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Scenario: More than half of all residential water connections in Britain are not metered. Residential customers pay a flat fee regardless of usage. Scottish Water, which supplies water in Scotland, says there is no evidence that the installation of meters encourages lower than normal usage of water.

1.The Salmond family lives in a home that is not metered. The family consumes around 10,000 gallons a month. What is the family’s monthly demand curve for water, assuming that the demand curve is a straight line, and (the price is of water is £50 per 1,000 gallons) the Salmond family consumes nothing.
2.Calculate the total benefit and marginal benefit from water when the Salmond family consumes 10,000 gallons a month. What is the family’s buyer surplus?
3.Suppose that Scottish Water installs a water meter at the Salmond’s home and charges a price of £5 per 1,000 gallons. How much water would the family buy, and how much would it spend each month?
4.What is the maximum amount Scottish Water could charge the Salmond family for the consumption in question 3?

 

Sample Solution

The bargaining power of suppliers

This factor determines the extent to which suppliers can influence the price on organization. When there are a lot suppliers in the industry, organizations can switch from one supplier to another as long as the price is the lowest in the market and vice versa (My Accounting Course, 2019).

The number of suppliers in the milk industry is a lot. This means that A2 Milk has a lot of choices when it comes to who to get supplies from. This makes the bargaining power of supplier low. However, despite high number of suppliers, the suppliers do no compete within the industry for products, which means that A2 company can only purchase what the suppliers provide. This gives the supplier a high bargaining power. To sustain in this competitive industry, A2 milk can get supplies from multiple suppliers, more flexibility within its supply chain. Or they can encourage better relationship with the supplier can benefit on both sides.

The extend of rivalry between competitors

This factor determines competitive level in the industry, whether does the firms have control over the prices of goods and services (My Accounting Course, 2019).

If the rivalry among the existing companies in this industry is intense it will result to decrease in prices and profitability. A2 Milk operates in a very competitive industry. This competition does take toll on the overall long term profitability of the organization. To stay in such a competitive market, A2 Milk needs to focus on differentiating its products so that competitors will have less effect on its customers that seek its unique products. As the industry is growing, A2 Milk can focus on new customers rather than winning the ones from existing companies. The A2 Milk can conduct market research to understand the supply-demand situation within the industry and prevent overproduction.

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