GECO5113/GECO5213 Business Economics For Managers Assignment Case Study | UniRazak

GECO5113/GECO5213 Question 1 (50 Marks)

Case Study: Advertising and the Price of Spectacles

Firms often spend millions of dollars per year on advertising and other forms of marketing which social media and mass media. In term of demand analysis, the aim is twofold. Advertising is designed to inform the consumer of the product and influence their tastes and preferences. A successful advertising campaign should result in an increase in the demand for the product at each given price level, thereby shifting the demand curve to the right.

What effect does advertising have on the price of a product? On the one hand, advertising might make consumers view products as being more different than they otherwise would. If so, it would make markers less competitive and firms’ demand curve less elastic, and this would lead firms to charge higher prices. On the other hand, advertising might make it easier for consumers to find the firm offering the best prices. In this case, it would make markets more competitive and firms’ demand curve more elastic, and this would lead to lower process.

Advertising is also to increase brand loyalty. Successful advertising and marketing will enable consumers to associate a certain lifestyle or image with the product. If firms are able to successfully create a sense of brand loyalty, then this makes their competitors’ products less viable as alternatives. Therefore, a successful advertising campaign can decrease the Price Elasticity of Demand for their product.

A lower Price Elasticity of Demand for a product may allow the company to charge higher prices and gain an increase in revenue. This may help to explain why some designer or luxury brands are able to charge far more than what it costs to produce their products.

In an article published in the Journal of Law and Economics in 1972, economist Lee Benham tested these two views of advertising. In the United States during the 1960s, the various state governments had vastly different rules about advertising by optometrists. Some rate allowed advertising for spectacles and eye examinations. Many states, however, prohibited it. For example, the Florida Law read as follows:

It is unlawful for any person, firm, or corporation to… advertise either directly or indirectly by any means whatsoever any definite or indefinite price or credit terms on prescriptive or corrective lens, frames, complete prescriptive or corrective glasses, or any optometric services… This section is passed in the interest of public health, safety, and welfare, and its provisions shall be liberally construed to carry out its objects and purposes.

Professional optometrists enthusiastically endorsed these restrictions on advertising.

Benham used the differences in state law as a nature experiment to test the two views of advertising. The result was striking. In those states that prohibited advertising, the average price paid for a fair of spectacles was $33. (This number is not as low as it seems, for this price is from 1963, when all prices were much lower than they are today.

To convert 1963 prices into today’s dollars, consumers can multiply them by 5). In states that did not restrict advertising, the average price was $26. Thus, advertising reduced average prices by more than 20 percent. In the market for spectacles, and probably in many other markets as well, advertising fosters competition and
leads to lower prices for consumers.

(a) Justify FOUR (4) reasons why businesses spend millions of dollars on advertising.

(b) Use an appropriate diagram, examine How might advertising make markets less competitive? How might it make markets more competitive?

(c) Examine what is meant by brand loyalty and outline how advertising can generate brand loyalty.

(d) Critically discuss the possible relationship between an increase in advertising expenditure, brand loyalty and the Price Elasticity of Demand.

Question 2 (25 Marks)

Case Study Semiconductor Production Efficiency in Penang

Penang, Malaysia, has been called the “Silicon Valley of the East” for its pivotal role in the global semiconductor supply chain. In 2023, Penang achieved record-breaking USD 12.8 billion in foreign direct investment (FDI), with global giants such as Intel, Micron, Infineon, and ASE establishing or expanding operations. Intel, for instance, announced its largest Malaysian investment ever—USD 7 billion—to build an advanced packaging and assembly facility. This new facility is expected to strengthen Intel’s global supply network as the company diversifies away from over-reliance on China.

The semiconductor industry is inherently capital-intensive, requiring billions in upfront investment. Yet, production in Penang faces rising energy costs, labour shortages, and the need for constant technological upgrades. Local firms often operate as suppliers to these multinational giants, producing components, testing, and assembling chips. These suppliers face the challenge of balancing labour-intensive activities, which rely on semi-skilled workers, with the increasing need for automation and AI-driven manufacturing to maintain cost efficiency and productivity.

From a managerial perspective, decisions often revolve around the production function— deciding how much output can be generated with varying combinations of capital (e.g., advanced machines, robotics) and labour (engineers, operators). The law of diminishing returns is evident when simply adding more workers does not proportionately increase output unless accompanied by investment in better technology. To remain globally competitive, firms are adopting automation, investing in renewable energy to manage rising utility costs, and working with local universities to build a skilled talent pipeline.

This context illustrates how the isoquant–isocost framework can be applied: firms face tradeoffs in substituting labour with capital while aiming for cost minimization. For instance, when energy costs rise, the isocost line becomes steeper, forcing firms to reevaluate whether labourintensive processes should be replaced with energy-efficient, capital-intensive solutions.

(a) Explain how semiconductor firms in Penang apply the production function concept to optimize output under conditions of rising energy and labour costs. Provide examples of input substitution between labour and capital.

(b) Using the isoquant–isocost analysis, illustrate and explain how firms decide on the costminimising combination of labour and capital when energy prices increase. Support your answer with a diagram.
(c) Critically evaluate the managerial and policy strategies that could sustain Penang’s competitiveness as a global semiconductor hub. Discuss initiatives in automation, workforce development, and government incentives.

Question 3 (25 Marks)

Case Study: Oligopoly and Game Theory in Malaysia’s Aviation Industry

The Malaysian aviation industry has long been shaped by the rivalry between AirAsia and Malaysia Airlines (MAS). AirAsia, relaunched in 2001 as a low-cost carrier, revolutionized air travel in Southeast Asia by offering ultra-low fares with a no-frills model. Within a decade, it became one of the largest low-cost carriers in the world, expanding aggressively across ASEAN and beyond. By contrast, MAS, once a prestigious full-service carrier, struggled with financial losses, rising costs, and a series of restructuring attempts.

The rivalry between AirAsia and MAS reflects the classic features of an oligopolistic market— few dominant players, high barriers to entry (aircraft acquisition costs, airport slots, regulations), and interdependent decision-making. For example, if AirAsia slashes fares on domestic routes, MAS must respond or risk losing market share. This behaviour is often described using game theory, where each airline’s profit depends on not only its own decision but also its competitor’s strategy.

A well-documented case occurred in the mid-2010s when both carriers engaged in aggressive price wars, leading to short-term consumer benefits (cheaper tickets) but long-term financial strain for both airlines. Recognizing the destructive nature of this competition, the Malaysian government even attempted to broker a “share swap” between AirAsia and MAS in 2011, though it collapsed due to public backlash.

The competition intensified with the rise of Firefly and Batik Air, adding new dynamics. Airlines often face the strategic dilemma of whether to lower fares to capture more customers or maintain prices to protect margins. In repeated interactions, such as seasonal promotions and long-term strategies, tacit collusion and price rigidity may emerge, as carriers realize that continuous undercutting erodes profitability.

This situation highlights the application of payoff matrices and Nash equilibrium. If both AirAsia and Firefly lower prices, they both suffer reduced profits, but if one maintains fares while the other lowers, the undercutter gains. The Nash equilibrium often results in price rigidity unless collusion or regulation alters incentives.

(a) Construct a payoff matrix for AirAsia and Firefly with strategies: “Lower Price” vs “Maintain Price.” Identify the likely Nash equilibrium and explain its significance in the Malaysian airline market.

(b) Discuss how repeated strategic interactions in the airline industry may lead to tacit collusion or price rigidity. Use real examples of AirAsia and MAS’s price wars and restructuring efforts.

(c) Critically assess whether the Malaysian Aviation Commission (MAVCOM) and other authorities should intervene to protect consumer welfare. Propose two regulatory or policy measures to ensure competition while maintaining industry stability.