Vimal Kumar Rai A0067543B BMU5003 Economic Analysis For ManagersDr. Ivan Png Individual Assignment 21 April 2010 1. Fertility (D12010, #1) a. Referring to the linear trend : (i) If the literacy rate is 60%, what is the fertility rate? (ii) If the literacy rate is 100%, what is the fertility rate? Answer (i) : 7. 8Answer (ii) : 1. 4 b. A large cost of having a baby is the time that a mother must invest to bear and rear the child. For a more educated woman, is the value of this time higher or lower? Answer : For a more educated woman the value of this time is higher.
Assuming the higher level of literacy has come about with the investment of time and money (outflow) into education, and consequently that the return on this investment will only be generated by starting to work and earning money (inflow), then it follows that the opportunity cost of having a baby will be higher than for someone who has not invested in education. A more educated woman is more likely to take into account the cost of the loss of income and hence is more likely to have none or fewer children.
She is also more likely to compute the cost of the additional time that will be needed to be spent with a child (or more than one child) and hence decide to have no children or fewer children (especially since the amount of time available per day is finite and identical for everyone i. e. 24hrs). c. In the chart mark “cost of child” on the vertical axis. Does the trend line have any relation to a demand curve? Please explain. Answer : Yes it does; it is identical in reasoning. The higher the price (i. e. he cost of bearing and rearing the child) the lower the quantity demanded (i. e. the number of children birthed/desired). The cost can be perceived or actual. The other assumption is there is diminishing marginal returns setting in i. e. as the costs of bearing and rearing multiply by the number of children, or as the perceived/actual benefit of having children gets fulfilled, there will be a falling desire to have more children. d. Please give an alternative explanation for the relation in the figure: Use the fertility rate to explain female literacy.
Answer : Essentially it is talking about the “supply” (fertility rate) in relation to prices (female literacy) instead of looking at how costs impact the demand (for children). The premise is – as the fertility rate rises, the literacy rate of females falls. One assumption taken is that there is a fixed “production” time span – between the age of possible fertility to that of permanent infertility. On average that can be from 15 years to say 40 years, give or take a few years. Female literacy is also calculated with a fixed period of time – usually from the age of 15 years to about 24 years.
The overlap is clear, meaning that education and having children are like “complements” in an economic sense. Given the overlap between fertility and education, it stands to reason that as female fertility goes up (i. e. more children are born), less time and money are available to be spent on education, thereby causing literacy rates to be lower. Another explanation is based on the availability of educational facilities in relation to all the children being born within a particular geographical area.
It is conceivable that the rate of growth of educational facilities is not commensurate with the rise in fertility i. e. with the number of children born. Compounded with a cultural desire/bias for sons as opposed to daughters, a rise in fertility could correspond to a fall in female literacy rates if boys are given preference for obtaining an education over girls, given scarcer educational opportunities. This trend has been seen in many parts of the developing world, especially regions which are largely agrarian/agricultural e. g. Bangladesh/India etc. nd is supported by many studies. 2. Answers to “Tankers” a. Identify the following as either a short- or long-run decision: (i) lay-up (idling the vessel); (ii) scrapping. Answer: Laying-up a vessel is a shorter-run decision while scrapping the vessel is a long-run decision. Laying-up a tanker represents a temporary cut-back on the “supply” of capacity, which will probably be reversed in some time. Scrapping the tanker is a permanent decision that cannot be reversed. Considering the vessel itself is a huge fixed cost (or sunk cost) with capacity that is necessarily perishable i. e. f it remains unused then at the very least the fixed costs are incurred, laying up the vessel is a short-run decision that could be taken if the marginal revenue from operating it does not at least equal the marginal cost of the operation. Scrapping the vessel would be to acknowledge that there is no further hope/desire to earn any sort of revenues and that the hit of the sunk costs is willing to be undertaken by the owner. Alternatively, it could be a decision taken after the sunk costs have been recovered and the revenue earned from operating it does not even cover the marginal costs of operating the vessel.
Given the huge costs involved, this is likely to be a long-run decision. b. Explain how the owner of a tanker should decide whether to continue to operate, lay-up or scrap a vessel. Answer: Assumptions made for this case are as follows – oil tanker demand is predicated on the following factors : I. Freight rates (and distance to transport the oil being a major factor) II. Oil consumption (inelastic demand and elastic supply of oil, and reserves of oil) III. Viability/security of oil pipelines (alternative mode of transport of oil) IV.
Alternative use of tankers (as offshore storage) V. International regulations (can be extreme, hence causing “shocks” to the demand-supply balance) Oil tanker supply is based on the following factors : I. Shipbuilding and scrapping time and cost (life span of a tanker – takes about 2 years to be build and will be scrapped after 20-30 years) II. Cost of operations (specifically labour, fuel and maintenance/repair) III. Size of tankers available in the market IV. Operating speed of the tanker V.
Freight rates and market inter-play between owners, charterers and brokers VI. International regulations (can be extreme, hence causing “shocks” to the demand-supply balance) At any point of time, the decision whether to operate, lay up or scrap a vessels would be based on upon an interplay of some or many of the above assumptions governing the demand and supply of oil tankers. The interplay of the assumptions would have to be seen in context of long-run or short-run objectives given that the cost incurred in manufacturing a tanker is significant and is therefore a sunk cost.
Operating a tanker (Short-Run) The individual owner should ignore the cost of the tanker in his calculations as it is a sunk cost and irrelevant in this time span in the decision whether or not to operate. His decision to operate will be primarily based on whether tanker/freight rates would be at least equal to his marginal cost of operation. Operating a tanker (Long-run) The individual owner must realize that over the longer run, many of the variables could change significantly. New supply could hit the market, labour rates could be revised upwards, demand for oil could decline i. e. asically supply is more elastic in the long-run. Necessarily included in this analysis would be whether he is already engaged in long-running charter contracts, whether the cost of the tanker has been amortised, or even whether there is an amount of outstanding debt to service. In the longer-run, if the tanker owner finds himself unable to cover at least his average total cost of operation, he would decide it pointless to operate the tanker. Laying Up (Short run) The decision to lay-up the tanker in the short-run would be very much dependant upon the marginal cost incurred in operating the tanker.
If the marginal costs incurred are going to be higher than the freight rates offered (with a correspondingly high rate of increase of costs if the distances traveled are longer/farther), then the tanker owner may decide it more financially beneficial to lay-up the tanker. As the considerably-high sunk costs of the tanker are not considered, combined with the fact that short-run price volatility is therefore going to be much higher, laying up can be seen as a viable alternative to operation of a tanker if the freight rates do not allow at least a break-even scenario for the owner.
Laying Up (Long run) It is assumed that since oil demand is relatively inelastic, and supply of tankers quite elastic, therefore laying up for the longer-run is not a viable economic or financial decision to take. If such a situation were to persist -where the longer-term cost of operations is higher than the freight rates – the case becomes stronger for scrapping the vessel or to convert it to other use. Scrapping Scrapping the vessel is a definitive action that stops all future supply of the tanker; further it would most likely be a long-run decision ecause it is irreversible and represents no further desire or hope to earn any revenues from operations or an acknowledgement of the decision to absorb the hit of the sunk costs of building the tanker in the first place. Suppose that over the longer term freight rates weakened, combined with new regulations on the structure of tankers (thereby necessitating expensive retro-fitting) and higher operating costs (e. g. labour, berthing charges, fuel prices etc. ), a case might become very strong for the tanker to be scrapped. . The marginal cost of keeping a tanker in service (the “lay-up equivalent”) is the tanker’s operating cost minus the cost of lay-up. When tanker rates fall, which tanker owners would be first to lay-up : those with high labour costs and low fuel-efficiency, or those with low labour costs and high fuel-efficiency? Answer : When tanker rates fall in such a situation, it effectively means that supply of tankers remains constant while demand for tankers falls i. e. we are evaluating a short-run scenario.
When evaluating the impact of labour costs and fuel efficiency, we are basically looking at the variable costs of operations, assuming that labour rates are higher fully or partially variable and fuel costs are directly related to the distance traveled by the tanker. Also, tanker owners with high labour costs and low fuel-efficiency would be faced with a “double-whammy” of higher costs – labour rates would be more expensive plus, because of low fuel-efficiency, they would be paying more for fuel as well. Obviously, tanker owners with low labour costs and high fuel-efficiency would be in a financially stronger position.
The “cost” of lay-up for either category of tanker owners would be directly dependent on their fixed and/or variable spends on labour and fuel plus the notional lost opportunity of revenue earned from operation of the oil tanker. Operating cost for tanker owners with high labour rates and low fuel efficiency would be necessarily higher than for others who would only have to relatively lower costs of labour and fuel. Hence the first to lay up would be those tanker owners with high labour costs and low fuel efficiency at a time when the revenue potential (tanker rates) falls. The End
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