Economic Principles and Decision Making

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INSTRUCTIONS:

Schmeckt Gut plans the market launch for the Schmeckt Besser energy bar in Atollia within the next couple of months.

The Research Department of Schmeckt Gut has conducted a market analysis of Atollia. The results are provided for you in the EXCEL file in Module 4 Assessment.

Based on international sources, the Research Department is comfortable in making the following predictions on average incomes in Atollia, the inflation rate in Atolia and tariff rates on imports from Industria:

  • Average Incomes: could increase by 1% or 3% or 5% or 7%
  • Inflation rate: could increase by 2% or 3%  or 4% or 5%
  • Tariffs on imports from Industria: could increase by 7.5% or 10% or 5% or there may be no tariffs, in which case there would be free trade between Industria and Atolia.

The Board of Schmeckt Gut is interested in obtaining information on how the expected annual demand for the Besser energy bars would be under the Best Case Scenario, Worst Case Scenario or Middle (Base) Case scenario. To give you an understanding of what the scenarios mean, consider the best case scenario. The “Best Case Scenario” would occur when the annual demand for our energy bars is at its highest. The question to ask is: “ Which income, inflation and tariff predictions would produce the highest possible demand?“ I am sure with this illustration you can decipher what the “Worst case scenario” stands for. The Base or Middle Case scenario is when normal or average conditions occur.

Your task:

Your task is to write a 3,000 word report to the Board of Director of Schmeckt Gut in which you address the following:

  1. From the predictions on incomes, inflation and tariffs given above and using data in the provided EXCEL Spreadsheet (Data for Assessment Module 4) suggest assumptions that  would produce  each of the following outcomes:  (A) Worst Case Scenario (B) Base or Middle Case Scenario and (C) Best Case Scenario. Justify your reasoning. Consider the information in the Excel spreadsheet given to be the Base Case Scenario. Based on the Base Case Scenario prepare Excel spreadsheets showing the following variables for the Best Case Scenario and Worst Case scenarios. In fact you should end up having have three Excel tables each containing the following variables:

Dependent Variable – Annual Demand

Independent Variables:   X1 = Average income per person

X2= Tariff on Imports of energy bars

X3 = Number of stores

X4 = Inflation

Each Excel table should be similar in form to the one for the Base Case below but have different figures for the independent variables due to the fact that assumptions will change from case to case.

Example of Excel Table – Base Case

Annual Demand Average Income per person Tariff on energy bars Number of stores Inflation
Y X1 X2 X3 X4

 

Remember to create Excel tables for the for the Worst Case and Best Case scenarios as well.

  1. Discuss the effects on supply and demand of energy bars as a result of changes in the variables such as incomes, tariffs and inflation. In your answer also make references to the concepts of aggregate demand and aggregate supply, the Philipps Curve and the Laffer curve. This part requires application of economic theory (both micro and macroeconomics).

 

  1. Conduct a multiple regression analysis (in log-linear form) under each of the three scenarios above i.e. Base (Middle) Case, Worst Case and Best Case scenarios. In the interpretation of the regression results discuss the impact of the different assumptions on the annual demand of Schmeckt Gut energy bars I Atolia.

 

  1. Having performed the scenario analysis make a recommendation to the Board of Directors on what it should do in order to create value for the business as it seeks to expand its market into Atolia.

IMPORTANT INFORMATION ON LOG LINEAR REGRESSION

Normal RLog Linear form is log Y = bo +b1X1 +b2X2+ b3X3+b4X4 +error term

egression equation is Y =bo +b1X1 +b2X2 +b3X3 +b4X4 + error term

Please calculate the Log of Y base e (this is = LN(Y) in Excel. Do not calculate the logs of X1, X2, X3 and X4 as discussed in class. Perform the regression with log of Y against the values of X1, X2, X3 and X4 which have not been transformed to logarithms.

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