginal cost and fixed costs got to do with filling aircraft seats with paying passengers? Copyright: Celia Martinez Bravo
What strategies might they adopt to attempt to fill those seats?
Hint: Think about the relationship between fixed costs, variable costs and marginal cost pricing.
A haulage company is contemplating the purchase of a new fleet of units. They have a choice between two manufacturers. The first manufacturer offers a 35-ton 4-axle lorry with a carrying capacity of 33.6m³, whereas the second manufacturer is selling a 44 ton 6 axle unit with a carrying capacity of 76m³. The 35-ton unit is priced at £85,000 whereas the 44-ton unit is £120,000. The firm is looking to buy 6 units in total and they will all have to be the same type.
Image: Is the more expensive lorry cheaper in the long run? Copyright: Dorn Byg
What would be the most efficient lorry to buy and why?
Hint: This is all about unit costs.
Vodafone and BT are working together to develop a phone that recognises the landline connection when in the home but switches automatically to a mobile connection when it moves out of range of the landline. The companies are contemplating how to set a price for this new all-in-one phone service.
Image: How do you set a suitable price for a product that could do away with 'fixed' use phones in the home? Copyright: Khalus Ivan
What pricing strategy would you suggest they use if they are seeking to maximise their total revenue?
Hint: Think of the costs of development, the 'sunk costs' and the cost to the companies of providing the service - especially given the current difference in the cost to consumers of phoning a landline connection from a mobile!
At weekends, train-operating companies give passengers the chance to upgrade to travel in first class seats for a relatively small extra charge on the normal standard class fare.
Image: What price first class travel? Copyright: Jake Levin
What are the economic justifications for this policy?
Hint: Think about the cost to the train-operator of running the trains, the number and type of people who would normally pay a premium rate for first class seating and how much it costs them to offer this 'service'.
Go to a local supermarket to buy a bottle of wine and you might, if you were really trying to impress your friends, pay £19 for a 'good' bottle of wine. That same bottle of wine at a restaurant could, however, cost the diner £67.
Image: Can such a high mark up on a bottle of wine be justified? Copyright: Fernando Nogueira
How might the restaurant justify the size of the profit margin on the bottle of wine?
Hint: Think of the fixed costs of running the restaurant but also the attitude of consumers who might visit such a restaurant.